Refinery project approved despite exaggerated cost: bidding decision cancelled

The Federal Government seems not to have learnt any lesson from Supreme Court's verdict on Pakistan Steel Mills (PSM) sell-off, whereby it was directed to exercise care and ensure extreme transparency while dealing with public offerings.
The summary approved by the Economic Co-ordination Committee of the Cabinet (ECC) on October 31 2006, for setting up Khalifa Coastal Refinery with an approximate range of 9-13 million tonnes per annum capacity, was fraught with a number of anomalies in the modus operandi in granting permission to International Petroleum Investment Company, to execute the joint venture with a public concern, Parco.
It is surprising such a major decision has been made without the support of any study and thus knowingly the date of commissioning announced at the press briefing 2010 has been changed to the first quarter of 2012.
First of all, the summary offers a strange logic that in view of the fact that IPIC is an Abu Dhabi Emirate-owned company and other members of consortium would also be Dubai/Abu Dhabi companies (who knows what those companies are or may be). Therefore, the condition of international competitive bidding may be withdrawn in modification of earlier ECC decision taken on April 14, 2006.
Such an autocratic selection of a firm for a major joint venture gives rise to the feeling that the ECC has once again used a short cut to oblige a specific party. International bidding should have helped to determine the real price tag of the project. But those sitting at the helm of affairs preferred to act in their autocratic style of governance in deciding the fate of a huge project like this, said a Karachi based consultant.
It is also well known that Royalties in Middle East, besides running the government, are also in private business for themselves. For instance, UAE companies like Etisalat have competed with Singapore government's investment arm of Tamasek for PTCL.
The price tag of any project is always a debatable issue. Khalifa Coastal Refinery is no exception. The cost of the proposed refinery is estimated at $4-5 billion. Also, six years gestation time indicates that the joint venture will have to do everything from scratch and that the proposed project is yet a thought on paper only.
The estimated cost of the Khalifa Refinery, if compared with the cost of under-construction Essar Oil Ltd--a refinery in India with a production capacity of 10.5 to 12 million tonnes of processed products per year (million MT per annum)--seems highly exaggerated. Essar Oil Limited is being constructed in Gujarat, India, at an estimated cost of $2.26 billion which is less than half of the Khalifa Coastal Refinery's estimated cost.
On the other hand, India's Reliance Industries Ltd is presently undertaking extension of 33 million MT per annum in Reliance Petroleum situated at the special economic zone in Jamnagar at an estimated cost of $6 billion. The oil and petrochemicals company plans to nearly double the capacity at its 660,000 barrels per day facility, which is greater than the proposed capacity of the Khalifa Coastal Refinery.
Compared with the cost of Essar and Reliance oil refineries, the Khalifa's estimated cost of $4 to 5 billion is highly dubious. These facts were needed to be taken into account had there been study to support the agreed cost. It is more surprising that in the blue book referred to in the ECC summary itself the cost has been kept at $1.7 billion by government experts Enar Petrotech.
Moreover, 26 percent of such an exaggerated cost would be funded by Parco with the option to offload up to 20 percent shares to parties like Asian Development Bank with the approval of the government. Such an agreement for the offloading of 20 percent shares will be enough to bear the real cost and the exceeding amount will reduce the investors' equity in the project.
Ultimately, the nation will again have to bear the burden in the years to come as ex-refinery price would still be fixed by the government taking into account all costs including debt servicing, the consultant remarked.
A leading local textile-cum-banking group has already showed interest in putting up a coastal refinery. How can free land and infrastructure (including mooring) be offered to foreigners and not to Pakistani businesses? asked the consultant.
The text of the summary is being reproduced below for the interest of the general public. ECC vide its decision in Case No ECC-72/4/2006 dated April 14, 2006 approved a package of incentives for setting up of a new state-of-the-art oil refinery of 200,000 to 300,000 barrels per day (about 9-13 million tons per annum) at Khalifa Point near Hub, Balochistan, with the direction that the Ministry of Petroleum and Natural Resources and Oil and Gas Regulatory Authority will select the party on the basis of international bidding.
