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Ministries at loggerheads over gas supply plan

December 25, 2012

—File Photo

ISLAMABAD: With gas shortfall constantly rising, the ministries of petroleum and water and power are at loggerheads over supply of more than 200 million cubic feet per day (MMCFD) of gas to fertiliser or power sector.

The shortfall currently estimated at about 1.7 billion cubic feet per day (BCFD) and the committed demand of about 6.2 BCFD is causing losses to the industrial sector and leading to workforce layoff and closure of a number of power plants and fertiliser units. Maximum gas supplies currently stand at about 4.3 BCFD.

For the petroleum ministry, supply of gas to Engro Fertiliser is a binding legal requirement backed by sovereign guarantees and provision of comparatively cheap fertiliser to the agriculture sector.

For the power ministry, gas supply to power plants is one of the key instruments in an election year to contain electricity shortfall and rising cost of power generation heavily dependant on expensive furnace oil.

At the heart of the entire problem is scarcity of gas and cash flows. With financial considerations in mind, the petroleum ministry and its subordinate gas companies prefer supplies on the basis of cash recovery and fertiliser sector is a client of choice with better payment history and cash at hand.

For gas companies, the power sector is a black hole where money remains stuck.

The dispute has emerged despite a decision taken by the Economic Coordination Committee of the cabinet in October to supply about 202 MMCFD to the fertiliser sector to keep into production some of the fertiliser units for major part of the year.

The decision was based on the petroleum ministry’s argument that restoration of gas to fertiliser plants would meet a contractual obligation with Engro Fertiliser and help reduce urea prices. This emanated from a competitive bidding under which three companies were offered 100 MMCFD of gas for fertiliser production in 2007.

The petroleum ministry argued that despite the sovereign guarantee given to Engro, many other sectors were receiving gas without any contract.

Therefore, it has worked out a formula under which 60 MMCFD of gas from Mari field currently going to the Guddu thermal power plant is to be swapped at Kandhkot which remained unutilised and additional 22 MMCFD from the same field can be diverted to Engro’s new plant to start urea production.

The Engro plant was completed about two years ago at a cost of $1.1 billion, but it could not get committed gas and its production capacity of 1.3 million tons remained unutilised. Based on sovereign guarantee, the World Bank’s International Finance Corporation is also a debt and equity investor in the project.

The Sindh High Court had directed the government in October last year to supply the committed gas to Engro to meet the sovereign guarantee requirement and Article 158 of the Constitution which calls for giving priority to users in a province where gas is produced. The order remained unimplemented.

Engro is reported to have suffered a loss of Rs27 billion in two years and defaulted on its loan obligations to the banking sector. According to an estimate, the farming community suffered a direct loss of about Rs45 billion in two years because of an increase in urea prices and another Rs15 billion due to black marketing of urea as shortages increased. The government spent $1.1 billion on fertiliser imports in two years and paid over Rs55 billion as subsidy on the commodity.

The ECC has constituted two ministerial committees to resolve the dispute between the two ministries and work out legal and financial modalities and submit a report at its next meeting expected to be held next week, even though the ECC had agreed in principle to provide 202 MMCFD of gas from Kunar-Pasakhi Deep, Mari, Reti Maru, Bahu and Makori fields to four fertiliser plants on the SNGPL network.

The petroleum ministry believes that after completion of legal and commercial formalities, it will take up to 18 months to actually start providing gas to fertiliser plants. It reported that of the four fertiliser plants in the SNGPL system, Engro’s plant was located near Mari and Reti Maru fields and hence these resources could be supplied to Engro within four months for which Engro was ready to lay pipelines and recover the cost in phases.