ISLAMABAD, May 18: The government has decided to proceed with a strategic sale of 51 per cent shares in Pakistan Petroleum Limited (PPL) along with its management control on "as is where is basis", Dawn has learnt on good authority.

With transfer of 51 per cent shares to the strategic investor latest by December this year, a total of about 73 per cent share of PPL would go into the private sector hands and leave only 27 per cent shares with the government from its current 93 per cent shareholding.

The government has already announced to offer 15 per cent shares to the general public through initial public offering in the lots of 500 shares to each applicant during the next month. About seven per cent shares in PPL are owned by international finance corporation and private sector investors.

Official documents obtained from the Privatization Commission suggest the decision has been taken by the privatization board on the report of financial advisors - Merrill Lynch International and KASB and Co who have already given presentations on the transaction structure.

This also comes following a presentation on PPL's privatization to a meeting presided over by the president which decided that "there were no timing or security issues and as such the transaction can be processed for privatization," notwithstanding some strategic concerns of the ministry of petroleum and natural resources.

Interestingly, the financial advisers have opposed the IPO of PPL because valuation in a domestic offering would not fully capture the expected substantial increase in profitability over the next five years.

It has also noted a couple of disadvantages and risks of IPO. These include high probability that government would not be unable to realise the optimal value, a non-representative benchmark price is set for the sale of strategic stake and the creation of minority shareholder issues at the time of strategic sale.

The financial advisers have also called for enhancement of consumer gas prices under the gas pricing agreement of 2002 that provides for the Sui and Kandhkot wellhead price to be increased by about 70-80 per cent in five years.

The three options were initially examined for PPL privatization namely; 51 per cent share sale, 26 per cent share sale or a staged sale with an initial sale of 26 per cent shares to a strategic investor to be followed by a further sale of 25 per cent shares subject to fulfilment of specified terms and conditions.

The Privatization Commission (PC) authorities believe that sale of 51 per cent shares along with management control on as is where is basis best met the government's objectives including maximisation of sale proceeds.

The investor buying 51 per cent stake in the company would be more committed to the development of the company and introduce modern exploration and production technology, systems and develop human resource.

The financial advisers claim that companies like Premier Kufpec, OMV, Occidental Petroleum, BP, BHP Billiton and TotalFinaElf, China National Petroleum Corporation and Petronas, ENI (Lasmo), CNOOC Ltd., Kerr-McGee Corp, Apache Corp, Burlington Resources, Amerada Hess Corp, Royal Dutch/Shell, Unocal, MOL, Conoco and Marathon were interested in acquiring a strategic stake in the PPL.

The financial advisers also claim that the lot of potential investors would be much broader at the time of formal launch of the road shows because of marketable image of the PPL that has working structure of a multinational oil and gas firm.

The government was told that 51 per cent shares and transfer of management control is likely to receive a fair value for PPL with all proceeds realised upfront rather than in the form of future staggered proceeds.

Also, a plain vanilla strategic sale would be attractive to both large players as well as second tier E&P companies. Furthermore, the reasonable size of PPL's portfolio would allow medium and small companies to participate and thus expand the investor universe.

They said the existing exploration commitments of PPL would be continued by the investor who would be looking to further enhance the exploration portfolio to ensure growth of the company.

Similarly, the involvement of an international E&P player through significant investment would be a positive signal for other international players to come into Pakistan. The 51 per cent option also matched the target investor profile of majors and larger independent oil companies.