ECC undecided on fuel offtake dispute for two LNG plants

Updated November 09, 2019

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Some participants press for blanket approval of proposal seeking an end to 66pc ‘take or pay’ condition for gas utilisation. — AFP/File
Some participants press for blanket approval of proposal seeking an end to 66pc ‘take or pay’ condition for gas utilisation. — AFP/File

ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet on Friday put off the settlement of a dispute between the Power and Petroleum Divisions over proposed withdrawal of guaranteed 66 per cent liquefied natural gas (LNG) offtake by two power plants — Haveli Bahadurshah and Balloki — on the priority privatisation list.

The meeting presided over by Finance Adviser Abdul Hafeez Shaikh was held with single-point agenda to “review and adjustment of risk allocation under power purchase agreement (PPA) and implementation agreement (IA) for the privatisation of National Power Parks Management Company (Pvt) Ltd.”

Informed sources said that some participants pressed for blanket approval of a summary moved by the Power Division seeking an end to 66pc ‘take or pay’ condition for gas utilisation.

Dr Shaikh, despite appreciating the quality input for and against the proposal from both divisions, did not allow a blanket approval in a rush.

The sources said that some senior members of the ECC highlighted the amount of subsidy required for capacity charges of the two plants after privatisation which appeared to be on much higher side than the immediate revenue needs of Rs300 billion through sale of the two plants.

A participant pointed out that the two power plants were estimated to supply about Rs185bn worth of annual energy but they would be on the lower side of the economic merit order and may need to be kept unutilised and paid capacity charges, necessitating subsidy in some cases going up to Rs117bn a year.

Another participant highlighted that the Sui Northern Gas Pipelines Ltd (SNGPL) had not yet received Rs20bn subsidy on account of cheaper gas it provided to the textile sector last year under a government decision. The additional Rs117bn subsidy would remain, therefore, questionable.

Dr Shaikh told the participants that privatisation plan for the two projects should remain in the fast track but desired the adjustment of risk allocation to be taken up at the next ECC meeting on the basis of pros and cons in terms of clear cut financial implications.

He also clarified that LNG import agreements with Qatar or other private suppliers would not be affected in any circumstances and financial risk assessments should be provided on the basis of two basic conditions: the privatisation will go ahead as planned and LNG import agreements would remain sacrosanct.

He also desired a roadmap on how the surplus LNG in case of removal of 66pc condition on two power plants would be consumed as it came to light that other power plants, industry, fertiliser and transport sector did not have the appetite for such quantities.

An official statement said the ECC noted that change in the percentage of gas supply to these plants managed would not affect their privatisation as the capacity payments of both the plants were ensured under the PPA. Therefore, the ECC decided that Privatisation Commission should go ahead with its transaction.

The Power Division had proposed withdrawing existing minimum guaranteed offtake of 66pc on annual basis and that annual electricity production plan should continue to be provided without this guarantee.

The division’s officials argued that in the event that “Pakistan is contractually bound to adhere to the Pakistan State Oil (PS0) agreement with Qatar Gas up to the year 2025”, the government should withdraw the existing minimum guaranteed offtake of 66pc immediately after the review period of PS0 agreement with Qatar Gas in 2025.

Till that, a new option should be incorporated in the revised agreements to be offered for privatisation that ensure the SNGPL to follow “the National Power Control Centre instructions pertaining to diversion of unutilised Regassified Liquefied Natural Gas (RLNG).”

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’s notified price of RLNG or sold back to the spot market and difference to be paid by power purchaser.

The Power Division has said that with the transition of generation mix towards cheaper and indigenous resources, resultantly displacing RLNG plants dispatch with local coal, nuclear and by imported coal, the existing minimum guaranteed offtake of 66pc under the PPA was not sustainable.

Additionally, if such guaranteed offtake continues to be maintained in the PPA, economic merit order would have frequent violations resulting into the dispatch of costly power plants and non-utilisation of the efficient generation plants due to said guaranteed offtake under the arrangement of take or pay loss of about Rs471bn till 2025 and, if gas is not diverted to other sectors.

Published in Dawn, November 9th, 2019