Board of Directors of Sui Southern Gas Company Limited (SSGC) on Saturday approved the state-owned utility''s plans to purchase Progas Pakistan Limited, an LPG marketing company undergoing liquidation proceedings under court orders, well-informed sources told Business Recorder. The decision backed by Islamabad was taken in a special meeting of Board held in Karachi.
An official confirmed that the Board met on Saturday but the Managing Director of SSGC was not available for comments on the deal. According to sources, Abbas Bilgrami, the chief executive of the distressed private sector company, would continue to run Progas and may also be appointed as a Special Advisor to the Ministry of Petroleum and Natural Resources. When contacted, Abbas Bilgrami, denied that he was being made Advisor to the Petroleum Ministry.
Those in support of the controversial acquisition argued that the model adopted by Progas, which did not work for the original owners, would work for SSGC because of existing and upcoming changes in the LPG policy framework.
Supporters of the deal said that Progas would earn revenues through providing terminal services, selling products to private sector LPG marketing companies, synthetic natural gas (SNG), and autogas stations. SSGC predicts that the first year gross margin from Progas will be $7.44 million and that this will go up by over 570 percent to $50.08 million by the seventh year.
However, some board members expressed reservations about this saying that SSGC divested from LPG marketing 10 years ago and, citing past performance including problems with the LNG Mashal Project, does not have the expertise to make this project work.
It was pointed out that the Progas terminal had only been utilised about 5 percent over the last five years because of competition from Engro Vopak''s multi-purpose terminal which was profitable. It was also pointed out that the debt of Progas had exceeded Rs 20 billion. It was further pointed out that SNG systems being operated by SSGC were already heavily subsidised and setting up more would only increase the burden on the company and taxpayers.
Progas is facing a forced sale on the orders of the Sindh High Court after banks and financial institutions sued them over non-repayment of interest and principal. SSGC obtained a stay order against the court-ordered auction of Progas and would be putting in a bid for the company. After negotiating with lenders, their liability comes to about Rs 1.5 billion, say official sources working on the proposal.
In accordance with the directions of the Board a subsidiary, SSGC LPG Ltd (SLL) was registered in October 2009. Since then SSGC has been planning to enter into the complete LPG supply chain ie extraction, storage, bottling and distribution business. Recently an opportunity to set up and build this business on fast track through the acquisition of assets of an established LPG infrastructure company at a forced sale value has manifested itself. These acquired assets shall be held in the SSGC LPG Ltd (SLL).
Progas assets include a fully functioning multipurpose Jetty, Trestle, LPG storage facility (6,750 MT) and downstream logistics and filling plants. The annual terminal capacity is 2 million tons and the terminal can handle up to 15,000 DWT vessels with provisions to handle up to 80,000 DWT vessels for LNG imports at additional cost.
The annual indigenous LPG production is around 580,000 MT, additionally 109,500 MT is imported. While the local production is expected to remain flat, the imports will rise substantially to 1.8 million MT by 2020, to cater to increased demand, growing at over 8 percent annually.
OGRA has rationalised the pricing structure to allow for a reasonable margin for imported LPG, presently at $150 maximum over the imported LPG landed cost. Moreover, the producer''s prices are also linked to CP Saudi Aramco which has a direct correlation with imported LPG cost.
SLL being in the public sector will strive to be a major player in the LPG market with focus on meeting the suppressed demand while keeping prices stable at affordable level in comparison to other available fuels. This can be achieved by maintaining regular supply in the market through imports and giving the price benefit to the consumers based on the weighted average cost of local and imported LPG. This will help set the pace for regulating market prices through market forces instead of interference from OGRA. At a conservative estimate $90 average net margin per ton for a 600 tons LPG supply for 2011/12 financial year, SLL profit from LPG business alone could exceed Rs 1.6 billion.
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