Gas consumers likely to bear higher mark-up cost as Pakistan attempts to execute Gwadar LNG pipeline

Chinese company will provide 85% of financing for the project

ISLAMABAD: The consumers of gas in Pakistan will suffer as the Economic Affairs Division (EAD) is expected to further lend the money borrowed from China at a higher mark-up in an attempt to execute the Gwadar liquefied natural gas (LNG) pipeline project, officials say.

The Gwadar pipeline has been planned as an alternative to the Iran-Pakistan (IP) gas pipeline that faced international sanctions. The former could be connected to the IP pipeline after the lifting of restrictions.



China Petroleum Pipeline Bureau has been designated by the Chinese government to work on the Gwadar project and arrange 85% of financing. According to the officials, Chinese banks have offered financing at Libor plus 2.25%.

Pakistan has clinched the pipeline deal at a lower price as following negotiations China Petroleum revised the cost downwards to $1.3 billion compared to $1.5 billion quoted in the financial bid given to Inter-state Gas Systems (ISGS). The two sides have already initialed an agreement.

An official revealed that the EAD would further lend the financing acquired from China to ISGS at 15% mark-up for laying the LNG pipeline.



“Gas consumers will bear the cost of mark-up that will be included in gas prices,” he said, adding the Pakistan Atomic Energy Commission had also been facing a similar problem but it arranged a direct loan from China for setting up nuclear power plants in the country.

However, the officials pointed out, the Ministry of Finance has barred the Ministry of Petroleum from acquiring loans directly from Exim Bank of China and asked to process the loans through the EAD.

As a result, Pakistani consumers will not only pay the cost of loan repayment including mark-up to the Chinese bank but will also pay mark-up to the EAD.



According to the officials, the EAD is giving the loan at a higher mark-up because of fluctuations in currency rates.

The revised cost of the Gwadar pipeline is even lower than the expenses being incurred by the gas utilities - Sui Northern Gas Pipelines and Sui Southern Gas Company - on extending their pipeline networks to enhance the transmission capacity to 1.2 billion cubic feet per day.

The gas utilities are spending $1.1 billion on expanding the pipeline networks that amounts to $34 per inch metre. The cost of building the Gwadar LNG pipeline stands at $32 per inch metre.

The Chinese company will also construct an LNG terminal at Gwadar Port on the build-and-operate model and it will be able to handle 600 million cubic feet of LNG per day.

“The government will negotiate with the Chinese company a tolling fee keeping in view the fee for the other two LNG terminals,” the official said.

Elengy Terminal Pakistan Limited, a subsidiary of Engro Corporation, is running the first LNG terminal at Port Qasim with a fee of 66 cents per million British thermal units (mmbtu).

For the second LNG terminal at the port, the contract has been awarded to Pakistan GasPort Limited at a tolling fee of 41.77 cents per mmbtu.

The previous Pakistan Peoples Party-led government had imposed gas infrastructure development cess on the consumers for laying gas pipelines and so far Rs183 billion has been collected.

However, the current PML-N government has spent the entire collection on metro bus schemes and nothing is left for implementing gas import projects.

Published in The Express Tribune, July 15^th, 2016.

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