ECC set to approve RLNG policy today

The Economic Co-ordination Committee (ECC) of the Cabinet, scheduled to meet on Friday (today) with Finance Minister Dr Abdul Hafeez Shaikh in the chair, is expected to approved RLNG (Re-gasified Liquefied Natural Gas) policy, likely to be based on integrated and tolling project structure, official sources told Business Recorder.
Pakistan is facing a severe gas shortage exceeding 2,000 million cubic feet per day (mmcfd) and local production is unable to keep pace with the domestic requirements. As a result, the country''s economic progress is being seriously affected. Import of Liquefied Natural Gas (LNG) can mitigate the crisis and enhance gas availability in the country. The imported LNG would be received, stored and re-gasified in LNG terminals and delivered through connecting pipeline(s) to the existing transmission pipeline network as RLNG.
To meet the challenge, Sui Southern Gas Company Limited (SSGCL) had launched ''Pakistan Mashal LNG Project'' (PMLP) to import 500 mmcfd LNG and carried out a request for proposal process under which M/s 4Gas emerged as the potential LNG developer. Accordingly, on February 9, 2010, ECC approved award of LNG supply contract to M/s GDF Suez and terminal to M/s 4Gas.
The Supreme Court of Pakistan took a suo moto notice on April 28, 2010 and advised to put up fresh summaries on Mashal LNG Project and short-term LNG project for consideration of ECC of the Cabinet. On the summary submitted by the ministry, the ECC on January 25, 2011 decided to reinitiate the projects expeditiously in a transparent manner. Subsequently, Law Division''s advice was solicited on how to construe ''reinitiate'' - whether the project has to be restarted after shelving the case of 4Gas viz: cancellation of Mashal tendering process and rebid the project, or to commence the proceedings of awarding the contract to 4Gas from the stage where it was left off. The Law Division has clarified that the word ''reinitiate'' in this case meant to start the project afresh.
In May 2011 SSGCL invited EoIs from private sector companies interested in capacity allocation and willing to develop their own LNG FSRU, arranging their own supply of LNG and having their own buyers of RLNG which may also include the Sui Companies under Third Parties Access (TPA) regime. The TPA rules have been finalised with the consultations of all stakeholders and would be notified shortly. Under this arrangement, the gas utility companies (SSGCL/SNGPL) can also buy RLNG from the private party(ies). SSGCL received 17 proposals out of which three companies have obtained construction licences from Ogra for setting up LNG terminals and allocated them capacities in the pipeline network. In addition, one conditional construction licence and one provisional licence have also been issued. This project is active, however, the main impediment to project implementation is the establishment of buyer-seller relationship between importers of LNG and users, particularly in view of the huge circular debt, which is affecting the ability of the potential buyers to regularly pay for LNG usage.
In order to expeditiously arrange LNG supplies, the ministry of petroleum intends to initiate competitive bidding via public tenders to be floated through gas utility companies. The process will be open to all parties and will cover purchase of RLNG based on integrated and tolling project structure as follows: (i) Pursuant to para 2(a) of the LNG Policy 2011, the gas utility companies intend to purchase RLNG from third parties under an integrated project structure whereby the RLNG supplier will procure LNG, set up the terminal for storage and re-gasification and deliver RLNG. The base-load volume of RLNG will be 800 MMCFD (spread over two separate LNG developers - 400 MMCFD each) at delivery point under a 10-year contractual arrangement (extendable); (ii) the advantage of spreading the award to more than one supplier is to avoid dependency on single supplier (eg diversification) and to promote LNG supplies under TPA by utilising spare capacity, if any. The bidders will be free to install spare LNG terminal capacity which will also be utilised for tolling arrangement. In the calculation of the RLNG price, the bidders will only apply LNG terminal capacity charges (fixed plus variable) for the portion corresponding to the contracted quantities to the gas utility companies; (iii) all bidders will be required to quote the RLNG price (at SSGC''s delivery point) linked to market benchmarks in US dollars per million BTU (gross). The market benchmarks will be specified by the bidders such as Brent, basket of crude or other market indices (with publication source). Tolling tariff up to the delivery point for spare LNG terminal capacity shall also be quoted separately; (iv) the lowest two evaluated bids will be ranked first and