Profile: The JJVL story – II
Iqbal’s contacts, resources help him.
The LPG market was deregulated in 2000-2001 but unlike all other fuels, the dynamics are entirely different. PHOTO: FILE
KARACHI:
As production began, it all came down to the business model. And Iqbal Zafaruddin Ahmed had the best at his disposal.
With JJVL he controlled the entire supply chain. From the producer to two of his own marketing companies and many others relying on JJVL, he ensured that cash kept flowing in.
“Gas flows from Badin field were depleting,” said Fasih Ahmed, a director at Associated Group and Iqbal’s son. “Till 1997, no one actually thought of this as a feasible project. There was no guarantee for how many years could LPG be extracted.”
A part-time journalist and full-time entrepreneur, Fasih is publisher of Newsweek in Pakistan and has a joint venture to publish out the international magazine in many other countries.
He insists JJVL has been ‘misunderstood’. “We had no guaranteed returns like the IPPs get. All the risk was shifted on to us by SSGC. Even the court-appointed auditors have determined that our return was between a reasonable 8% and 10%.”
One important reason that the Supreme Court struck down the project was the benchmark for calculating royalty payments. JJVL extracts LPG from SSGC system against a price of gas and a royalty, which makes up for the gas utility’s profit.
The court declared that the royalty was to be calculated on Saudi Aramco’s contract price plus the freight cost, which means the imported cost of LPG. But JJVL paid royalty on basis of the highest producer price prevailing in Pakistan, causing a loss of over Rs22 billion to the government, it says.
According to court filings, JJVL says it never agreed to the royalty formula which would use import cost of LPG, which was expensive than that produced in the country. Doing so would make its product expensive than those of other local producers, it said.
Any link with imported LPG would not just have increased JJVL’s cost but also open doors for the fuel’s import.
About the same time when work on JJVL’s plant was going on, a company called Progas Pakistan Limited was negotiating with the government on a LPG import terminal.
The LPG market was deregulated in 2000-2001 but unlike all other fuels, the dynamics are entirely different. Around 1,100 tons a day is produced locally against demand that ranges between 1,400 tons to 1,900 tons. The gap is met through imports.
Price of gas and petrol is tightly controlled where government decides the profit margins of producers, marketing companies and distributors. But when it comes to LPG, controlling price beyond marketing companies is almost impossible.
To reach end consumers, LPG marketing companies rely on over 6,000 distributors and more than 20,000 retailers who receive the product often in rusted cylinders and rickety trucks. The Oil and Gas Regulatory Authority has time and again failed to oversee them.
The allocation of LPG from local producers has also remained a disputed matter. With so many marketing companies vying for limited supplies, producers like JJVL, Pak Arab Refinery, OGDCL and Pakistan Refinery Limited continue to dictate.
Companies like Progas, Shell and SHV, which had invested heavily on storage tanks, cylinders and trucks were often left dry. The only way to survive was to import. All of these three major players have wrapped up LPG operations in the country.
“Every time my imported product landed at the port, Iqbal dropped producer prices and I had to book losses,” said an importer, who requested not to be named.
The Associated Group denies the charge. As for the Progas terminal, Iqbal said, “It was not our doing. Their entire business model was flawed.”
Fasih insists Shell has exited the LPG business globally whereas SHV also left because of other reasons.
SSGC-JJVL nexus?
Munawar Baseer Ahmad, the managing director of SSGC between October 2002 and September 2007, met Iqbal for the first time in April 2003. “He came along Aitzaz Ahsan to convince me.”
Baseer has been made a party to the case and he is also submitting a reply to the court.
“Prior to the last bidding round, two attempts to set up extraction plant had failed. BP even refused to invest saying the project was not financeable. We were late in initiating this,” he said.
According to an agreement, SSGC had up till 2003 to award the extraction project before the rights to do so revert to BP. “When I took over, the project was still facing delays and I had to rush.”
Contrary to what is believed, Baseer says he was the one who helped change the controversial Clause 18 in the implementation agreement.
“I was confidentially told that the clause will force SSGC to takeover all liabilities, losses and the plant if for any reason JJVL couldn’t operate. That meant taking the risk of falling gas pressure or LPG content. I couldn’t possibly have let that happen,” he said.
Baseer started receiving calls from then petroleum minister Nauraiz Shakoor and Abdullah Yousuf, petroleum secretary, forcing him to sign the agreement. But he says he didn’t budge.
About using Saudi Aramco CP has benchmark for royalty calculations, he said the company decided against it. “Ultimately, we had to ensure that consumers were protected. Why should be support importers over local producers?”
Iqbal, he says, has a peculiar way of wooing people. “He would book a plane and take everyone to a foreign country. But I don’t think he did anything wrong.”
He supports the JJVL project and also backs it in its stance that bid invitation or Request for Proposal did not include any royalty formula. The final implementation agreement was signed on August 12, 2003. “JJVL is a fantastic project. It runs at efficiency level of over 96%. No other producer could match that. If the sponsors shut off the plant and take their software, no one would be able to run it,” he said. However, Baseer was unable to explain why would SSGC forgo its right to earn more royalty using import parity price?
Making money a crime
Sitting at the top of a company whose revenue exceeded $150 million would surely have made Iqbal many enemies. But why exactly Khawaja Muhammad Asif, the Water and Power Minister, pursued the case till the very end remains a mystery. Asif had filed the petition, which became basis for the judgement, in 2011. Fasih says his father has no enmity with him.
Whatever the fate of JJVL, Iqbal has emerged as a businessman who knows how to survive. He knows what he has gotten himself into.
