Power Division seeks to release LNG plants from fuel offtake commitments

Updated October 30, 2019

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In a major move, the Power Division is seeking an end to the existing minimum guaranteed annual Liquefied Natural Gas (LNG) offtake to facilitate privatisation of $2 billion power plants in Punjab amid strong resistance from state-owned oil and gas companies. — AFP/File
In a major move, the Power Division is seeking an end to the existing minimum guaranteed annual Liquefied Natural Gas (LNG) offtake to facilitate privatisation of $2 billion power plants in Punjab amid strong resistance from state-owned oil and gas companies. — AFP/File

ISLAMABAD: In a major move, the Power Division is seeking an end to the existing minimum guaranteed annual Liquefied Natural Gas (LNG) offtake to facilitate privatisation of $2 billion power plants in Punjab amid strong resistance from state-owned oil and gas companies.

Top government officials confirmed to Dawn that three major oil and gas suppliers — Sui Northern Gas Pipelines Ltd (SNGPL), Sui Southern Gas Company Ltd (SSGC) and Pakistan State Oil (PSO) — have put on record in recent meetings that they would not remain financially viable entities as their entire LNG supply chain from Qatar to end consumers was based on guaranteed offtakes.

This comes after an estimated investment of about $7bn on the LNG supply chain infrastructure. The basic premise of LNG imports over the past decade had been to reduce import bill through substitution of expensive furnace oil, increase power sector efficiencies and lower carbon emissions.

Gas companies fear LNG glut if decision implemented

As a result, more than 80 per cent of total LNG imports were consumed by the power sector. The total infrastructure investment included about $5bn on four LNG power plants in Punjab, more than $1bn on LNG pipeline network, another $1bn two re-gassification terminals.

The Power Division has now suggested three options in a draft summary to the Economic Coordination Committee (ECC). Under the first option, it has proposed “to withdraw the existing minimum guaranteed offtake of 66pc on annual basis”. Accordingly, the annual production plan shall continue to be provided without any minimum guaranteed offtake of 66pc and this shall be reflected in the revised Power Purchase Agreement (PPA), Gas Supply Agreement (GSA) and Implementation Agreement (IA) to be executed for the purpose of privatisation of National Power Parks Management Company Limited (NPPMCL).

The NPPMCL is a subsidiary of the Power Division and the owner of Haveli Bahadur Shah and Baloki Power Projects of 1320MW each.

The second option entails two further choices in case the government is contractually bound to adhere to the PSO agreement with Qatar Gas till the year 2025. The first choice is to withdraw the existing minimum guaranteed off-take of 66pc immediately after the review period of PSO agreement with Qatar Gas in 2025.

However, a change should be incorporated in the revised PPA, GSA and IA to be offered for privatisation to ensure that SNGPL to follow National Power Control Centre’s instructions pertaining to diversion of unutilised RLNG and such instructions shall take precedence over any other LNG supply arrangement of SNGPL with any power sector project operating on RLNG on ‘as and when available basis’.

The second choice under this option is that till 2025, the difference of the RLNG requirements for these two power plants as per economic merit order principle and the RLNG requirements for minimum 66pc guaranteed offtake should be utilised by other sectors of the economy on Oil and Gas Regulatory Authority notified price of RLNG or sold back to the spot market.

Under the third option, the Power Division has proposed that an additional cumulative impact of about Rs471bn on the basket arising due to the guaranteed off-take of 66pc up to 2025 on account of dispatch of these power plants beyond the principle of economic merit order shall be allowed as subsidy to power sector consumers.

When contacted, the Power Division’s Senior Joint Secretary Zargham Eshaq said he was not aware of any such proposal while Secretary Power Irfan Ali did not respond.

Informed sources told Dawn that based on this summary, the Petroleum Division has directed the PSO and the two gas companies to submit their written risk allocation profile within 36 hours so that their viewpoint could also be placed before the ECC.

A Petroleum Division official said that in case of 66pc “take or pay” clause gone, the SNGPL and PSO would go bankrupt because they would not be left with any dependable consumer class to sell this imported gas that had guaranteed agreements with foreign suppliers involving heavy penalties.

He said the two gas utilities had no substitute consumers. “The only consumers that exist in the system are those who consume it for almost free like domestic consumers and those who want it subsidised like zero-rated sectors and fertiliser”.

He said the Power Division was now more interested in coal-based plants to be operated after it contracted more than the required generation capacity and has exposed the entire energy sector to heavy losses.

The PSO’s receivables had gone beyond Rs330bn while the receivables of two gas utilities were more than Rs100bn as of now. Producers like Oil and Gas Development Company Ltd and Pakistan Petroleum Ltd have more than Rs300bn in outstanding dues and most of these funds remain stuck up with the power sector.

On top of this, private entities have now been allowed direct LNG imports that would drive transport sector and other industries away from the gas utilities. The PSO’s foreign guarantees would also be exposed in case of non-fulfillment of its obligations to take full LNG quantities.

The SNGPL has told the government that GSAs 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 SNGPL but also PSO and SSGC, being the key players involved in G-to-G negotiated RLNG supply chain.

The company has advised the government not to amend these contracts with respect to any change in offtake 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, SSGC, etc.

Published in Dawn, October 30th, 2019