Oil policy shift: PTI govt puts $12.7m burden on itself

Halt to furnace oil supply via APL pipeline leads to revenue shortfall claims

ISLAMABAD:

A paradigm shift in furnace oil consumption policy of the government has resulted in revenue shortfall for Asia Petroleum Limited (APL), putting a burden of $12.7 million per annum on the government.

This has prompted economic policymakers to allow APL to get credit facility from a bank by pledging movable and fixed assets of the company.

The government has also approved a supplementary grant of Rs1.9 billion for bridging APL’s shortfall through Pakistan State Oil (PSO) in the current financial year.

Petroleum Division officials told The Express Tribune that residual furnace oil (RFO) transportation through an APL pipeline to Hub Power Company (Hubco) had been almost discontinued – following reduced use of furnace oil in power plants – which was a cause for shortfall claims against guaranteed throughput valuing at Rs1 billion per annum.

In case of delay in payment to APL, they said, the government would also need to bear late payment surcharge and exchange rate differences. Therefore, the matter was immediately taken up with the Finance Division.

“The paradigm shift relating to use of furnace oil in power sector has created yearly payable for APL of $12.7 million on the government. In this respect, for financial year 2019, the government paid through supplementary grant Rs1.9 billion of APL’s shortfall through PSO,” APL MD said.

“The government has also allowed APL to avail credit facility from a bank against movable and fixed assets of the company.”

APL had been incorporated in Pakistan on July 17, 1994 as an energy and infrastructure company established to transport RFO through its terminal and an underground pipeline system. It was commissioned under an implementation agreement between the government of Pakistan and APL on June 26, 2003 for transporting RFO through the pipeline system from Port Qasim to Hubco – a 1,292-megawatt power plant in Balochistan.

Later, a fuel transportation agreement was inked by PSO and APL on May 13, 2004 for furnace oil supply to Hubco with annual guaranteed throughput of 1.5 million tons at a tariff of $12.12 per ton for first 19 years and $8.49 per ton till 2027.

The government provided sovereign guarantee for covering any shortfall in the guaranteed throughput.

According to sources, PSO has lodged an audited shortfall claim amounting to Rs998 million in guaranteed throughput for the period July 1, 2017 to December 31, 2018 besides expected claim of Rs884 million for the remaining period while considering the prevailing exchange rate and late payment surcharge at the time of actual payment to APL.

It was stated that the fundamental reason behind the shortfall was reduced furnace oil demand from the Power Division for Hubco because of a paradigm shift in government’s policy towards increased consumption of cost-efficient fuels and other alternative resources rather than RFO.

Therefore, the Finance Division was required to pay the shortfall of about $12.7 million per annum through a budgetary grant/allocation till the expiry of agreements.

In the meantime, the Petroleum Division, taking cognisance of the severity of the matter, convened a meeting of all stakeholders with the intention of exploring the options available for legal remedy.

The huddle was attended by representatives of the Finance Division, Power Division, Petroleum Division, Oil and Gas Regulatory Authority (Ogra), PSO, Hubco and APL.

A representative of the Finance Division told the meeting that due to the absence of a budgetary allocation, a summary for clearing APL’s claims under a technical grant may be moved for approval of the Economic Coordination Committee (ECC).

An APL representative argued that due to the discontinuation of RFO supply through its pipeline, shortfall claims were being generated and the company was facing financial and operational challenges.

Therefore, in order to meet liquidity requirements, the company was in the process of acquiring a financing facility from Habib Metropolitan Bank, the APL representative said.

As part of a security package, according to APL, the bank would require as a guarantee the fixed and moveable assets of APL including but not limited to the pipeline. However, it would require government’s approval.

It was suggested that the proposal may be considered subject to the condition that the government would not be responsible for any financial obligation or loss on the credit facility and any delay. However, after taking ECC’s approval, APL would submit a request to the Finance Division for the credit facility with due justification.

The ECC approved a supplementary grant of Rs1.9 billion for bridging the APL’s shortfall in the current financial year. It also directed the Petroleum Division to quickly come up with remedial measures for optimal use of the pipeline facility to reduce the cost for the government.

The ECC also gave its consent for pledging APL’s assets for borrowing from the bank.