Credibility gap: Engro may pull out of $3b coal mining project

Government’s inability to keep its past promises cited as the main reason for reluctance.


Zafar Bhutta April 02, 2012

ISLAMABAD:


Having been bitten once by the government's failure to keep its promises, Engro Corporation seems unwilling to let itself be sucked in once again.


The company’s subsidiary Engro Powergen is considering pulling out of its joint venture with the Sindh government for a $3 billion coal mining and power generation project after the government has failed to clear the energy sector’s circular debt and also failed to honour the sovereign guarantee to provide 100 million cubic feet of gas per day to Engro’s $1.1 billion fertiliser plant in Daharki.

Engro has gone about as far as it can on its own in this partnership. It has conducted a bankable feasibility study for a 6.5-ton per day coal mining and 1,200-megawatt power generation project. Were the project to go ahead on time, it would cost about $3 billion and be completed by 2016.

“It is now close to getting into the project execution stage and being able to attract financing and investors,” sources told The Express Tribune.

However, the sources added that Engro’s management is hesitant to pull the trigger on the project for a variety of reasons. The primary reason appears to be the government’s failure to provide the promised gas to Engro’s plant at Daharki, for which the company raised $1.1 billion mostly in debt. While the company is not facing immediate financial difficulty, its ability to continue expansion depends on the success of its previous projects.

“The government also appears non-serious. They have not developed the infrastructure that they promised they would. There is a lack of incentives, and there is low coordination between the provincial and federal governments. And they have not even resolved the issue of tariffs and coal pricing,” said one source familiar with the matter.

In addition, the company appears reluctant to trust the government’s ability to pay the promised tariffs, even once they are agree upon, given the fact that many other independent power producers have been forced to invoke their sovereign guarantees several times in order to get paid.

“No investor wants to their outstanding receivables and payment stuck. However, the government is not keen on solving circular debt,” sources close to the company said.

Engro Corporation officials were unavailable to comment on the record.

Some sources also alleged – without naming any names – something more sinister afoot. “Some interest groups are also causing hindrance in the work on the Thar Coal project and these groups are working to disrupt relations between the government and those parties interested in Thar’s coal,” sources said.

The Thar desert in Sindh is estimated to have as much as 175 billion tons of lignite, a variety of coal that is often used in power generation. Thar’s reserves can generate up to 100,000 megawatts of electricity for several decades and are likely to be an important factor in helping reduce the country’s energy import bill.

The Pakistan Business Council estimates that the country will spend $120 billion by 2020 in oil imports to meet its needs, much of which stem from the power sector. The country can currently generate about 14,000 megawatts of electricity but will need to produce about 26,000 megawatts by 2020.

While there are some hydroelectric and oil-fired thermal power plants coming online over the next few years, the bulk of the 12,000 megawatt gap in electricity production will have to come from Thar’s coal fields. Experts estimate that the country needs to generate up to 7,000 megawatts of electricity from Thar. Yet the government’s inability to live up to its contractual obligations appears to be a severe impediment in raising any investment in Pakistan’s power sector.

Published in The Express Tribune, April 3rd, 2012.

COMMENTS (11)

Poor Pakistani | 9 years ago | Reply

Resources should be developed and power should be supplied as it is the sole option left , still there are some people playing politics and safeguarding their own vested interests behind the sad situation of existing crisis . We all should urge the decision makers of the country to think about the poor people , who are waiting for getting their homes lightened ,and painfully watching elite people in protecting their own interests rather than nation's interests

Dr.Shabbir | 9 years ago | Reply

i really dont understand ,why govt is not investing in UCG project ? it is being done far more better than Engro. And Also it gives very high BTU gas, natural gas problem can also be resolved ! ! !

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