Govt. favoring imported LPG over local production
Iqbal Z. Ahmed is the Chairman and CEO of Associated Group, which owns Pakistan GasPort Consortium Limited, Pakistan’s single largest LNG regasification and storage terminal, and Jamshoro Joint Venture Limited, a LPG extraction facility. Mr. Ahmed serves as the Chairman of SIMS (Services Institute of Medical Sciences), Lahore and President of GCU Endowment Trust.
In the following interview, Mr. Ahmed talks about the domestic LPG sector and the situation which has led to the closure of the company’s JJVL plant. Below are the edited transcripts:
BR Research: Let’s begin with the overview of the LPG sector.
Iqbal Z. Ahmed (IZA): LPG known as the ‘poor man’s fuel’ is a key energy source in the country largely used domestically and commercially. However, its use in the industrial sector is also picking up. It is a naturally occurring lighter hydrocarbon or may also be produced during the refining process of crude oil in refineries. LPG is an environment-friendly fuel. LPG in Pakistan includes both domestic and imported LPG.
Though LPG’s share in total energy supply stands at a little over 1 percent, it is a source of energy for critical areas that do not have piped gas availability. Around 65 percent of LPG is produced locally, while the rest of the demand is met through imports.
Besides 6 E&P companies and 5 refineries, Jamshoro Joint Venture Limited, JJVL has been the country’s largest private-sector gas processor with a share of around 15 percent. Then there are hundreds of LPG marketing companies and thousands of LPG distributors and over 30 LPG importers.
The sector is regulated by OGRA. LPG prices are regulated under the LPG Production and Distribution Policy 2016 by OGRA that notifies prices on monthly basis.
BRR: Tell us about JJVL plant and AG's activities in the LPG sector?
IZA: Our plant, Jamshoro Joint Venture Limited is a state of the art natural gas separation plant developed with 100 percent private ownership in 2005. Our first LPG extraction plant of 200 mmscfd was commissioned in 2005, followed by 125 mmscfd plant in 2014. JJVL’s latest total processing capacity has increased to 345 mmscfd, making us the largest private sector investment in the LPG sector.
Sui Southern Gas Company (SSGC) has been providing JJVL with natural gas produced by oil and gas fields in Sindh. Under its supreme court-validated agreement with SSGC signed in Dec 2018, JJVL separates Liquefied Petroleum Gas (LPG) and Natural Gas Liquids (NGL) from the gas and injects the natural gas at pipeline specifications into the SSGC gas system.
This contract was expiring on June 20, 2020, but was extendable. However, SSGC ended the contract with JJVL for reasons best known to them, and the plant has been sitting idle since June. As a result of this closure, over 310 tonnes per day of LPG has been pushed out of the system; and over 110 tonnes per day of NGL has been lost.
BRR: Why in your view would the government push out over 300 tonnes of LPG from the system? It’s not as if we are producing excess. Or is it because the quality of imported LPG is better?
IZA: The only plausible reason for such policy direction would be that the government is supporting the LPG imports over local production. This can also be seen from the lopsided taxation that puts indigenous production at a disadvantage. The Sales Tax differential where the indigenous LPG is taxed at 17 percent while imported LPG is taxed at 10 percent shows the government’s intent. The local LPG has a Petroleum Development Levy of Rs4669 per MT while the regulatory duty on imports have been removed. Furthermore, the government has moved a summary for further concessions on the imports of LPG. So there is a clear policy support for importers over local production.
Just recently, there have been reports that the SSGC’s 100 percent owned subsidiary SSGC LPG (Pvt.) Limited (SLL) has decided spend precious foreign exchange on the import of 2500 MT monthly which could easily be produced locally. We are trying to convince them but so far we don’t see government’s will to support local production. Such moves are pure disincentives for investment in the establishment of LPG extraction facilities in the country.
As a result of the closure of our LPG, 700 MT of import has started from Taftan. Firstly, Taftan LPG is banned by US under their sanctions order. This could be a big blow to the country once FATF takes notice. Secondly, all the gas coming from Taftan is of substandard quality and we have been repeatedly highlighting the need for a testing laboratory at Taftan to gauge the quality to no avail. And in addition, smuggling has also started.
BRR: What is the financial impact of JJVL’s closure on the economy?
