AGP highlights financial irregularities and circular debt in oil and gas sector

ISLAMABAD: The Auditor General of Pakistan (AGP) has unearthed financial irregularities of hundreds of billions of rupees in Oil and Gas Development Company Limited (OGDCL) and receivables from gas companies during the financial year 2023-24.

According to Clause 13.03 of the GSPAs, the buyer of gas shall pay within 30 days of invoice in the designated bank account share of each partner and in foreign exchange within 45 days from the date of receipt of invoice. Similarly, as per COSA, the refinery shall pay due amount within two months from the date of receipt of invoice from each partner of the producing field.

During audit of OGDCL for the FY 2023-24, it was observed that an amount of Rs 635 billion million was outstanding as on June 30, 2024, mainly on account of inter-corporate circular debt from gas companies and power producers i.e., SNGPL, SSGC, Uch Power Private Ltd. and Attock Refinery Limited.

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Out of total receivables, an amount of Rs 350 billion (55 percent) was outstanding beyond one year which included Rs 2.195 billion pertaining to oil refineries and other consumers. Audit noted that weak financial management and non-resolution of circular debt issue resulted in non-recovery of outstanding amount of Rs 635 billion. The matter was reported to the management in August, 2024. In DAC meeting held on January 1 & 2, 2025, the management stated that an amount of Rs 153.741 billion had been recovered up to November, 2024. The DAC directed the management to get the recovered amount verified from Audit and expedite the recovery of balance amount. No further progress was reported till finalization of the report. The audit recommended to expedite the recovery of outstanding amount besides pursuing the issue of circular debt with the Petroleum Division/Federal Government.

The audit contended that the issue was reported earlier also in the Audit Report for Audit Year 2019-20 vide para number 2.2.6.39 having financial impact of Rs 321,241 million and in Audit Year 2023-24 vide para number 2.2.4.12 having financial impact of Rs 577 billion. Recurrence of same irregularity is a matter of serious concern.

The OGDCL: Undue retention of Funds of BESOS - Rs 41 billion:

According to Supreme Court of Pakistan order dated October 22, 2020, operative part thereof at Para 19 regarding Benazir Employees Stock Option Scheme (BESOS), ?in view of discussion where the very scheme was found to be against Article 154 of the Constitution, the judgement dated November 24, 2016 passed by the learned Islamabad High Court in ICAs No. 292 to 294 of 2016 and uphold the judgment dated January 03, 2018 passed by the learned High Court of Sindh in Constitution Petition No. 1837 of 2014 was set aside. Further, according to Finance Division O.M F.NO. 8(6) AO-CF/2021-22 issued on May 09, 2022, Petroleum Division was tasked to direct the concerned SOEs to deposit the balance amounts under BESOS in the Federal Consolidated Fund within 07 days. During audit of OGDCL for the FY 2023-24, it was observed that BESOS was initiated on August 14, 2009 and Federal Government decided to distribute 12 percent of its equity among workers of SOEs to encourage stake and ownership of employees. OGDCL transferred 432.189 million shares valuing Rs 43. 218 billion to OGDCL Employees Empowerment Fund (OEET). On October 22, 2020, Supreme Court of Pakistan issued a detailed order, declaring that BESOS was executed in breach of Article 154 of the Constitution of the Islamic Republic of Pakistan. Therefore, any amount deposited/set aside by the SOEs was to be immediately deposited in the Federal Consolidated Fund. However, despite lapse of four years, the management failed to implement the Judgment of SCP. Out of 432.189 million shares, OEET transferred back 165.665 million shares to OGDCL but the management did not reflect this fact in the financial statement of OGDCL. Remaining 266.524 million shares were still with OEET. Further, an amount of Rs 41 billion was accumulated over the period on account of unpaid dividends on BESOS shares but the management did not deposit the same in the Federal Consolidated Fund. This resulted in non-implementation of Supreme Court judgment leading to non-transfer of shares and non-deposit of accrued dividend in the FCF - Rs 40,870.881 million. Audit maintained that due to weak management, accrued dividend of Rs 40 billion on BESOS could not be deposited in the FCF, and the shares were also not transferred to Government. The matter was reported to the management in September, 2024. In DAC meeting held on January 1 & 2, 2025, the management stated that OGDCL had deposited Rs 20.000 billion on September 11, 2024.

The AGP concluded undue favour to the contractor due to less deduction of LD charges - Rs 117.902 million.

According to Clause 12.1 of contract signed between OGDCL and M/s Siemens Pakistan for hiring of services for C-Type inspection and core exchange of gas turbines EGT-2 and EGT-3 installed at Uch-I plant, if the contractor fails to deliver any or all of the good/services within the time period(s) specified in the contract, the purchaser shall, without prejudice to other remedies under the contract, deduct from the contract price/bank guarantee as LD, a sum not more than 0.5 percent of the contract price per week or part thereof for first four weeks, 1.00 percent per week for next four weeks and 1.5 percent per week exceeding four weeks up to maximum extent of 10 percent of the contract value. During audit of OGDCL for the FY 2023-24 it was observed that the management initiated a case for C Type inspection with service and replacement of parts of Gas Turbines on proprietary mode from M/s Siemens Pakistan amounting to GBP 3.995 million. As per technical and financial bid evaluation, the countries of origin were Great Britain, Vietnam, Germany, USA, Belgium and China.

The contract was signed on September 27, 2022 with the applicable period of one year. M/s Siemens supplied two wrong bearings valued at GBP 55,973.400 and short-supplied two bearing shells valued at GBP 29,549.100 on the plea that the country of origin was India. During service of Turbines, the contractor used old parts with commitment that these old parts would serve the purpose. Thus, contractor failed to fulfill the commitment of contract within stipulated period. LD charges @ 10 percent amounting to GBP 399,597 should have been imposed but OGDCL imposed LD charges on missing bearing shells only. This resulted in undue benefit to the supplier by imposing less LD charges instead of due LD charges of GBP 396,642.090 equivalent to Rs 117.902 million.

Loss of revenue due to forced curtailment of gas because of line pack issue of SNGPL – Rs 13 billion. According to Rule 5(5) of the Corporate Governance Rules, 2013, the board shall establish a system of sound internal control, which shall be effectively implemented at all levels within the Public Sector Company, to ensure compliance with the fundamental principles of probity and propriety. Further, according to minutes of 263rd BoD meeting dated November 01, 2023, it was stated that OGDCL incurred loss due to less gas intake by SNGPL from Qadirpur field due to SNGPL system constraints. Furthermore, according to minutes of meeting on workshop on forced gas curtailment held on May 06, 2024, OGDCL elaborated the consequences of curtailed gas and loss to OGDCL/national exchequer. It was further briefed that the reduction of 350 MMCFD natural gas flows from the major local gas fields has created difficulties for the producers which can inflict a huge damage to the wells. During audit of OGDCL for the FY 2023-24, it was observed that OGDCL had to curtail production from its 05 fields during the CYs 2021 to 2024. The less gas intake by SNGPL from Qadirpur, Nashpa, Chanda, Dhok Hussain and Togh fields due to SNGPL system constraints adversely impacted production. The forced reduction of natural gas flows from major gas fields created difficulties which could inflict a huge damage to the wells. The old gas fields were more vulnerable as they could not be recharged when the gas flows from them were massively decreased. OGDCL failed to take up matter with DG (Gas) to take remedial measures. This forced gas curtailment due to less intake by SNGPL resulted in revenue loss of US$ 46.480 million equivalent to Rs 13 billion.

The audit maintained that less gas intake by SNGPL resulted in curtailment of production and loss of revenue of Rs 13 billion to OGDCL.

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