All in a day’s work: ECC okays errant clause in Qadirpur gas price agreement

Allows unlimited export of sugar, PPL’s acquisition of Tullow assets in South Asia.

ISLAMABAD:

In a controversial move that may spell trouble for decision-makers, the government has okayed a controversial clause added to an agreement made in 1993 between the government and stakeholders in the country’s fourth-largest gas field.

Headed by Finance Minister Dr Abdul Hafeez Shaikh, the Economic Coordination Committee (ECC) of the Cabinet approved a summary on Tuesday regarding the renewal of a gas price agreement (GPA) between the Qadirpur Joint Venture and Sui Northern Gas Pipelines Limited. The ECC approved the summary despite opposition from the finance ministry and the Planning Commission.

As part of the renewal of the GPA, the ECC has also allowed the incorporation of Article 4.1(b) in the original document. The insertion of this clause allows greater increases in the wellhead gas price of the Qadirpur field, as it links it to changes in international prices of high sulphur fuel oil (HSFO). The inclusion of the article will allow step-wise increases in the gas price once the price of HSFO exceeds $200 in the international market. The agreement will be effective from the next fiscal year (2013-14), the finance ministry said.

Article 4.1(b) had been included later in the gas price agreement made earlier in 1993. The ECC at that time had no inkling of the move, as the clause had been missing from the summary that had been forwarded to it for approval. Sources say the clause has now been provided legal cover to prevent possible prosecution of those involved in the deal.



The Ministry of Petroleum and Natural Resources, which had moved the summary that called for the renewal of the GPA, had nonetheless told the ECC that “the ministry could not find any record substantiating the insertion of Article 4.1(b) in the GPA.”

The ECC’s original decision had been to cap the wellhead price at $200 per ton and renegotiate the price every ten years. The upper limit, under the newly-approved summary, has now been enhanced to $400 per ton.

While talking to The Express Tribune, the finance minister said that the change in the pricing formula will not have any immediate implications. However, insiders say the move had ulterior motives, and will benefit the parties involved in the project at the expense of end consumes, who will be paying the higher prices of the gas.

Citing an example of how the decision will inflate prices, a source said that if HSFO prices shoot up to $290 per ton, gas prices will increase to $3.91 from the current $2.56 per million British thermal units. Currently, the prices of HSFO are ranging around $600 per ton. However, given the upper cap, producers will only be able to enjoy an increase in gas prices equivalent to the increase in HSFO cost up to $400 per ton.

Qadirpur is one of the largest gas fields of the country, with 3.6 trillion cubic feet (tcf) of balance recoverable reserves. Its daily production ranges from 600 to 700 million cubic feet of gas per day (mmcfd). The field is 75% owned by the Oil and Gas Development Company (OGDC), while Kirthar Pakistan has a stake of 9.5%, Pakistan Petroleum Limited 7%, and Premier Kufpec Pakistan Exploration Limited (PKPEL) and PKPEL-2 hold 8.5% and 4.75% respectively.

Other matters

The ECC also allowed the unlimited export of sugar by abolishing the quota limits. The ECC took the decision after it was told that sugar is available in abundance in the country, and that it is ‘necessary’ that sugar mills be allowed to export more sugar.

Shaikh said that in order to keep prices stable in the domestic market, through the availability of sufficient stocks, the committee will require a briefing on the availability of the stocks every time it meets henceforth.

The ECC additionally a summary forwarded by the commerce division that asked that the Trading Corporation of Pakistan be allowed to procure and maintain a strategic reserve of 500,000 tons of sugar. The Trading Corporation wants to purchase 330,000 tons of domestically-produced sugar during the 2012-13 sugar crushing season.

The ECC also gave its approval, in principle, to Pakistan Petroleum’s (PPL’s) bid for Tullow Pakistan Development Limited and Tullow Bangladesh Limited. However, it observed that the acquisition is still subject to approval by the State Bank of Pakistan.

During the meeting, the finance secretary also presented a review of key economic indicators. He said that the year-on-year inflation rate currently stands at 6.9%, which he claimed was “the lowest among regional countries.”

Published in The Express Tribune, December 12^th, 2012.