Amid warnings of a massive oil and gas shortage, the Petroleum Division has proposed a comprehensive package to the Economic Coordination Committee (ECC) as it seeks settlement of circular debt worth Rs1.6 trillion in the energy chain.
At present, oil and gas companies are facing financial collapse, which may lead to disruption in oil and gas supply across the country.
Pakistan State Oil (PSO), Oil and Gas Development Company (OGDC), Pakistan Petroleum Limited (PPL) and Pakistan LNG Limited (PLL) are the entities mainly trapped in the Rs1.6-trillion circular debt.
Of the total debt, Rs1.08 trillion is the principal and Rs520 billion is the markup. The Petroleum Division has proposed the issuance of Sukuk (Islamic bonds) to cover the entire circular debt along with some other measures. It proposed the settlement of gas development surcharge (GDS) payable by PPL on gas sales to Genco, against the amount receivable by PPL from Sui Northern Gas Pipelines Limited (SNGPL) while allowing SNGPL to settle its receivables from the government of Pakistan on account of GDS against the amount payable to PPL.
It proposed the adjustment of debt with equity in profitable public sector entities/ power projects/ companies in the energy chain.
The Petroleum Division suggested adjustment through adding a fixed rate to gas prices of SNGPL/ Sui Southern Gas Company (SSGC) for realising their receivables from the government and other sectors, and ensuring the clearance of their payables. The principal amount, as well as markup/ late payment surcharge, has been increasing with the passage of time due to continued supply of fuel/ liquefied natural gas (LNG)/ gas to power, gas and refinery sectors.
In this regard, various government audit teams have highlighted that the increase in financial cost arising from delayed recovery from the power sector is adversely affecting the profitability of public sector enterprises (PSEs) with the risk of bad debts resulting in possible bankruptcy. PSO has revealed that Genco-III spent PSO’s funds (Rs80 billion) on the Nandipur power plant and covering fuel losses rather than paying PSO. This has further increased PSO’s receivables.
Exploration and production (E&P) companies ie OGDC, PPL and Government Holdings Private Limited (GHPL) - being the last entities in the circular debt chain for receiving outstanding dues from power, refinery and gas sectors - have been negatively impacted and are now at a stage where they may halt supply of crude oil and gas in the foreseeable future. As a result, a massive shortage of oil and gas could emerge across the country and the entire petroleum sector may collapse, if the settlement of circular debt is not accorded top-most priority.
In order to resolve the circular debt issue and improve national energy and economic security, a few possible options have been suggested for debt clearance after exclusion of mark-up, if permissible under relevant laws and rules.
The circular debt in the power sector emerged mainly in 2008 due to shortfall in the cash flow of distribution companies, which adversely affected their ability to pay power generation companies (Genco, Hubco, Kapco, etc) for electricity supply.
Consequently, these companies could not make full payments to PSO, OGDC, PPL and PLL for supply of fuel, gas and LNG.
Despite delayed payment from power and gas sectors, PSO says it has been protecting refineries since long by making timely payments due to which PSO has to resort to massive bank borrowing to avoid default on international payments and consequent disruption in the supply chain of petroleum products.
Similarly, OGDC and PPL have continued to provide gas to intermediate entities (SSGC and SNGPL) and power plants (Uch and Guddu) without getting payment.
In order to find a sustainable solution to the circular debt issue, a committee may be formed, led by the Finance Division and comprising Power and Petroleum Divisions as well as Securities and Exchange Commission of Pakistan.
The committee will develop modalities for clearing the debt through adjustment as per the options or suggest some other methods as deemed appropriate. The committee will submit its final recommendations for the settlement of circular debt to the ECC for approval within 30 days.
The Petroleum Division feels that inaction can lead to collapse of some of the profitable entities causing major disruption to the supply chain.
Published in The Express Tribune, November 4th, 2020.
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