ISLAMABAD, Oct 19: Pakistan Petroleum Limited (PPL) has sought increase in its rate of return from 27 per cent to 40 per cent to improve cash flow and exploration activities, a senior government official has told Dawn.
The demand, however, has put the government in dilemma because it would upset federal and provincial budgets in view of fall in gas development surcharge and royalty share.
The upward revision in the rate of return to Pakistan Petroleum Limited (PPL) would result in sharp decline in the gas development surcharge of the federal government and royalty share of Balochistan, and if the precedent is set it would have long-term impact on Sindh as well, official sources said.
It will, however, improve PPL’s position for privatization. GDS is shared by the provinces as well. Total GDS target under the national budget for the current fiscal year is Rs15 billion of which Rs4 billion GDS comes from PPL.
The demand came following a similar decision in favour of Mari Gas Limited — a company owned by Fauji Foundation of the Pakistan Army.
Official sources told Dawn that Mari Gas was permitted a couple of months back a higher fixed rate of return, from 22.5 per cent to 30 per cent, to start exploration activities with an annual expenditure of $20 million but not exceeding 30 per cent of company’s total gas sales. Together with production bonus and others, total rate of return to MGCL translates into 42 per cent, official sources said.
PPL, the producer of country’s pioneer and largest Sui Gas field, is owned by the government except for around 7 per cent shares owned by foreign investors led by International Finance Corporation (IFC), a commercial limb of the World Bank.
A decision to dismantle the gas price agreement 1982 (GPA) of PPL is long overdue under covenants signed with the World Bank and IFC. But final announcement could not be made because of political implications arising out of over 300 per cent expected increase in gas tariff and opposition from Balochistan leaders.
The current gas consumer price consists of cost of gas (weighted-average of wellhead gas prices), transmission and distribution costs, gas utilities’ return on assets and taxes like gas development surcharge (GDS) and general sales tax (GST). Wellhead prices are linked to the international price of crude oil or fuel oil and the difference between wellhead and consumer price goes to the government as GDS.
In case of PPL, the wellhead price for Sui and Kandhkot gas are currently being fixed far below its economical value. Wellhead prices of these fields would be linked with crude oil price as per the existing policy. This will not only rationalize the gas prices being paid to the producers of these fields, give them the real worth of their gas but also fetch better price for PPL at the time of its privatization, official sources said.
The wellhead price of Sui and Kandhkot is currently around $0.40 per mcf (million cubic feet) while the current wellhead price of new private sector gas fields under 1994/97 petroleum policy is over $2.20 per mcf. This disparity is to be eliminated through dismantling of GPA for profitable sale of PPL, official sources said.
The Balochistan assembly had adopted a resolution in May 1998 to buy out the company instead of its privatization. The Balochistan believed it had right under article 153 and 158 of the constitution to have control over their natural resources.
Incorporated in 1950 as a public limited company, PPL’s majority shareholding of around 93 per cent was taken over by the federal government in 1997. Hundred percent owner and operator of Sui, the largest gas field in Pakistan, PPL has 100 per cent shareholding in Kandhkot, 39 per cent in Adhi, 50 per cent in Mazarani, 7 per cent in Qadirpur and 15 per cent in Miano gas fields.
A public limited company listed at country’s three stock exchanges, MGCL has an equity base of Rs400m and is currently producing around 420 mmcfd of natural gas from its 62 wells. The MGCL gas is dedicated to the fertilizer plants and Wapda’s Guddu Thermal Power Station.
Recently, the company has discovered additional gas reserves of 2.7 tcf (trillion cubic feet) in Mari Deep field that has further strengthened company’s financial position.
Estimates suggest that in monetary terms and at assumed price of $2 per mcf (million cubic feet), the new production would yield an additional net revenue of about Rs600 million per annum to the company. The additional return payable to shareholders at one per cent would be around Rs3.7 million per annum that will be an incentive for the company to increase its gas production and increase revenues to the government kitty in the form of taxes and savings in foreign exchange through replacement of imported fuel.