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Opaque gas pricing to hit consumers

December 17, 2012

Illustration by Abro
Illustration by Abro

While deviating from the earlier decision by the Economic Coordination Committee, the recently revised gas pricing mechanism for Qadirpur Gas Field is set to improve profitability of OGDCL-led consortium. This will create an additional burden of more than Rs2-3 billion per annum on gas consumers.

While the impact may be nominal compared with over Rs50 billion losses on account of about 11 per cent (about 300 million cubic feet of gas per day) system losses, the Qadirpur price revision exposed the manner in which the oil and gas production agreements are signed by the bureaucracy.

The revision in pricing mechanism was necessitated by a controversial clause in the gas purchase agreement with the Qadirpur Joint Venture. A detailed scrutiny of the record suggested that clause 4.1(b) of the agreement did not have the approval of any competent authority and was inserted in the agreement through an act of omission or commission.

A demand by ministries concerned for an investigation to fix responsibility for signing an unauthorised clause was hushed up. The objections by the ministry of finance and Planning Commission over the price revisions based on controversial clause and the reasons to justify deviations from past ECC decisions were also not entertained.

The revisions were, however, allowed on the basis of contractual obligations and renegotiations under which the joint venture partners agreed not to press for Rs15 billion claims they felt entitled to since 2005 under the controversial agreement.

Qadirpur Gas Field, with a production of about 500 million cubic feet per day, is owned 75 per cent by Oil and Gas Development Company, 9.5 per cent by Kirthar Pakistan Exploration, 8.5 per cent by Kufpec Pakistan Holding and seven per cent by Pakistan Petroleum Limited.

The original agreement approved by the ECC in 1993 required the linkage of wellhead price to be changed from 66 per cent to 100 per cent parity with the border price of fuel oil. Discounts, already agreed and linked to the price of fuel oil, were to remain unchanged and price was to be applicable to the entire range of production from the field without any discount on higher production. The ECC also required the protection of giving higher price equal to other foreign producers under comparable conditions to be withdrawn and the agreed formula not subject to renegotiations for 10 years.

However, the final agreement which was signed between the government on behalf of the Sui Northern Gas Pipelines Limited and Qadirpur Joint Venture did not provide the conditions of 10 years embargo. Instead, an unauthorised clause 4.1(b) was inserted in the agreement. It said: “In the event the Marker Price exceeds $200 per ton, the assumed average price shall maintain the step-wise increase as per table-A in Article 4.1 (a), and the parties shall negotiate within six months a new schedule of discounts to be applied to the extended values of assumed average price for the purpose of determining the resultant gas price.

“Till such time as the parties agreed to the new discount level, the discount of 45 per cent shall remain in force for the purpose of price notification. Prompt retrospective price adjustment shall thereafter be made following such determination”.

The gas purchase agreement including this clause was finally signed with JV partners by the then Secretary Petroleum Syed Naseer Ahmad in July 1997, after prior clearance from finance and law divisions. The ministry of petroleum and natural resources did not find any record substantiating the insertion of the controversial clause.

Incidentally, the event of fuel oil prices going beyond $200 per ton (capped at the time of signing of the agreement in 1997) in the international market did not occur in the first 10 years of operations of the Qadirpur field which started production in September 1995. The applicable Marker Price of HSFO exceeded beyond $200 per ton for the first time in July-December 2005 when the six months average price was $208 per ton.

Accordingly, the government started negotiations with the JV partners to arrive at a discount rate. As the negotiation were in progress, the gas price for 2005-06 were notified by Oil and Gas Regulatory Authority on the basis of 45 per cent discount as required under the controversial clause of 4.1(b) under which July-December 2005 prices increased to $2.83 per MMBTU and $3.91 per MMBTU for January-June 2006 from about $2.56 per MMBTU.

As Ogra pricing under the controversial clause entailed a sharp increase in the end consumer prices, the government in July 2006 notified provisional discount beyond HSFO price of $200 per ton under which the maximum price was worked out at $2.69 per MMBTU at HSFO price of $300 per ton. These prices have been in place since then.

A committee of petroleum ministry senior officials held negotiations with the JV partners again and worked out a price of $3.01 per MMBTU at HSFO price of $380 per ton and persuaded the JV partners to cap the discounts at a Marker Price of $400 per ton of HSFO. Now, the controversial clause has been granted post facto approval by the ECC. The impact, thereof, would be that the JV partners would be entitled to a gas price of about $3.4 per MMBTU for the remaining life of the project expected in 2017.

The agreed discount rate if applied retroactively would have resulted in payment of arrears of about Rs15 billion by SNGPL to the JV partners. Through negotiations, it was however agreed that the negotiated extension in discount table be applied prospectively with effect from December 12, 2012 by treating the provisional prices notified since July 2005 as final and without any retroactive adjustment from any side.The ministry of finance had been objecting to legalisation of the controversial clause seeking explanations why the deviations were made in the original agreement “which has entirely changed the ECC decision for price fixation as well as discount on the price”, in addition to possible losses to the government and consumers. It also wanted fresh economics of the field given the fact that the production from the field had increased from 340 MMCFD to 600MMCFD and reserves had gone up from 3.89 trillion cubic feet to 4.3tcf.

Besides similar objections, the Planning Commision also demanded an enquiry as to why the 1993 ECC decision requiring no negotiations after 10 years was changed through the gas price agreement to entail renegotiations after 10 years.

The petroleum ministry, however, believed that such questions did not hold ground because the government did not lose anything in the first 10 years and then continued with a provisional gas price that again remained capped given the fact that majority shareholding of the Qadirpur Field was held by state-owned companies — OGDCL 75 per cent and PPL seven per cent.

Such unauthorised agreements with private companies or foreign investors which may cause colossal loss to the government and the consumers, remain outside public scrutiny. Inclusion of international arbitration clauses in agreements with foreign investors could have devastating consequences. Agreements/contracts should be drafted with utmost care and scrutiny by experts and all relevant arms of the government , rather than being dealt by a selected few.