Sticky situation: No relief in sight as circular debt swells to Rs400b

Oil and gas firms face liquidity crunch, growth plans in jeopardy.

ISLAMABAD:

The inter-corporate debt in the energy chain has again swelled to Rs400 billion in spite of a significant increase in electricity tariffs in the last one year in a bid to curb liabilities and improve revenues of power generation companies.

“Companies in the oil and gas sector are facing an uncertain and difficult situation following a massive increase in circular debt to Rs400 billion,” said an official of the Ministry of Petroleum and Natural Resources while talking to The Express Tribune.

Earlier, after coming to power in June last year, the PML-N government cleared the circular debt amounting to Rs480 billion for a better flow of energy supplies. Now, the debt has jumped again, causing liquidity crunch for state-run oil and gas companies and stymieing their development plans.

The liabilities are not different from the level seen during the tenure of the previous Pakistan Peoples Party (PPP) government, when it stood at Rs444 billion.

“The exploration and development plans of Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL) and others are under threat from the circular debt,” the ministry official said.

According to government estimates, domestic gas production is expected to drop from the current 4,100 million cubic feet per day (mmcfd) to 1,600 mmcfd by 2022 as existing reserves are depleting.

The government was planning to drill 400 wells in the next four years to give a boost to oil and gas supplies, but if the debt problem was not addressed, it would be difficult to achieve the exploration target, the official said. “The failure of power producers to improve recoveries has led to the energy woes,” he remarked.

Receivables of Pakistan State Oil (PSO) – the state-run oil marketing giant – stand at Rs200 billion, of which power companies have to pay Rs180 billion.

“PSO got Rs21 billion a couple of days ago, but the amount is not enough to ease its liquidity strain,” the official said, forcing the company to defer some oil import orders.

PSO requires Rs32 billion immediately to make payments to international and domestic fuel suppliers.

The company has already defaulted on five letters of credit opened for oil imports because of delay in payments by power companies and now again the company is on the brink of financial collapse.

Power companies have paid only Rs4.5 billion from their resources in the current month.

According to officials, the Pakistan Electric Power Company (Pepco) is recovering Rs4 billion per day from the consumers, but is allocating only Rs200 to Rs250 million to PSO for fuel supply.

International oil suppliers are hesitant to commit cargo shipments without advance payment by PSO. Premiums on international oil purchases have also gone up.

“The petroleum ministry is doing its best to provide oil to power producers and will continue to do so, but some issues need to be addressed,” another ministry official said.

“In the past, timely payments were promised to PSO for a smooth flow of imports, but the promise was never honoured and the company faced serious financial and supply issues.”

The Ministry of Water and Power had been asked to chalk out a mechanism that could ensure smooth payments for oil supplies by electricity producers but nothing had been done so far, he said.

Published in The Express Tribune, August 31^st, 2014.

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