ISLAMABAD: Questioning the legality of the business of liquefied natural gas (LNG), the Oil and Gas Regulatory Authority (Ogra) has asked three key oil and gas companies to secure a legal cover from the government for provisional pricing of the commodity to avoid legal and financial complications.

In a letter to key stakeholders in the LNG supply chain — Pakistan State Oil, Sui Southern Gas Company and Sui Northern Gas Pipelines Limited and ministries of finance and petroleum — Ogra said that since the pricing, sale and invoicing of LNG business in its existing form and documentation were not legal in the eyes of the law, the regulator could not legalise or approve them.

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Ogra has pointed out seven major legal shortcomings in finalisation of sale price of re-gasified LNG (RLNG) for end-consumers.

“Determination with respect to RLNG price can only be done once the desired information/documents complete in all respect are submitted,” Ogra said in the letter, referring to a series of meetings held with oil and gas companies and the petroleum ministry in recent weeks.

It asked the stakeholders to provide “approval of the federal government regarding a master sale-purchase agreement signed between PSO and Qatar Gas and the rate of LNG in respect of the cargo purchased uptill now”.

Secondly, Ogra has sought the agreement and term sheet agreed upon with the Port Qasim Authority given the fact that PQA charges have been included on a provisional basis in the RLNG price demanded for approval without any rationale. Thirdly, the regulator is also not at ease with the absence of certified copies of tripartite agreement (among Pakistan State Oil, Sui Southern Gas Company and SNGPL) and the swap arrangement to connect LNG received at port and transported to the end-consumers, for example, in Punjab.

The fourth requirement relates to SNGPL’s agreements with RLNG consumer. As the fifth, Ogra says, “Sui Northern Gas Pipelines Limited cost of service has been wrongly calculated as it did not encompass the RLNG volume in total gas volume to determine unit rate and did not segregate the network to the extent of RLNG transmission and distribution segment only”.

Ogra has also pointed out that no rationale has been provided to calculate the retainage (LNG quantities not transferrable out of gasification unit or gas pipeline system) for working out total cost of RLNG.

The seventh shortcoming, Ogra says, it has not been provided any report by Engro Terminal or SGS certification firm in respect of LNG quantities received and RLNG delivered.

Ogra has also noted that a number of summaries have been moved by the stakeholders involved in the supply chain, but the record of basic requirements for pricing mechanism was not presented to the federal government.

It said PSO claimed to have imported 9-10 cargoes with the concurrence of the petroleum ministry, but “no evidence/document has been provided to this effect”.

The regulator said LNG could not be compared with other petroleum products which had an established and approved mechanism being practised for decades.

It said oil pricing had almost completely been deregulated and its rates verification mechanism provided by the federal government while involvement of the Oil Companies Advisory Committee and assurances by oil marketing companies of its transparency and long-term contracts at the government level were already available on record, but such transparency was not available in case of LNG imports so far.

Even after the arrival of first LNG cargo at Port Qasim on March 27, LNG is being supplied to fertiliser plants, mostly Pak-Arab Fertilisers, and to compress natural gas (CNG) stations on provisional orders of the petroleum ministry.

The main issue is that while the government has given an end-price inclusive of all transportation and gasification charges to CNG at around $14-15 per MMBTU depending on the purchase price, LNG supply to fertiliser plants is being charged at the rate of domestic gas prices or about $4 per MMBTU lower than imported product.

Resultantly, Pakistan State Oil has developed a new circular debt of around Rs20 billion on its account. Who will pick up this Rs420 per MMBTU price differential and how this will be adjusted at a later stage when Ogra concludes pricing mechanism is unknown.

Published in Dawn, September 14th, 2015

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