The government is considering to allow Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipeline (SNGPL) to jointly implement the Iran-Pakistan (IP) gas pipeline project due to funds being easily available from international investors and low operating costs, sources told Business Recorder.
They said that the government has been working on two options: to implement the project by Interstate Gas Company Limited (ISGCL), or by SSGC and SNGPL jointly with respect to operating cost of 1000 mmcfd. Funds provision to ISGCL entails a number of issues, like provision of equity, which would delay overall implementation of the project. However, the Ministry of Petroleum has proposed that ISGCL be compensated for its operating cost, and be reimbursed the actual cost of gas, by SSGC and SNGPL.
"As the capital expenditure would be incurred by SSGC and SNGPL, the cost of financing would be borne by them," sources said, adding that as the pipeline network would be used by SSGC and SNGPL, no charges for the pipeline network will be taken from ISGCL.
As one option, if the project is implemented by ISGCL, the company is likely to be given a return on equity (ROE) of 15 percent in $ terms (net of tax). Since the financial structure of ROE guaranteed companies is front-loaded and financial charges including principal repayments are taken as a passthrough item, it is estimated that average operating cost in the first ten years would be around Rs 70 to Rs 80 per 1000 mmcfd. This may increase with the depreciation in the value of the rupee against $. The current cost of SSGC is around Rs 15 per 1000 mmcfd, or Rs 5 per 1000 mmcfd after financial charges.
In the second option, if the project is to be implemented by SSGC and SNGPL jointly, which currently own 100 percent of ISGCL equity, they would be responsible for implementing and financing the project. They will be given a return as per current tariff formula on the capital expenditure. The gross return is 17 percent in rupee terms before financial charges and tax. After adjustment for financial charges and tax, the return would be lower. The cost per 1000 mmcfd under this financing structure would come to around about 40 percent of the cost incurred by ISGCL to implement the project.
"Therefore, keeping in view the cost comparison, it would be appropriate to allow SSGC and SNGPL to jointly implement the project," sources said, adding that the government of Pakistan can give its guarantee for raising funds by these two entities. Another factor which supports the implementation of the project by SSGC and SNGPL is the current international interest rate, which is around 5-6 percent for fixed long term loans.