LNG terminal: SSGC likely to approve capacity charges as govt steps in

Payment of Rs10b per year will be eventually borne by consumers.

Zafar Bhutta October 16, 2014


The board of directors of Sui Southern Gas Company (SSGC) will meet in a special session here on Saturday in a bid to give its seal of approval to a standby letter of credit worth $50 million for Elengy Terminal Pakistan Limited (ETPL) to cover capacity charges for a period of six months.

The board members will gather in the wake of government’s pressure to clear the way for a contract for paying Rs10 billion worth of capacity charges per annum to ETPL for handling liquefied natural gas (LNG) imports, a burden that will be eventually borne by consumers, sources say.

ETPL, a wholly owned subsidiary of conglomerate Engro Corporation, is constructing an LNG terminal at an estimated cost of $150 million at the Port Qasim and will receive $100 million per annum in capacity charges even in the absence of LNG supplies.

In its previous meeting, the SSGC board had refused to accept the letter of comfort, ensuring guaranteed supplies, given by Pakistan State Oil (PSO) with one board member saying PSO was a supplier, therefore, SSGC would require back to back letters of credit for ETPL.

“After SSGC’s refusal, the Ministry of Petroleum said it would issue the letter of comfort, but it has no value without approval of the Economic Coordination Committee (ECC),” an official said.

Now, the official added, a meeting of the SSGC board had been called in Islamabad to push the board members to approve the issuance of letter of credit to ensure payment of capacity charges without getting the letter of comfort from PSO.

A majority of members of the SSGC board are nominated by the government that has more than 80% shares in the company. It may also be noted that SSGC is based in Karachi and its board meetings are usually held there.

The government had given the task of importing LNG to PSO, but according to an agreement signed between SSGC and Engro, if adequate volumes were not purchased for processing, SSGC would be bound to pay a penalty of about $300,000 per day, the official said.

In order to shield SSGC from the penalty, a supply guarantee was required, but the SSGC board was being asked to approve the standby letter of credit without the guarantee.

In the first year, SSGC is only allowed to deliver a maximum of 200 million cubic feet per day (mmcfd) of LNG to the terminal for processing and the quantity would be enhanced to 400 mmcfd from the second year.

Since the LNG terminal is being set up for the benefit of people, the restriction on one of the largest public sector companies dealing in natural gas seems to be a strange move.

As the terminal could handle up to 570 mmcfd, it is believed that other players in the oil and gas sector would be interested in utilising the facility as well. But unlike SSGC, their purpose may not be to import and ensure supply of this vital fuel, but to sell it at a premium.

“It amounts to exploitation that a project initiated to meet the energy needs of the country will be used by private entities to gain premium from those who do not have access to piped natural gas,” the official said.

In any case, he added, forcing an entity such as SSGC to spend a hefty amount that could be negotiated had been held illegal by superior courts in some cases in the past.

The Supreme Court has ruled that the contract for LPG processing was awarded to Jamshoro Joint Venture Limited (JJVL) in questionable circumstances as it appeared that terms favouring the private entity were deliberately negotiated by the board.

“If the government forces the SSGC board into taking a decision that is not in its best interest, it would be interesting to see how the Supreme Court responds to the matter,” a board member remarked.

SSGC Managing Director Shoaib Warsi did not respond to the request for comments on the issue.

Published in The Express Tribune, October 17th, 2014.

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