June 4, 2003	Wednesday	Rabi-us-Sani 3, 1424

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ISLAMABAD, June 3: The government is facing a Rs3 billion penalty for the sovereign guarantees it had given to a US-based independent power producer for the smooth fuel supply and power generation by the Oil and Gas Development Company Limited (OGDCL) and Wapda.

Official sources said the Uch Power Limited, a 584mw power company, had declared two separate kinds of force majeure for failure by the OGDCL and Wapda to comply with the provisions of the implementation of the fuel supply agreement.

Under the pact, the power company has the right to stop its power generation activities for the reasons beyond its control, and the federal government is required under its sovereign guarantees to pay penalties to meet losses to the power firm.

The issue was brought to the notice of the federal government through the Economic Coordination Committee of the Cabinet which met last week to overcome the problem.

The ministries of water and power and petroleum and natural resources have informed the government that Pakistan could not take the case for the international arbitration because of two reasons. First, the arbitration cost, including legal fees, was higher than the penalty claims, and, secondly, it would send a wrong signal to foreign investors.

In view of the sensitivity of the case, the cabinet committee formed a high-powered body led by the finance secretary to examine various aspects of the case and hold negotiations with the company to resolve the penalty dispute through give-and-take.

Other members of the committee are secretaries of water and power, petroleum and natural resources, privatization and investment, and officials of the OGDCL and Wapda.

The Uch Power Company Limited, located at Dera Murad Jamali, is run on low BTU natural gas which contains high degree of moisture. The OGDCL which is the operator and owner of Uch gas field is required to provide uninterrupted gas supplies to the Uch power project.

In view of the high moisture content, the OGDCL was required to install a purification plant, while Wapda is required to install two minor generators on purification plant.

The two state-run entities had made sizable investments on these additional facilities to deliver purified gas to the power plant which had recently developed serious technical problems.

The Uch Power Limited has also served a notice for termination of the agreement.

Since both the OGDCL and Wapda have failed to meet their contractual obligations, the government is required under the guarantees to compensate the power company for the losses it has faced, the official sources said quoting a summary to the ECC.