Various incentives, including free of cost land, have been offered for this refinery in addition to those already given in the Petroleum Policy 1997, subject to its commissioning by 31st December, 2010. ECC Summary along with approval is at Annex-1.
The Ministry of Petroleum and Natural Resources prepared a Blue Book through a consultant Enar Petrotech Services (Pvt) Ltd, which inter alia contained all basic information relating to investment opportunity in the setting up of a new oil refinery at Khalifa Point. The Blue Book was proposed to interested investors as well as investors in the Pak-China Energy Forum held in Islamabad from 25th - 27th April, 2006.
International Petroleum Investment Company (IPIC) of Abu Dhabi, a Government owned company, approached the Ministry of Petroleum and Natural Resources and expressed its keen interest in making investment in the Coastal Refinery of 200,000-300,000 barrels per day capacity at Khalifa Point and thereafter confirmed their interest through a letter dated 10th August and 24th September 2006 (Annex-II).
IPIC established in 1984 is run by an independent Board of Directors, whose Chairman is Sheikh Mansour Bin Zayed Al Nahyan and it has 24 years experience of investing in petroleum related projects. IPIC's shareholding in Parco is held through its IV holding company Abu Dhabi Petroleum Investment Company (ADPI).
Salient features of IPIC proposal in the Coastal Refinery are as under:
i) A Consortium to build the proposed refinery will consist of IPIC and its associated investors in the ratio of 75 percent and Parco 25 percent. Out of IPIC's proposed 75 percent stake, half of the stake could be retained by IPIC while the remaining half to be taken by other UAE Government institutions including companies from the Emirates of Abu Dhabi and Dubai.
ii) IPIC has proposed that the name of the refinery would be Khalifa Coastal Refinery.
iii) IPIC proposes that Parco should join in this project with a view to having integrated approach with reference to Parco's existing Mid-Country Refinery Project.
iv) IPIC would be only financing the project while Parco, apart from putting in its share of funds, will co-ordinate and act as Operator of the new Coastal Refinery.
v) The cost of the proposed refinery is estimated at $4-5 billion and it could be commissioned by the year 2011-2012.
Parco management is of the view that in order to exercise effective control of the company, particularly in relation to fundamental business decisions, their shareholding should not be less than 26 percent of equity. The Ministry of Petroleum and Natural Resources is in agreement with Parco's above proposal.
The Asian Development Bank vide its e-mail dated October 3, 2006 (Annex-III) has also shown interest in participating in the proposed Coastal Refinery which will be considered against Parco's 26 percent shareholdings.
In view of the investment proposal offered by IPIC at para 3 above and the position explained at paras 4 & 5, following is submitted for consideration and approval of the ECC:
i) Parco may be allowed to form a joint venture company with IPIC for setting up of the state-of-the-art new deep conversion refinery at Khalifa Point, Hub Balochistan.
ii) Parco may be allowed to take 26 percent share equity with the option to offload up to 20 percent of their shares to parties such as Asian Development Bank subsequently with the approval of the Government of Pakistan. Accordingly, JV Company will comprise IPIC 74 percent and Parco 26 percent shareholding.
iii) The land up to 1000 acres from the 1800 acres available at Khalifa Point Hub, Balochistan, will be provided to IPIC/Parco joint venture free of cost for the proposed Khalifa Coastal Refinery Project. In modification of earlier ECC decision dated 14-4-2006 referred above, the land will be used only for the Refinery Project.
iv) All other incentives/concessions, terms and conditions approved by the ECC vide its decisions dated 14-4-2006 will be applicable for IPIC/Parco Joint Venture Company. The refinery project will be commissioned by 1st quarter of 2012 as proposed by the IPIC in modification of earlier commissioning deadline of 31st December 2010.
v) In view of the fact that IPIC is an Emirate of Abu Dhabi owned company and other members of consortium would also be Government of Abu Dhabi/Dubai owned companies; therefore the condition of international competitive bidding may be withdrawn in modification of the earlier ECC decision dated 14.4.2006. The proposals at para 6 above are submitted for the approval of the ECC.