Gas controversy: LNG terminal bid more than fair, says Engro official

Haque says bid won through competitiveness.

KARACHI: The lowest bid that won Engro Corporation the rights to build and run a liquid natural gas (LNG) terminal was offered despite strict conditions the government attached with the project, a top company executive told The Express Tribune. 

The terminal, with a capacity to handle 400 million cubic feet per day (mmcfd), is not protected by sovereign guarantee and the risk of any eventuality is transferred onto the investors, said Sheikh Imranul Haque, Engro Vopak Terminal Limited Chief Executive Officer.

“It will be an airtight agreement for the government,” he said. “There are clauses like the one which binds us to pay a penalty of $150,000 a day if construction overshoots the deadline. The government has also reserved the right to take over the terminal if we can’t run it. I think this is the fairest deal.”



A formal agreement has yet to be signed for work to start. State-run Sui Southern Gas Company (SSGC), which will receive the gas in its pipeline system, has forwarded its recommendation for a final nod to the Economic Coordination Committee (ECC).

But SSGC’s board approval for the project last month was followed by a notice to the stock exchange on February 7 that said certain unspecified conditions have to be met before anything happens.

This caused the industry to speculate that SSGC doesn’t agree with the take-or-pay requirement, which means Engro will have to be paid even if LNG is not imported through the terminal.

Haque says there shouldn’t be any confusion on the matter. “The take-or-pay clause was part of the request for proposal (RFP) document. It is not something which we inserted. This is what was offered to the bidders.”

The previous government came under increasing pressure over similar protection offered to investors in rental power projects. Known as capacity payment, the clause meant that the government had to pay a power producer for minimum capacity utilisation of the machinery.

On the other hand, industry officials say that such safeguards remain imperative considering the state’s weak fiscal and external account position.

In the past, independent power producers often did not have money to buy fuel and run the plants as they awaited payment from customers, which are state-run power distribution companies.

Engro won the bid for the project by offering 66 US cents per million British thermal unit (mmbtu) as tolling or handling charges. Awarded for a period of 15 years, it will generate $1.5 billion in revenue over its life.

“This number, $1.5 billion, looks very big. But its spread over many years and when looked at considering our investment, the return is not unjustified,” Haque said. “As a matter of fact, the return is less than the 17% offered to power projects.”

He said people criticising the tolling charge are not giving weight to the time value of money.  However, the company has refused to make public the size of investment.

“The project design of our competitors in the bid was more expensive than ours by at least $30 million. We could have raised our bid but we didn’t. Engro believes in fair play.”

Engro’s LNG terminal, which will be located at Port Qasim, will be the first in Pakistan and follows multiple attempts to import LNG that were bogged down by transparency issues.

Haque said a new jetty will be built near Engro Vopak’s existing liquid terminal. A ship with an onboard re-gasification plant and storage tanks, being hired from US based Excelerate Energy, will be permanently berthed at the jetty.

“This is the quickest way to meet our energy needs,” he said. “We would have approximately 335 days to make the terminal ready after the agreement is signed.”

The company won’t be importing LNG. The government will use Pakistan State Oil (PSO) to bring the supplies.

“I think this arrangement actually makes sense. Everyone would be comfortable with a state organisation getting sovereign guarantee to bring LNG,” he said.

Published in The Express Tribune, February 14^th, 2014.

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