Shifting operations: Saudi Arabia offers cheaper gas to Tuwairqi Steel

Move comes after Pakistan refused gas supply at discounted price.

ISLAMABAD:

In a bid to encourage Saudi Arabia-based Al Tuwairqi Holding, the Saudi government has committed to providing the company with cheaper gas.

The move comes after the Pakistan government refused to provide gas at a discounted rate to Tuwairqi Steel.

Tuwairqi Steel Mills Limited (TSML) is a joint venture between the companies of Saudi Arabia and South Korea. They had planned to set up Pakistan’s largest steel complex with a capacity of 1.28 million tons per annum.



Its Direct Reduced Iron (DRI) plant has been staying shut for the last several months due to the dispute over gas supply.

Phase-I of the DRI plant has been completed with an investment of $340 million. While the capital injection in phase-II and III will be in the range of $850 to $900 million. However, this investment is subject to the commercial success of the DRI plant.

The management of Tuwairqi Steel has requested for gas supply at Rs123 per million British thermal units (mmbtu) in order to effectively operate the plant. However, the government has refused, saying it would have to bear a subsidy of Rs25 billion over five years on this account.

Also, the Finance Division and the Ministry of Petroleum and Natural Resources have opposed the plan, saying the government is not legally bound to provide gas at a concessionary rate.

“Now, the Saudi government has offered to provide gas at 70 cents per mmbtu to Tuwairqi Steel if it sets up a plant in Saudi Arabia,” an official said, adding the price was lower than the price demanded from the Pakistani government.

According to officials, the ambassador of Saudi Arabia to Pakistan took up the matter with Finance Minister Ishaq Dar several times to reach a solution but the government showed its reluctance.

The officials added a lobby in Pakistan had played a key role in keeping the matter from reaching a settlement as it wanted to buy the Al Tuwairqi plant.

However, the management of Tuwairqi Steel is now dismantling the plant to shift it to Saudi Arabia, they said.

In November 2014, while addressing a press conference, Al Tuwairqi Holding Chairman Dr Hilal Hussain Al-Tuwairqi had warned of an inevitable end of the mill’s operations if the government did not provide promised gas at a discounted rate.

In an effort to reach a settlement, the company had even offered 15% (126 million) shares in the steel mill to the government without any payment in response to the gas supply. Later, the company offered to give 17% shares to the government but the issue remained unresolved.

In May 2004, a Memorandum of Understanding (MoU) was signed with Pakistan, under which the government was to provide a level playing field in provision of gas as fuel and feedstock.

The Tuwairqi Steel management stated that it was promised that gas would be supplied at a lower tariff to enable the company to compete in the international market. The Ministry of Industries had recommended a tariff of Rs123 per mmbtu for five years.

However, the Ministry of Petroleum and Natural Resources cautioned that the financial impact of the reduced tariff on Sui Southern Gas Company will be about Rs5 billion, requiring a 3.3% increase in gas prices for all consumers, except for domestic and fertiliser sectors.

The Ministry of Industries had argued in the Economic Coordination Committee (ECC) that though the mill was seeking a support of Rs4 to Rs5 billion per annum, its DRI plant will contribute to the country’s economy an estimated Rs12 billion.

Apart from this, foreign investment of Rs89 billion will be made in forward and backward linkages of the DRI plant. After establishing the linkages, the ministry says, the mill will contribute Rs100 billion annually to the economy in import substitution.

Published in The Express Tribune, January 24^th,  2015.

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