Qadirpur issues are far from over

Thursday saw investors going berserk at the Karachi Stock Excha-nge, showing a particular liking for the shares in OGDC and PPL, after the former released an early morning notice regarding Ogras announcement of the provisional notification of wellhead gas price of Qadirpur field.
What investors seemed to have missed in their euphoria, is the word provisional, which suggests that the final revision could be much more or much less than this one - as normally has been the case with many provisional numbers in the past.
Tracking into previous such announcements wouldn go amiss to better judge the hype and importance of the issue. Ever since it was last revised in 2007, the Qadirpur gas field wellhead price revision had been long overdue. Now, the regulation authority has announced different wellhead prices for four half-yearly periods starting from January 2008 to December 2009.
The provisional price from Rs161.02/mmbtu in 2007 has been increased by 32 percent to Rs231/mmbtu for the Jul-December 2009 period. The earnings impact analysis on OGDC and PPL have poured in from all the corners of the analysts community - reaching a consensus earning upside of Rs1.6/share and Re 0.6/share for the OGDC and PPL respectively, in FY10 alone.
What is more important is that the price revision seems more like the exchange rate differential benefit during the two year lapsed period. OGDC, the majority stakeholder in Qadirpur field is still in negotiation with the government over the final pricing mechanism.
The issue of delay in the installation of compressors hasn yet been sorted out between the two parties and could be detrimental in reaching a consensus over the final price. Moreover, the role of Economic Coordination Committee (ECC) cannot be undermined, as whatever the price level notified by Ogra, it will have to be approved by the ECC.
Although, Ogra has not notified any upper limit pricing cap in its provisional announcement, the buzz in the market is that price cap would not be more than $300-320/ton of furnace oil price, up from the previous limit of $210/ton. If thats the case, then it is well below the expectations, which soared last year after news reports hinted that the field price could be capped at $400/ton.
Then, there is another player in the game besides Ogra and the field stakeholders - i.e. the Sui Northern Gas Pipelines (SNGPL). For OGDC and PPL to get the revised price from Qadirpur, the government will have to raise consumer tariff for the gas distributed through SNGPL.
Being a large field, Qadirpur has a considerable impact on consumer tariffs, which makes the governments job even more difficult to raise gas tariffs merely three months after a massive 18 percent increase across the board. The ECC will again be on the decisive end of this issue as it will have to choose to approve or disapprove, what could be a proposal of a 4-5 percent increase in gas tariffs.
For those who see the glass half full; even if the government decides not to increase the politically sensitive gas tariff, things would still be in control. The argument that OGDC and PPL would be compensated through an adjustment in SNGPLs Gas Development Surcharge (GDS), holds some weight.
But those who see the glass half empty, and who unfortunately are in large numbers, believe that things are not as simple as they may seem. SNGP faces huge UFG losses and any adjustment made in GDS would further dent its ability to absorb UFG costs.
Secondly, and rather more importantly, the government, given its fiscal constraints, is in dire need of money and it is hard to fathom that it will let go a substantial amount from the GDS this easily.
In short, it appears a bit too early to incorporate the impact of Ogras announcement on the earnings of gas explorers - as the dilemma like mentioned above might lead to considerable delays in cash flows to both OGDC and PPL.