Financing projects: government may revise gas provision cost criteria

The government is likely to revise gas provision cost criteria, at the request of gas companies, to provide funds for development projects, or loans at 5 percent, sources in Petroleum Ministry told Business Recorder.
The two gas companies--Sui Northern Gas Pipelines (SNGPL) and Sui Southern Gas Company (SSGC)--are purchasing gas from exploration and production (E&P) companies and supplying (selling) to various categories of consumers. They are operating on fuel cost plus 17.5 percent return on assets formulae under licence from the Oil and Gas Regulatory Authority (Ogra). The companies are implementing/extending distribution development schemes to supply gas to new areas of the country on recommendations of parliamentarians and GOP directives.
Sources said that based on the recommendations of a ministerial committee comprising Ministries for Labour, Manpower and Overseas Pakistanis, Foreign Affairs, Petroleum & Natural Resources, Water and Power, Information Technology, Humayun Aziz Kurd, MNA and Secretary Petroleum & Natural Resources, the Federal Government in June 2008 revised the per consumer cost criteria upward by 2/7 times for supply of gas to new towns/villages which, for different provinces, are as under:
Old criteria Punjab/Sindh, Rs 20,000, new criteria Rs 54,000, KP old criteria Rs 40,000, new criteria Rs 108,000, Balochistan, old criteria Rs 100,000, revised criteria Rs 270,000. Further, the past practice of assuming 30 percent consumer base as potential consumers has also been revised as 60 percent which has effectively increased the cost criteria 5.4 times.
This revision in the cost criteria has adversely affected the financial health of gas companies which is evident from the following: cost of directives issued since June 2008 SNGPL Rs 34.3 billion, SSGC Rs 7.5 billion; share of SNGPL on the basis of revised cost criteria, SNGPL Rs 24.1, SSGC Rs 4.1 billion; share of SNGPL on the basis of old cost criteria, SNGPL Rs 6.6 billion, SSGC, Rs 1.3 billion; and increase in financial burden due to revision in criteria, SNGPL Rs 17.5 billion, SSGC, Rs 2.8 billion. Practically, the revision has increased SNGPL's burden from 19 percent from operations, which is not enough to continue financing ongoing capital expenditure on the directives being received from GoP without resorting to borrowed funds from banking sector.
Sources said that companies are operating on more or less 17 percent return on assets regime which does not allow financial charges (interest) as operating expenses. At the moment, financing from financial institutions is available at interest rate ranging from 14 percent to 16 percent. Hence, the companies have no incentive to initiate new projects funded through commercial loans, as any financial charge incurred in borrowings will directly reduce their profitability.
In view of these circumstance, the companies have suggested either (i) restore old cost criteria, or (ii) 100 percent soft term loan at five percent mark-up for feasible projects be allowed.