ISLAMABAD: The Cabinet Committee on Energy (CCoE) has censured Petroleum Division for inordinate delay in Pakistan-Stream Gas Pipeline (PSGP) project, formerly known as North South Gas Pipeline, and sought alternate plan by mid of current month, sources close to SAPM on Petroleum and Power told Business Recorder. Sharing the details, sources said, Government of Pakistan and Government of Russian Federation signed an Inter-Governmental Agreement (IGA) on the cooperation of a milestone project to develop gas transmission infrastructure of 42" to 56" pipeline diameter, costing US $ 2.25-2.5 billion that will ensure enhanced energy security of Pakistan. From Port Qasim to district Kasur, spread over 1,040 km length of trunk pipeline, the project will secure sustainable gas supply infrastructure for next 40 years. This will be the most essential conduit between installation of new LNG terminals and industrial growth of Pakistan. Besides, this is a historic strategic opportunity to strengthen investment relationship with Russia.

Pakistan Stream Gas Pipeline Project was announced in a joint statement of Pakistan-Russia Inter Governmental Commission on November 26-28, 2014.

ECC gave its in principle approval on January 10, 2015. Later CCoE authorized Petroleum Ministry to engage with Russian counterparts on October 14, 2015. Prime Minister accorded approval to the draft of the IGA through summary on July 8, 2015 and IGA was signed in Islamabad by Petroleum Ministers of the two countries on October 16, 2015.

On April 11, 2016, ECC gave its decision on project model and constitution of PNE. However, ECC has also approved financing model of 1.2 bcfd capacity RLNG-III pipeline by Sui on January 5, 2018.

According to the Petroleum Division, between 2015 to 2020 timelines to finalize the contractual agreement was extended six times. Meanwhile the ECC decided to fund the project through GIDC on February 10, 2020. This was followed by the Supreme Court decision on the GIDC on August 13, 2020. On October 15, 2020, CCoE reiterated its decision to utilize GIDC in compliance with Supreme Court deadline which was ratified by the Cabinet with the direction to utilize GIDC subject to approval of GIDC HPPRB on December 24, 2020. Consequently, GIDC Board gave its approval on December 28, 2020 and Rs.62.5 million was released to ISGS on May 25, 2021 after completing the formalities of Finance Division.

Federal Cabinet approved the Protocol to IGA on March 9, 2021. Amended IGA has been signed on May 28, 2021 whereas the original IGA was signed on October 16, 2015. At present structure of Russian consortium has been finalized being seventh version in the last five years in which Russian nominated entity has been identified as FSUE (Russian Ministry of Energy), ETK (Execution specialist) and PAO IMK (Production specialist) - with a company namely, PAKSTREAM LLC.

The sources said, broad understanding has been achieved in the signed IGA equity share, role in decision making on selection of EPC contractor, pricing, FEED, risk sharing arrangements, facilitations and concessions/exemptions etc. According to the IGA, Pakistan nominated entity, Inter State Gas System, will undertake the project through GIDC proceeds of (74%) and external equity (26%).

Now the amended IGA paves the way for signing of shareholders agreement, draft of which has been shared with Russia on December 23, 2020. In return, Russian side shared the "Heads of Terms on March 17, 2021. Both parties are working on critical aspects of SHA including shareholding structure of SPC, Corporate Governance model, project implementation arrangements, securities /guarantees, tariff, facilitation, and risk mitigation.

The Petroleum Division argues that at this stage, key challenges include finalization of SHA by July 27, 2021 and the Petroleum Division is on the look-out for a professional legal team. A technical team comprising of officials has been notified and negotiation strategy is being finalized through deliberations on "Heads of Terms" and SHA, to safeguard commercial and economic interests of Pakistan.

Petroleum Division says that for that “project structure” needs to be finalized at the earliest. Decision about pipeline diameter needs to be made in the light of long-term energy needs and lifecycle costs. Decision about Pakistani companies' participation in EPC contract (local or international JV) needs to be made. GIDC component of financing (Rs. 321 billion) deposited in Federal Account No =I needs to be assured for the project. Route alignment and land acquisition needs to be finalized.

Formal project feasibility is not yet ready which can be done quickly through NESPAK for which a case for exemption from PPRA rules is in process. Work on alignment of completion of project with COD of new LNG terminals is also underway.

The sources maintained that looking at the overall picture, three scenarios are drawn which are as follows: (i) in scenario No. 1, there may be the Russian EPC Contractor (along with external funding partner), and Pakistani firms may be getting business for supply of raw materials, labor, O & M etc. Russia may enhance its equity contribution along with O & M contract post COD. Pipe manufacturing and compressor stations may go under Russian control (to be manufactured outside); (ii) in scenario No. 2, a consortium of local and international companies takes significant stake in the EPC contract along with enhanced financing exposure. In case of local manufacturing of pipeline, the project will deliver enhanced local technical/HR contribution, like SNGPL and SSGCL along with an international partner who may take long term O& M contract; and (iii) in case of a situation where Russians are no more interested in the project, Pakistan has to be ready with a contingent plan. Pakistan may form a consortium of local and international companies to win EPC contract along with enhanced financing exposure. Local manufacturing of pipeline may be introduced to ensure maximum local technical/HR contribution and SNGPL and SSGCL along with an international partner which may take long term O & M contract.

In order to move forward, Petroleum Division sought policy direction from CCoE on SHA negotiation, project structure and financing arrangements as well as allowing Petroleum Division to give strong signal to local firms to form JV ahead of selection of EPC contractor. Petroleum Division maintains that it may also be allowed to sign a local steel manufacturing industry to prepare for the forthcoming challenge.

"All this will be based on firm commitment from the Finance Ministry for advance releases of GIDC installment, commensurate with project expenditures while Petroleum Division continues to evolve its understanding on contingency plan in case of deadlock with Russians.

On June 24, 2021, the CCoE Chairman, Asad Umar observed that the issue was very important for the future economic growth and energy requirement of the country. Moreover, various directions have already been conveyed by the forum from time to time. Therefore, the project needs to have financial close without the further loss of time.

The Committee also observed that there are massive negative consequences for the delays in the implementation of this project and the deadline set by Supreme Court of Pakistan has already been missed, with no imminent possibility to start work. Therefore, an alternate plan needs to be finalized as soon as possible, but not later than mid-July 2021.

Copyright Business Recorder, 2021


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