second which will be subject to negotiation. In order to award the contract to the bidders on the negotiated prices, relaxation in the corresponding PPRA rules is required; (v) in relaxation of para 9 of LNG Policy 2011, the government guarantees will be provided to the gas utility companies in order to guarantee payment for purchase of RLNG depending on the price (2 to 3 months value of RLNG for a rolling L/C for two suppliers in the range of $700-1000 million). Furthermore, the government guarantees already issued in respect of Independent Power Plants (IPPs) or others may also be assigned for RLNG payments; (vi) in view of the changing dynamics of LNG markets, the RLNG price will be subject to revision after five years on mutually agreed terms. However, if the RLNG price at delivery point, at any time, goes beyond the imported fuel oil price, the RLNG price formula will also be reviewed. Any disputes or disagreements on the price revision will be settled through international arbitration involving an LNG market consultant of international repute; (vii) in case the RLNG suppliers procure any LNG cargoes from the spot market against base-load volumes (excluding volume flexibility mentioned, envelop-1, item f), suppliers will declare such cargoes and any price advantage arising out of such spot cargoes (compared to contract price formula) shall be adjusted in the RLNG price accordingly for Sui Companies;(viii) bid(s) may be rejected if the lowest evaluated bid(s) result in a delivered RLNG price at SSGC''s delivery point higher than BTU parity with imported fuel oil price or any other valid reason as per normal business practices; (ix) the prospective bidders will submit their proposals as per the broad guidelines based on which the gas utility companies will develop the RFP. A bid bond will be required to ensure seriousness of the bidders. To ensure compliance with the contract, a performance bond (by the winning bidders) and penalties for non-performance will be specified; (x) ''Single-stage, two-envelope bidding procedure'' will be adopted in terms of rule 36(b) of the Public Procurement Rules, 2004 for the project. The first envelope will include the technical proposal (including bidder''s information) to ascertain the capability of the suppliers or terminal operators to ensure sustainability of supplies after the contract award. Commercial offers (envelope - 2) of only those bidders would be opened who qualify; (xi) the capacity allocations made to companies for direct sales to other consumers (under the third party access regime of EoIs) will continue subject to Ogra rules and regulations; (xii) the government will encourage the participation of multilateral development banks (MDBs) in LNG import projects to facilitate the financing of such projects through equity participation by MDBs and MDB instruments such as political risk guarantees and partial credit guarantees; and (xiii) para 3.1(c) of LNG Policy, 2011 provides that LNG imports can also be made on spot purchases based on market and commercial considerations. Gas companies will be allowed to purchase LNG from spot market without competitive bidding for which waiver of PPRA rules is solicited.
Petroleum Ministry recommended the government to consider option of utilisation of spare capacity available with the bidders for LNG purchases on government-to-government basis or on-spot purchases. An MoU has been signed with Qatar Gas and they have provided a term sheet subject to negotiation. Qatar Gas has also required guarantees by a satisfactory credit support and or an acceptable performance guarantee.
The RLNG price will be factored in the Weighted Average Cost of Gas (WACOG). A separate summary will be submitted to the ECC for seeking policy guidelines for fixation of category wise consumer prices once LNG prices are known. However, it is recommended that the RLNG volumes (and price) are primarily allocated to large consumers connected to the main distribution and transmission network to replace liquid fuel consumption and meet un-served demand. The RFP will be prepared by the Sui Companies and will be approved by the LNG committee, comprising Member, Energy, Planning Commission, Director-General (Gas), Joint Secretary (Corporate Finance), MD SNGPL and MD SSGCL. The same committee will be responsible for evaluation of bids and recommendations to ECC of the Cabinet for final approval for award of the contract. In addition to this, services of a consultant having international experience in LNG business will be hired by the Sui companies to assist the committee.
A higher level committee, comprising the minister for petroleum, deputy chairman, Planning, finance minister, Secretary P&NR, MD SNGPL and MD SSGCL, will be authorised to negotiate the prices with the bidders, for which a relaxation of Rule 40 of the PPRA Rules, 2004 has been requested.