ISLAMABAD, May 14: The ministries of petroleum and natural resources, privatization and finance have opposed a move to allow direct import of furnace oil by the independent power producers (IPPs) because that could jeopardise the privatization of Pakistan State Oil (PSO) and reduce its sale proceeds.

Wapda had proposed to allow IPPs to import the furnace oil directly through amendments in the implementation and fuel supply agreements to reduce intermediary costs on fuel cost.

The PSO has long-term agreements with IPPs for uninterrupted fuel supplies to IPPs for up to 30 years, which are protected under sovereign guarantees.

Background discussions with officials of petroleum and privatization ministries said that PSO would lose major chunk of its business if it was deprived of fuel supplies to power companies through dismantling its fuel supply agreements (FSAs).

The PSO had made huge investments to develop storage and port-handling facilities for fuel supplies on the directives of the federal government to meet fuel requirement of IPPs, and was required to pay heavy penalties if it failed to maintain uninterrupted supplies.

The sources said that PSO was on the advanced stage of privatization and any move to deprive it of its business would be seen by prospective investors as loss of market and would definitely tend to discount the bid price.

They argue that it should be left to the new buyer to decide, in consultation with the petroleum and privatization ministries, whether it wanted to continue with the existing FSAs and if not, how to deal with IPPs and what to do with storage and port handling facilities: whether Wapda or IPPs would be ready to purchase these facilities or pay rent.

These sources also see a lot of legal questions. To what extent the government could continue with sovereign guarantees if PSO failed to meet its obligations in the post-privatization scenario is a question the government will have to look into very carefully.

Commenting on some legal and practical issues, the sources said that in pursuant to guarantees issued under the IPPs implementation agreement (IA) the government currently guaranteed PSO’s payment obligations, under the fuel supply agreements, if the PSO defaulted.

A failure to maintain government guarantee in connection with a PSO privatization could give rise to an IPP termination right under the IA. Unless the guarantees were protected in the post-PSO privatization, the government risked the possibility of IA termination.

The finance ministry is of the view that the compensation would be for the IPPs lost capacity payments which the IPP would expect to receive in pursuant to the power purchase agreements or any liquidated damages imposed on the PSO.