Published in The Express Tribune, January 14th, 2014.
As production began, it all came down to the business model. And Iqbal Zafaruddin Ahmed had the best at his disposal.
With JJVL he controlled the entire supply chain. From the producer to two of his own marketing companies and many others relying on JJVL, he ensured that cash kept flowing in.
“Gas flows from Badin field were depleting,” said Fasih Ahmed, a director at Associated Group and Iqbal’s son. “Till 1997, no one actually thought of this as a feasible project. There was no guarantee for how many years could LPG be extracted.”
A part-time journalist and full-time entrepreneur, Fasih is publisher of Newsweek in Pakistan and has a joint venture to publish out the international magazine in many other countries.
He insists JJVL has been ‘misunderstood’. “We had no guaranteed returns like the IPPs get. All the risk was shifted on to us by SSGC. Even the court-appointed auditors have determined that our return was between a reasonable 8% and 10%.”
One important reason that the Supreme Court struck down the project was the benchmark for calculating royalty payments. JJVL extracts LPG from SSGC system against a price of gas and a royalty, which makes up for the gas utility’s profit.
The court declared that the royalty was to be calculated on Saudi Aramco’s contract price plus the freight cost, which means the imported cost of LPG. But JJVL paid royalty on basis of the highest producer price prevailing in Pakistan, causing a loss of over Rs22 billion to the government, it says.
According to court filings, JJVL says it never agreed to the royalty formula which would use import cost of LPG, which was expensive than that produced in the country. Doing so would make its product expensive than those of other local producers, it said.
Any link with imported LPG would not just have increased JJVL’s cost but also open doors for the fuel’s import.
About the same time when work on JJVL’s plant was going on, a company called Progas Pakistan Limited was negotiating with the government on a LPG import terminal.
The LPG market was deregulated in 2000-2001 but unlike all other fuels, the dynamics are entirely different. Around 1,100 tons a day is produced locally against demand that ranges between 1,400 tons to 1,900 tons. The gap is met through imports.
Price of gas and petrol is tightly controlled where government decides the profit margins of producers, marketing companies and distributors. But when it comes to LPG, controlling price beyond marketing companies is almost impossible.
To reach end consumers, LPG marketing companies rely on over 6,000 distributors and more than 20,000 retailers who receive the product often in rusted cylinders and rickety trucks. The Oil and Gas Regulatory Authority has time and again failed to oversee them.
The allocation of LPG from local producers has also remained a disputed matter. With so many marketing companies vying for limited supplies, producers like JJVL, Pak Arab Refinery, OGDCL and Pakistan Refinery Limited continue to dictate.
Companies like Progas, Shell and SHV, which had invested heavily on storage tanks, cylinders and trucks were often left dry. The only way to survive was to import. All of these three major players have wrapped up LPG operations in the country.
“Every time my imported product landed at the port, Iqbal dropped producer prices and I had to book losses,” said an importer, who requested not to be named.
The Associated Group denies the charge. As for the Progas terminal, Iqbal said, “It was not our doing. Their entire business model was flawed.”
Fasih insists Shell has exited the LPG business globally whereas SHV also left because of other reasons.
SSGC-JJVL nexus?
Munawar Baseer Ahmad, the managing director of SSGC between October 2002 and September 2007, met Iqbal for the first time in April 2003. “He came along Aitzaz Ahsan to convince me.”
Baseer has been made a party to the case and he is also submitting a reply to the court.
“Prior to the last bidding round, two attempts to set up extraction plant had failed. BP even refused to invest saying the project was not financeable. We were late in initiating this,” he said.
According to an agreement, SSGC had up till 2003 to award the extraction project before the rights to do so revert to BP. “When I took over, the project was still facing delays and I had to rush.”
Contrary to what is believed, Baseer says he was the one who helped change the controversial Clause 18 in the implementation agreement.
“I was confidentially told that the clause will force SSGC to takeover all liabilities, losses and the plant if for any reason JJVL couldn’t operate. That meant taking the risk of falling gas pressure or LPG content. I couldn’t possibly have let that happen,” he said.
Baseer started receiving calls from then petroleum minister Nauraiz Shakoor and Abdullah Yousuf, petroleum secretary, forcing him to sign the agreement. But he says he didn’t budge.
About using Saudi Aramco CP has benchmark for royalty calculations, he said the company decided against it. “Ultimately, we had to ensure that consumers were protected. Why should be support importers over local producers?”
Iqbal, he says, has a peculiar way of wooing people. “He would book a plane and take everyone to a foreign country. But I don’t think he did anything wrong.”
He supports the JJVL project and also backs it in its stance that bid invitation or Request for Proposal did not include any royalty formula. The final implementation agreement was signed on August 12, 2003. “JJVL is a fantastic project. It runs at efficiency level of over 96%. No other producer could match that. If the sponsors shut off the plant and take their software, no one would be able to run it,” he said. However, Baseer was unable to explain why would SSGC forgo its right to earn more royalty using import parity price?
Making money a crime
Sitting at the top of a company whose revenue exceeded $150 million would surely have made Iqbal many enemies. But why exactly Khawaja Muhammad Asif, the Water and Power Minister, pursued the case till the very end remains a mystery. Asif had filed the petition, which became basis for the judgement, in 2011. Fasih says his father has no enmity with him.
Whatever the fate of JJVL, Iqbal has emerged as a businessman who knows how to survive. He knows what he has gotten himself into.
Published in The Express Tribune, January 14th, 2014.