LNG import: PSO cancels tender in a serious blow to government

SSGC in a spot as it will have to pay capacity charges to terminal operator

ISLAMABAD:

In a setback to government’s efforts to swiftly import liquefied natural gas (LNG), Pakistan State Oil (PSO) has cancelled a gas supply tender because of regulatory constraints.

This step may push Sui Southern Gas Company (SSGC) – a state-owned gas distributor – to the brink of financial collapse as it will be required to pay thousands of dollars per day in penalties to the operator of LNG terminal.

“Due to certain constraints, PSO is unable to issue the Request for Proposal (RFP) documents within the tender process timelines (as extended) and owing to regulatory restrictions we cannot extend those timelines further,” the company told the bidders in its communication as quoted by the authorities.

“Accordingly, we will not be proceeding with the tender process at this time.” PSO had invited Expressions of Interest through an advertisement on May 30.



Since the Musharraf government, this is the sixth time Pakistan has failed to import LNG. Five tenders have already been cancelled.

However, after scrapping of the tender this time, SSGC finds itself in a tight spot as it will have to pay $300,000 per day in capacity charges to Engro terminal even if there are no LNG imports. The terminal is being set up at the Port Qasim, which is expected to be completed early next year.

Now, the government has been left with two choices including LNG import through a direct state-to-state deal with Qatar or any other country and spot purchases. PSO has asked the bidders to participate in bids for spot purchases.

It assured the bidders that both the government and PSO were committed to building an LNG portfolio through various procurement streams including tender float. It expected that the process for entering into agreements would be initiated very soon to purchase LNG from the spot market and hoped that the bidders would participate in it.

“We hope that you will again participate in the tender process for short/mid-term LNG supply when it recommences in due course.”

Earlier, giving in to government pressure, the SSGC board had 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 LNG imports without conducting due diligence. In a meeting, nine members of the board supported the issuance of the letter of credit whereas three opposed, arguing it would push SSGC to the brink of financial default if imports were delayed.

They were of the view that LNG buyer PSO should be responsible for paying capacity charges in case gas supplies were delayed, but the burden had been put on SSGC, which is a gas distribution company.

ETPL, a wholly-owned subsidiary of conglomerate Engro Corporation, is constructing the LNG terminal at an estimated cost of $140 million and will receive $100 million per annum in capacity charges even in the absence of LNG supplies.

ETPL had won the bid for terminal services and quoted a tolling fee of 60 US cents per million British thermal units (mmbtu).

According to the 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 suggested 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 the LNG supplier.

According to the plan, the country will import 200 million cubic feet of LNG per day (mmcfd) in the first year and 400 mmcfd from next year.

Published in The Express Tribune, November 30^th, 2014.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.