WHILE Wapda, KESC and independent power producers (IPPs) are under threat of suspension of oil and gas supplies by distribution companies on account of non-payment of outstanding bills, a letter from the Presidency issued this week warns them “not to suspend power generation on the pretext of payment default’’.

“Can there be anything more ridiculous than this warning?’’ questions an angry chief executive of one of about two dozen IPPs. The IPPs are angry because they are under perpetual notice for more than a year now from their fuel suppliers -- oil and gas distribution companies -- on non-payment of outstanding dues. The IPPs are unable to pay their fuel bills as purchasers of electricity are not clearing their dues.

“Instead of showing a plan and drawing up a roadmap to solve the circular debt issue within a certain stipulated timeframe, some wise man in the Presidency warns us against suspension of power generation’’, he said.

Wapda is under notice from Pakistan State Oils (PSO) and two gas distribution companies for default in payment of almost Rs11 billion to gas companies and a similar amount to PSO. Wapda promised to pay Rs500 million per day to PSO to clear its outstanding debt. But for the last 15 days it has not paid any money resulting in accumulation of Rs7.5 billion. Not left with any choice, the PSO has served a notice on Wapda.

All actors in the energy sector are, in one way or the other, under notice from each other, which invites government intervention. After this intervention there is some lull for a short period. “It is almost a replay of 2001 situation when the government resolved the issue by making adjustments in the book entries and issuing bonds’’, recalled a source in PSO.

As the situation stands today, the PSO has a claim of more than Rs85 billion on various government and non-government institutions.It has to pay more than Rs71 billion to refineries and is desperately in need of money to open letters of credit for import of furnace oil and other products. Its customers – PIA, power companies and transporters - need furnace oil, aviation fuel, petrol, kerosene, diesel etc. PSO enjoys a market share of more than 71 per cent but prices are controlled by the government.

Oil price is mainly politically driven say analysts. The previous government preferred to enlarge budget deficit to 7.5 per cent in 2007-08 by accumulating subsidies, instead of passing on the impact of rise in international oil prices to consumers.

It is for this reason that falling international oil prices have not brought much relief to consumers as well as to PSO, which registered a net financial loss in the first quarter of 2008-09 (July-September) on inventory.

“Petrol prices are expected to come down further and will eventually be less than those of diesel,’’ a market analyst of an oil distribution company indicated. “Rise in petrol consumption will tend refineries to produce more,’’ he explained. Since petrol is a fine-end product, it will lead to increasing production of all other products.

Analysts in oil distribution companies believe that international oil prices may not come down ‘below $40 a barrel’, even if downward slide continues. But analysts in an electric generation company said there was still some room for prices to drop even below $40 a barrel level.

Hubco has to receive Rs47 billion from Wapda for the power it sells to the national grid. It has to pay Rs37 billion to Pakistan State Oils (PSO) for oil purchases. On a rough average, Hubco consumes about 4,500-5,000 tons of furnace oil in a day to generate about 900 plus megawatt.

“Wapda has to pay $1.5 billion to Hubco and Kapco,’’ Javed Mahmood, chief executive of Hubco said. It owes Hubco $600 million and $900 million to Kapco.

Right now Hubco has an inventory of about ten days’ stock. “But we have to maintain a minimum stock of 20,000 tons of furnace oil without which the plant becomes dysfunctional.

This lingering issue of circular debt is sending a negative signal to the prospective investors in power projects who otherwise see an opportunity in this sector. In May this year, a team of Japanese businessmen offered to set up a 500 megawatt power project in Pakistan.

Only last week, Punjab’s Chief Minister Mian Shabaz Sharif held a detailed meeting in Hong Kong with private power producers and invited them to visit Punjab to consider investment in environment-friendly electricity projects. Besides offering them hydro-based project at various sites in Punjab, Shabaz informed them about 250 million tons coal reserves in Mianwali. Sources in Lahore expect a quick response from Hong Kong investors who may come to Lahore early next month.

The Asian Development Bank late last year sponsored a study on gas-fired power project at Dharki on the basis of which feasibility can be prepared. Dharki gas is said to be suitable only for generation of electricity.