Permission to Gencos to import FO on deferred payment: PSO opposes proposal of power ministry

Being a major stakeholder, Pakistan State Oil (PSO) has strongly opposed the proposal of the Ministry of Water and Power to allow power generation companies (Gencos) to directly import furnace oil on deferred payment.
PSO maintains that Pepco, which had made an attempt to directly import fuel oil in the past, could not ensure availability of the product and ultimately had to discontinue its import function, said an official of the Ministry of Water and Power on condition of anonymity.
Background interviews with the officials of the Ministry of Water and Power and PSO indicate that both are trying to prove the other a liar. "Pakistan State Oil had agreed to supply 27,000 tons of furnace oil daily to Gencos during winter and we pay for 23,000 tons but are being supplied only 10,000 tons which is affecting power generation," said the official. According to the proposal under consideration, Gencos will be allowed to import furnace oil directly through International Competitive Bidding (ICB) which is 7-8 percent cheaper than the fuel being supplied by PSO.
"We are neither being supplied contracted quantity of furnace oil, nor the oil quality is of international standards. Fuel oil being supplied by PSO has 10 percent water content which is affecting the power generating machinery," sources continued.
Pakistan State Oil argues that there are a number of question marks over the proposal of the Ministry of Water and Power, which may negatively impact their business relations. "If the Ministry of Water and Power intends to import furnace oil directly, PSO has no objection but before doing so the ministry has to null and void the present FSAs," sources said.
There is a perception in the public sector that some 'real' players present in the ministry are behind this move however, the ministry denies such charges. "For instance, if Gencos purchase 23000 tons furnace oil daily and the 'real' players receive a commission of 50 cents per ton this implies they are pocketing 12500 dollars, (375,000 dollars) in a month," commented one of the insiders. However, the Ministry of Water and Power states that when the procurement will be through ICB, there will be no chance of any commission.
"Historically, we have noted that out of average monthly receipts of Rs 199 billion to PSO, Rs 12-14 billion are being funded by the government of Pakistan whereas Pepco through its own resources is paying only Rs 5-7 billion per month," sources said, adding that in such a situation Gencos will be unable to directly import furnace oil. PSO on average supplies 500,000 MTs furnace oil to Hubco, Kapco and Gencos on a monthly basis, whereas, Pepco/IPPs have not been able to make payments to PSO on time against fuel supplies.
Sources in the Petroleum Ministry said that "all excuses/allegations of oil not being supplied by PSO, quality issues, etc, have been created at this point as there are some parties which want to make money in the name of direct oil imports". They have arrangements with some international suppliers who are offering them oil on deferred payments.
According to a letter available with Business Recorder sent to the Ministry of Petroleum, Water and Power and Finance on January 12, 2011, PSO says "Pepco/IPPs are already receiving product on deferred payment basis from PSO as the current receivable from Power sector is equivalent to 5 to 6 months of fuel supplies."
"It is also worth mentioning that if the proposed arrangement is finalised, the Pepco will have to bear an additional cash outflow on account of sales tax on import stage and transportation cost amounting to Rs 4.5 billion per month approximately. Hence, out of Rs 5-7 billion, Pepco will not be left with any substantial amount, which can be utilised to clear the prevailing circular debt as perceived in the proposed arrangement," the letter adds.
PSO maintained that before commenting on the draft summary for ECC, it would like to highlight that it (PSO) was the largest oil marketing company of Pakistan, importing the highest volume of fuel oil for the power sector at highly competitive rates through transparent tendering process.
"For this reason, PSO is considered as a reliable supplier of fuel oil to power sector. It is also worth mentioning that the procurement of fuel oil through imports is a specialised field requiring qualified and experienced human resource, expertise in procurement process through international suppliers besides having strong financials and company profile," the letter says.
PSO had proved in the past that it possessed the requisite expertise as a marketing company to arrange and manage imports of fuel oil on a sustainable basis to ensure continuity of power generation in the country. In its comments, PSO says that Kapco and Genco III are under long term contractual arrangements with PSO for supply of fuel oil.
The proposed arrangement would result in violation of these agreements, which could lead to legal implications. PSO has a contractual Oil Supply Agreement (OSA) with Kot Addu Power Company Limited (Kapco) dated June 27, 1996 for a period of 25 years for supply of LSFO and HSD exclusively. Northern Power Generation Company Limited (Genco-III); Pepco entered in a Fuel Supply Agreement for Genco-III on September 16, 2009 for a period of 15 years for supply of HSFD and HSD exclusively.
The letter adds: "there are a few ambiguities, as mentioned below regarding the terms of handling arrangement which require collaboration: (i) it is mentioned in the subject letter that PSO had already agreed to the handling charges @ 3.5 percent. However PSO has not given its consent in writing. Therefore, it will require a detailed analysis before entering into a legal agreement between PSO and stakeholders; (ii) Reimbursement of freight charges for the transportation of protest from Karachi to required destination through Road, Rail and Pipeline; (iii) A number of other operational modalities like insurance, transit losses, quality issues, berthing of vessels at the jetties, the discharge activities at port, charges for the nominations of surveyors, product sampling and testing, appointment of clearing agent, etc.
Other important factors are; (i) issue of devaluation of Pak rupee against the US$ under deferred payment arrangement needs to be considered that might have serious financial implications due to additional cash outflows at the time of settlement of deferred liabilities: (ii) in case of failure of the proposed arrangement, restoring the supply chain by PSO will require considerable time and efforts which might lead to serious power crisis in the country.
The letter continues, "We understand that the proposed arrangement will have serious implications on the overall supply chain of fuel oil in the country. Hence, it is strongly recommended that before the proposed draft summary is submitted to ECC for its approval, a detailed and in depth analysis of the proposed arrangement should be undertaken and discussed with all the stakeholders including PSO," letter adds.
Pakistan State Oil (PSO) is likely to scrap Fuel Supply Agreements (FSAs) with public sector power Generation Companies (Gencos), putting the entire power generation process in jeopardy, if the Ministry of Water and Power moves to import furnace oil directly.
PSO has also raised a question: are Gencos paying Rs 115,000,0000 against 23000 tons of furnace oil daily? The answer is no. "Gencos first pay PSO dues of Rs 120 billion and then strike independent furnace oil import deals. If Gencos have sufficient resources to purchase furnace oil directly, then why do they not clear PSO dues?" the sources questioned.
Before the start of winter season, PSO had advised the Ministry of Water and Power and Gencos to build up their inventories keeping in view the weather conditions but they did not pay heed. With regard to the accusations of 10 percent water in furnace oil, PSO has clarified that during decantation (pour furnace oil from one container to another) moisture contents mix up with furnace oil, which is natural phenomena and does not imply deliberate adulteration.
Moreover, to avoid any crisis and ensure that uninterrupted supply is maintained, PSO strongly recommended to Pepco and other stakeholders to build their stock levels for the winter, as transportation becomes an issue due to external factors over which PSO has no control. Pepco did not pay much heed to these recommendations, an official statement of PSO maintains.