Increasing white elephants

Published June 28, 2021
It should have been completed by 2017-18, according to original plans.
It should have been completed by 2017-18, according to original plans.

Eight years on, the $2.5 billion gas pipeline from Port Qasim — the centre of liquefied natural gas (LNG)import terminals — to Lahore to meet the energy needs of industry upcountry remains in the air. The project justifies the feasibility of new upcoming LNG terminals to create gas transportation capacity from ports in the South to consumption centres in the North.

It should have been completed by 2017-18, according to original plans. However, the timelines to finalise the contractual agreements with Russia on a ‘strategic government-to-government’ basis have changed six times between 2015 and 2020. Yet, the authorities are now rethinking if Pakistan’s own entities — Sui Southern and Sui Northern Gas Companies — should develop the project on their own with limited external technical or financial support albeit even if with a lower capacity or to chip in UAE’s Mubadala — a $250bn investment firm of the royal family.

The Cabinet Committee on Energy led by Planning Minister Asad Umar took up the case last week and asked the Ministry of Energy to conclude within 8-10 days if it is really feasible for Sui companies to take up the job with or without external advice and expertise to help make a final decision. “It cannot be kept in the limbo for more than a fortnight”, was the message in view of a deadline agreed with Russia to finalise a shareholders agreement (SHA) by July 27.

While the gas pipeline from Port Qasim should have been completed by 2017-18, the timelines to finalise the contractual agreement with Russia have changed six times between 2015 and 2020

At this stage, key challenges include finalisation by July 27 of the SHA for which the Petroleum Division is yet to engage a professional legal team. A Technical Team comprising officials has been notified and a negotiation strategy is also under deliberations through “Heads of Terms” and SHA, to safeguard the commercial and economic interests of Pakistan. For that, the project structure needs to be finalised at the earliest, according to the petroleum division.

A decision about pipeline diameter also needs to be made in light of long term energy needs and lifecycle costs. Sui companies are capable of handling 42-inch diameter pipelines but if the decision is for a 56-inch diameter pipeline, Russians appear to be the only options. Decisions about Pakistani companies’ participation in Engineering, Procurement and Construction (EPC) contract (local or international joint venture) also need to be made.

Moreover, the Gas Infrastructure Development Cess (GIDC) component of financing worth Rs321bn deposited in Federal Account No-1 needs to be assured for the project. Route alignment and land acquisition need to be finalised. Formal project feasibility is not yet ready which can be done fast through National Engineering Services Pakistan for which a case for exemption from Public Procurement Regulatory Authority rules is in process. Work on the alignment of the project with the Commercial Operation Date (CODs) of new LNG terminals is also underway.

Based on the latest situation, the petroleum division has three options. In the first case, there may be the Russian EPC Contractor along with an external funding partner, and Pakistani firms may get some business in the supply of raw materials, labour, operations & maintenance (O&M) etc. Russia may enhance its equity contribution along with O&M contract post COD. Pipe manufacturing and compressor stations are to go under Russian control as these are to be manufactured outside.

In the second case, a consortium of local and international companies is formed which take a significant stake in the EPC contract along with enhanced financing exposure. In the case of local manufacturing of the pipeline (that is possible up to 42-inch diameter), the project will deliver enhanced local technical and human resource contribution, like Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL) while an international partner may take a long term O&M contract.

In the third case of a situation where Russians are no more interested in the project, the government has to be ready with a contingent plan. In this case, the government has to put together a consortium of local and international companies for EPC contract along with enhanced financing exposure. Local manufacturing of pipelines may be introduced to ensure maximum local technical and human resource contribution and SNGPL and SSGCL along with international partner take long term O&M contract.

The government has to decide within a couple of weeks to take a policy direction on SHA negotiations, project structure and financing arrangements as well as give a strong signal to local firms to form joint ventures, ahead of the selection of EPC contractors. It needs to send signals to the local steel manufacturing industry to prepare for this forthcoming challenge based on a firm commitment from the finance ministry for advance release of GIDC instalments, commensurate with project expenditures alongside a contingency plan in case of deadlock with Russia.

Under an Inter-Governmental Agreement (IGA) signed in October 2015, the governments of Pakistan and Russia agreed on the cooperation of a milestone project to develop gas transmission infrastructure of 42” to 56” pipeline diameter, costing $2.25-2.5bn to enhance the energy security of Pakistan. From Port Qasim to District Kasoor, spread over 1,040km length of trunk pipeline, the project is considered the most essential conduit between the installation of new LNG terminals and industrial growth and to secure sustainable gas supply infrastructure for the next 40 years.

Pakistan Stream Gas Pipeline Project (formerly known as North-South Gas Pipeline) was announced in a Joint Statement of the Pakistan-Russia Inter-Governmental Commission in November 2014. With relevant approvals on both sides, the IGA was signed in Islamabad by petroleum ministers of both sides on October 16, 2015. In April 2015, ECC cleared the project model and constituted a price negotiation committee and then approved a financing model of 1.2 billion cubic feet per day capacity pipeline (LNG-III) by Sui companies.

No progress still, the ECC in February 2020 decided to fund the project through GIDC. The Supreme Court decision on GIDC followed in August 2020 for the utilisation of GIDC on such development projects. The Federal Cabinet ratified it. Meanwhile, an amended IGA has been signed on May 28 to replace the October 2015 IGA. At present, the structure of the Russian consortium that has been finalised is the seventh version in the last five years for which a Russian nominated entity has been identified as FSUE (Russian Ministry of Energy), ETK (Execution specialist) and PAO TMK (Production specialist) — with a company namely, PAKSTREAM LLC.

Broad understanding has been achieved in the signed IGA including equity share, role in decision making on the selection of EPC contractor, pricing, Front End Engineering Design, risk-sharing arrangements, facilitation and concessions and exemptions etc. According to the IGA, Pakistan nominated entity, Inter-State Gas System, will undertake the project through GIDC proceeds of (74 per cent) and external equity (26pc). The two governments are yet to settle critical aspects of SHA including the shareholding structure of the special purpose company, corporate governance model, project implementation arrangements, securities and guarantees, tariff, facilitation and risk mitigation.

Published in Dawn, The Business and Finance Weekly, June 28th, 2021

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