Giving in to government pressure, Sui Southern Gas Company (SSGC) on Saturday approved the issuance of a standby letter of credit worth $50 million in favour of Elengy Terminal Pakistan Limited (ETPL) to cover six months of capacity charges for handling liquefied natural gas imports, sources say.
However, the move was not in line with the decisions of the cabinet and Economic Coordination Committee (ECC), which had cleared an LNG services agreement between SSGC and ETPL on the condition that Pakistan State Oil (PSO), the LNG supplier, would issue a letter of comfort to SSGC, guaranteeing gas imports.
Though PSO submitted the letter of comfort, it was rejected by the SSGC board in its previous meeting as it fell short of the requirement.
“The SSGC board of directors has approved the standby letter of credit without a letter of comfort from PSO, which is a violation of the decisions taken by the cabinet and economic decision-making body,” a source said.
In a meeting, nine members of the SSGC board supported the issuance of the letter of credit and three members opposed, arguing it would push SSGC to the brink of financial default if the LNG supplier failed to make imports.
The opposing members pointed out that the approval went against an earlier decision of the SSGC board, which had linked the letter of credit with the issuance of a letter of comfort by PSO to stave off default.
“The LNG supplier should be responsible for paying capacity charges in case gas supplies are delayed, but the burden has been put on SSGC, which is a gas distribution company, in the face of pressure from the government,” the source commented.
ETPL, a wholly-owned subsidiary of conglomerate Engro Corporation, is constructing an LNG terminal at the Port Qasim at an estimated cost of $150 million and will receive $100 million per annum in capacity charges even in the absence of LNG supplies.
ETPL had won the bid for LNG terminal services and quoted a tolling fee of 60 US cents per million British thermal units (mmbtu).
According to the LNG terminal services agreement between ETPL and SSGC, the latter was required to arrange around $50 million to cover capacity charges for six months.
However, banks indicated that the letter of credit would depend on the signing of the heads of agreement – a non-binding document outlining main issues relevant to a partnership – between PSO and LNG suppliers before August 28.
According to officials, PSO – the state-run oil marketing company – had provided the letter of comfort to SSGC against capacity charges, but it was not acceptable without signing a deal with the LNG suppliers.
SSGC will pay in line with the import of 200 million cubic feet of LNG per day (mmcfd) in the first year and 400 mmcfd next year.
The capacity charges had also sparked concern among economic decision-makers, who asked PSO to carry out due diligence before issuing the letter of comfort.
The ECC, in a meeting held on February 28, expressed its dismay over revelations that PSO would issue the letter and pay millions of dollars in capacity charges even if it was unable to import LNG from Qatar.
It was of the view that this would put a huge burden on the taxpayers. “The federal government controls PSO, so the letter of comfort would have a bearing on the taxpayer’s money. Therefore, before issuing the letter, PSO should carry out due diligence,” the ECC noted.
“Now, SSGC will be responsible for payment of capacity charges instead of PSO,” an official said.
SSGC managing director did not respond to attempts made to take his comments on the latest development.
Published in The Express Tribune, October 19th, 2014.
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