SNGPL warns of huge fuel related costs if LNG power plants sold

Updated Oct 12 2019

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Voicing serious risks to its financial viability, the Sui Northern Gas Pipelines Ltd (SNGPL) has opposed the privatisation of two LNG-based government power plants (GPPs) of 2,640MW without absolving it of “take or pay” contracts with foreigner and local LNG suppliers. — AFP/File
Voicing serious risks to its financial viability, the Sui Northern Gas Pipelines Ltd (SNGPL) has opposed the privatisation of two LNG-based government power plants (GPPs) of 2,640MW without absolving it of “take or pay” contracts with foreigner and local LNG suppliers. — AFP/File

ISLAMABAD: Voicing serious risks to its financial viability, the Sui Northern Gas Pipelines Ltd (SNGPL) has opposed the privatisation of two LNG-based government power plants (GPPs) of 2,640MW without absolving it of “take or pay” contracts with foreigner and local LNG suppliers.

The federal government has taken in hand the sale of the two newly established power plants in Punjab worth $3 billion as top priority under the financial bailout programme signed with the International Monetary Fund (IMF).

Most of the financial risks associated with the move were highlighted by the Financial Adviser of the Privatisation Commission during the due diligence exercise of the National Power Parks Management Company Ltd — the owner of the Haveli Bahadur Shah and Balloki power projects of 1,320MW each.

The SNGPL has explained risk profile on account of implementation agreements (IA) and Gas Supply Agreements (GSAs) in case of GPPs.

The SNGPL has told the Privatisation Commission and the Ministry of Energy that it is not a party to the implementation agreement and Power Purchase Agreement (PPA) but obligations and rights of the government plants under the GSAs with SNGPL were reflected in the PPA including assured despatch of 66 per cent of the maximum gas allocation.

“GSAs with the GPPs were finalised on the basis of back-to-back arrangements with the upstream agreements. Therefore, any amendment in IA and PPA to change the risk profile of current RLNG supply chain will adversely impact not only the SNGPL but also PSO and SSGC, being the key players involved in G-to-G negotiated RLNG supply chain,” the SNGPL said.

The company has advised the government not to amend these contracts with respect to any change in off-take obligations of the GPPs just to make the project bankable and to attract the investors at the expense of huge losses to other entities like SNGPL, PSO and SSGC.

It also pointed out that upstream agreements, ie sale purchase agreement with Qatar Gas and corresponding SNGPL agreements with the PSO and SSGC were already locked on “100pc take or pay basis” and hence downstream agreements with the government plants reflect corresponding terms and conditions on a back to back basis, owing to the very nature of the transaction.

“The SNGPL, therefore, cannot revise minimum firm ordering of the GPPs unless and until upstream agreements including Qatar SPA and LSA between SSGC and Engro are revised for reduced volume as any surplus RLNG arising out of any reduction in take or pay for GPPs cannot be diverted to other consumers owing to tariff differential,” a letter seen by Dawn suggested.

Also, the RLNG was being supplied to GPPs through a supply chain involving different entities and SNGPL can only take obligation for its own failure of supply as provided under Reimbursement Agreement (RA) while the onus of default by other parties cannot be absorbed by SNGPL.

Hence, the existing arrangements, as available with RA, must continue. This will also provide comfort and security to the potential parties as long as the power purchaser guarantee capacity payments.

It reported that a joint meeting with PSO, SSGC, SNGPL and transition adviser along with Privatisation Commission consultants a few days back, the PSO had put on record that upstream agreement with Qatar was between G-to-G and there was no provision to revise the agreement while any reduced off-take by Pakistan shall result in triggering of ‘take or pay’ provisions and encashment of standby letters of credit (SBLcs) exceeding $1bn.

Published in Dawn, October 12th, 2019