IZA: The monetary impact of this is over Rs50 million a day in terms of loss to the economy. And there is no cogent reason for the decision. The annual revenue loss to the government and SSGC is in billions, which includes loss of Petroleum Development Levy, Sales Tax etc
That’s not it. There is an additional foreign exchange burden due to JJVL closure. this happens to tune in at $53.8 million for the foreign exchange spent on LPG imports to substitute JJVL production, additional foreign exchange spent on freight, foreign exchange earning loss due to non-export of NGL.
Also, JJVL, a project with replacement value of over $200 million and 50 percent foreign ownership, will have no choice but to declare bankruptcy. Moreover, the country’s GDP will suffer an estimated loss of Rs10 billion; over 5000 direct and indirect jobs will be lost; 750,000 homes will have to use Imported LPG and SSGC gas system will be put at risk with the injection of ‘wet’ gas into the system.
BRR: Coming to RLNG, you proposed an alternative to inking long term RLNG contracts to address energy woes. What’s the progress?
IZA: In the last three months where the government has been procuring RLNG from Qatar at 13.3 percent of Brent crude oil, RLNG is available at 2-3 percent of Brent in the spot market. I have been requesting the government to let the private sector import where private sector will fund the entire transaction and will be responsible for all the recoveries. the government is not fully utilizing the capacity of the terminal and is also not allowing private sector to come in. If they allow the private sector, the overall cost of RLNG would come down and benefit the consumer. The private sector is legally allowed to import LNG as per the Operations and Services Agreement. All the government has to do is to undertake third party access agreement as obligated by the LNG rules and LNG policy.
However, nothing is happening and it is all showing in the load shedding in Karachi, plants being run on expensive fuel and furnace oil import being allowed again. The priorities are not what the government claims them to be. Our second terminal is also being held up by the government for reasons not know to us. We have all the NOCs ready. There is idle capacity but the government does not want to give private sector a chance to bring in cheaper RLNG.
BRR: Circling back to the LPG issue that you face, what are SSGC’s contentions?
IZA: The Supreme Court of Pakistan, in their Order dated December 4, 2013, in CP 5/2011, held that SSGC is not free to deal with the asset of gas whimsically and in utter disregard of its fiduciary duty to the ultimate owners of the assets, the people of Pakistan. The Supreme Court of Pakistan further ruled that the supply of LPG to a large number of users is a matter of public interest impacting their lives, and supply of LPG to them needs to continue unabated.
We ae not aware of any rational reason for the government to end the contract. SSGC Board is claiming that the company suffered a loss during the 18-month agreement period. I am ready for an independent forum of independent experts to conduct the inquiry. We can prove that SSGC has actually made a profit of Rs1.5 billion. SSGC has zero investment in the JJVL facilities. During the 17 months of the Supreme Court mandated Agreement from January 2019 to May 2020, SSGC received revenues of over Rs5,700 million from JJVL, earned a profit of over Rs600 million, and saved over Rs500 million in Unaccounted for Gas (UFG) reduction. SSGC in its financial statements for 2018 declared a loss of over Rs14 billion; however, the losses would have been substantially higher if the JJVL income - more than 50 percent of which goes straight to the SSGC profit bottom line - and the reduction in UFG due to JJVL operations was not available.
On the other hand, SSGC has made key lapses. During the 18-month term of the Agreement, SSGC was to provide data to AFFCO for final determination of the revenue sharing formula. SSGC failed to provide the required data to AFFCO, and instead allowed the Agreement to expire without finalizing the revenue sharing formula, which is a clear contradiction of the orders of the Supreme Court. SSGC was also to make alternate arrangements for extraction of LPG and NGL, either directly or through OGDC; SSGC failed to make any such alternative arrangements during this period.
BRR: Should the LPG prices be deregulated?
IZA: Yes, and it was done at one point previously which attracted $1.5-2 billion worth of investment in the sector. But then it was changed. Market forces should be allowed to determine prices, but that seldom happens in Pakistan.
BRR: So what happens next?
IZA: We are in no way saying that imports should not be made. In dynamic markets, the governments provide level playing field to all participants. The decision of the SSGC Board of Directors to terminate the Agreement with JJVL without any alternate arrangements for processing the natural gas lacks technical, financial, commercial, and legal rationale. The people of Pakistan have been deprived of a very basic energy need; LPG prices have gone up contributing to inflation; the Government of Pakistan has lost revenues; SSGC has lost revenues from a profitable agreement; and the investment climate has been hurt.
We believe that the SSGC Board of Directors needs to review the decision and allow an extension, with mutual consent. SSGC will be free to terminate the Agreement with due notice and without any loss to the national exchequer once it develops alternate arrangements for processing the natural gas that are better than JJVL.