The government is set to end concessionary gas tariff for Fatima and Engro Fertilizer plants by mid of current year.
Currently, a concessionary gas tariff of $0.70 per mmbtu is being availed by Fatima Fertilizer Ltd and Engro Fertilizer Ltd. The concessionary period for Fatima Fertilizer is set to expire in July 2021 after completing 10 years from its commercial operation date (COD) whereas Engro Fertilizer’s concessionary period is coming to an end by June 2021.
However, the government and Engro Fertilizer are in dispute over expiration of gas supply agreement at discounted rates.
Once the concessionary period comes to an end for both the plants, the government would review the gas tariff for the entire fertiliser industry consuming indigenous gas and the existing distortions would be removed for creating a level playing field for all players, the Petroleum Division had informed the Economic Coordination Committee (ECC) in a recent meeting.
Even though the plants of both the fertiliser companies had been receiving cheaper gas, they were selling the fertiliser to farmers at the same higher rate that was being charged by the other fertiliser plants.
Other fertiliser plants had been paying Rs302 per mmbtu for gas to be used as feedstock and Rs1,023 per mmbtu for fuel stock. However, new fertiliser plants of Fatima and Engro had been paying Rs112 per mmbtu for gas to be used as feedstock.
These new fertiliser plants had not even booked the Gas infrastructure Development Cess (GIDC). Hence, these plants emerged as major beneficiaries as they paid less for gas and did not pay GIDC.
On the other hand, the economic decision making body approved extension in gas supply to Fauji Fertilizer Bin Qasim (FFBQL) for the next five years. However, the supply was committed on an available basis, which means there was no guaranteed supply.
The agreement between Sui Southern Gas Company (SSGC) and FFBQL had expired last month. FFBQL is the sole producer of diammonium phosphate (DAP) in Pakistan and the only fertiliser plant operating on SSGC’s system.
For supply of gas, FFBQL executed the first principal Gas Supply Agreement (GSA) in 1995 with SSGC, which was subsequently amended in 2007 and 2016, respectively.
Read: FFC plans to set up new DAP plant
In the last amended GSA, the second addendum to GSA came into effect from January 1, 2016 with extension of gas supply period for up to five years; until December 31, 2020, with the condition that gas supply to the plant will be contingent upon availability of supply of indigenous and imported natural gas to SSGC.
As per the original allocation, FFBQL was to be supplied 85mmcfd gas (70mmcfd for feedstock and 15 mmcfd for fuel stock) which continued to be in field until April 2010 when the government decided to curtail 20% supplies of fertiliser industry across the board for diversion to power sector to meet power shortfall.
In pursuance of the said decision, SSGC had reduced the original allocation of FFBQL to 88mmcfd and the same was adequately covered in the respective GSA with the condition that no damages would be imposed by FFBQL if at times the supply made by SSGCL is below 68mmcfd.
Before the expiry of GSA, FFBQL submitted written requests to SSGC and the Petroleum Division for renewal/extension of GSA for another term of five years on the same terms and conditions.
However, SSGC was consistent in its stance that owing to depletion of gas sources and increase in gas demand on its system it would not be able to supply indigenous gas to FFBQL instead RLNG can be offered at notified price and GSA on the latter proposition can be extended.
The Petroleum Division held a few meetings with SSGC and FFBQL on the issue and suggested various options to FFBQL including blended supply of RLNG and system gas but FFBQL was of the view that the current business model is unsustainable if gas tariff (fertiliser feedstock) is raised beyond its current level of Rs302 per mmbtu.
FFBQL had also made a request to the Petroleum Division that SSGC may be advised to continue indigenous gas supply while GSA terms may be decided in parallel.
The issue was also raised before the federal cabinet in its meeting held on December 29, 2020 highlighting that the plant will not be provided gas until a decision on allocation of gas is made by the government.
Published in The Express Tribune, February 7th, 2021.
Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.
COMMENTS
Comments are moderated and generally will be posted if they are on-topic and not abusive.
For more information, please see our Comments FAQ