ISLAMABAD: The Economic Coordination Committee (ECC) of the Cabinet has directed Petroleum Division to seek legal opinion from Attorney General for Pakistan AGP on the issue between Jamshoro Joint Venture Limited(JJVL) and SSGC, official sources told Business Recorder.
Sharing details, sources said, on August 21, 2020, Petroleum Division informed the ECC that on a written request of JJVL, the Chairman (ECC) directed the Petroleum Division to submit a summary. Accordingly, on July 28, 2020, a summary was placed before ECC for its consideration. In an ECC meeting held on July 28, 2020, Chairman ECC directed to seek comments of relevant GoP entities and re-submit the summary to the ECC.
The summary says that in 2003 SSGC awarded the rights for extraction of Liquid Petroleum Gas (LPG) and Natural Gas Liquids (NGL) from Badin gas field through a tender process, by signing an Implementation Agreement (IA) with JJVL. Through a long litigation history spanning 17 years, the current agreement expired on June 20, 2020. The JJVL plant had been closed since that date resulting in reduction of domestic LPG production of about 250 tons per day, which was approximately 12% of local production.
A brief history of the arrangements between SSGC and JJVL plant was as follows: SSGC signed an IA with JJVL on August 12, 2003, and the plant started production in 2005. The extracted LPG/NGL was owned by JJVL and in return JJVL paid SSGC royalty based on LPG prevailing producer price less certain adjustments. Based on the petition filed by Khawaja Asif, Supreme Court (SC) declared the IA awarded to 11JVL to be in gross violation of the bidding process as advertised and as set out in the tender documents and set aside the IA on December 4, 2013. Further, through a committee constituted by SCP, an additional royalty of Rs.4.25 billion was awarded to SSGC. However, a disagreement on freight was still outstanding and to be resolved by a final decision by the SC.
In September 2012, SSGC signed an agreement (MoU) for processing of gas from Bobi gas field (similar to model used by OGDCL for its KPD gas field) for the extraction of LPG and NGL for a processing charge (USD 237/MT of LPG and 'NGL produced) instead of the Royalty model.
In 2014, the MoUs for KPD, Naimat Basal and Sinjhoro gas fields were also signed between the parties under the same arrangement. Badin gas was also shifted to the same mechanism after cancellation of IA by the SC, under which arrangements JJVL was required to pay SSGC for its 50% share of allocated LPG arid NGL after netting the processing cost.
In May 2016, SSGC sent notices for the termination of the individual MoUs to JJVL in view of "negative" margins in the business with falling LPG prices internationally with the assumption that OGDC's extraction plant at KPD will be commissioned soon. However, JJVL obtained an injunction from Sindh High Court and its business operations continued until the SC took up the matter in June 2018 and upheld the termination of MoUs as valid.
The apex court appointed A.F. Ferguson & Co (AFFCO) to audit the Books of Accounts of JJVL and clear all the dues between the parties. After submission of the AFFCO Report, SC in its order of November 16, 2018 directed JJVL to pay net Rs.1.5 billion (net of receivables from JJVL and payables by SSGC) and Rs.3.9 million being on account of Late Payment Surcharge (LPS) to SSGC which was accordingly paid by JJVL. (iii) after upholding the termination of MoUs as valid by SCP on June 13, 2018, SSGC stopped the supply of gas to JJVL and the plant remained closed for 6 months. JJVL submitted a proposal based on profit sharing to SC which was forwarded to SSGC by SCP. JJVL contented that the closure of the plant is causing a loss to the national exchequer and is depriving the poor people as no LPG.is being extracted.
After concurrence of its Board, SSGC informed SC that given the investigations by NAB and multiplicity of cases, it did not wish to engage with JJVL directly and was not comfortable with the proposal submitted by JJVL. SSGC also informed the apex court that it planned to hire a consultant for advice on the best option available with respect to the LPG/NGL extraction. After considering all the points, SCP appointed a third party i.e. A. F. Ferguson (AFFCO) which were deemed to be the receivers of the court, to determine an appropriate sharing arrangement for both parties. AFFCO came up with a provisional mechanism of revenue sharing which was validated by SC in its order of December 29, 2018. The agreement was for 18 months, expiring on Jane 20, 2020 automatically unless mutually extended. As per the agreement, all revenue from sale of LPG went into an escrow agreement managed by AFFCO; SSGC obtained 57% share of revenues while JJVL received 43% for sales made by JJVL at producer prices of LPG and actual export price of NGL. This is subject to a final determination by AFFCO, to be applied retroactively to be approved by SC. The final determination remained outstanding for lack of information being provided by both parties to AFFCO until the expiry on June 20, 2020; both SSGC and JJVL have since provided the information, although AFFCO may seek additional data from them for its final determination. As of today, all amounts ordered by the courts to be paid by JJVL have been paid. Petroleum Division further informed that in May 2020, SSGC hired an international consultant M/s ILF ( Russia ) for evaluating different scenarios of LPG/NGL extraction. The consultant in its report declared that the current gas stream going to JJVL is a lean pipeline quality gas and is perfectly safe if injected directly into the system without any extraction of LPG/NGL. If this extraction is not done, an extra 8-10mmcfd of gas becomes available for sale. Based on its financial analysis, the commercial decision reached by SSGC was that it can have a higher revenue stream from selling these molecules as additional gas of 8-10mrncfd instead of selling it as LPG/NGL. This gas would be sold to high paying customers being curtailed today or obviating the need for importing more expensive LNG.
The legal team and attorneys stated that as per SC's order, SSGC had a clear right to let the agreement expire and it was advisable to do so given the extensive litigation history especially when it was not in the commercial interest of SSGC to continue the arrangement on existing terms.
Accordingly, on June 20, 2020, SSGC conveyed to Petroleum Division the decision of its Board of Directors (BoDs) not to extend the agreement, after extensive deliberations on technical, commercial and legal aspects. The arrangement between SSGC and JJVL is a commercial agreement and the BOD is fully empowered under law to decide the affairs in the best interest of SSGC.
Petroleum Division apprised that local production of LPG catered for approximately 65% of annual demand while the balance was made up through imports. Since the closing loan of JJVL (about 7% of total applies to both domestic and imports), no shortage had occurred since the space has been filled through more imports. After a few days of volatility, the price had also stabilized. Before the shutdown of the JJVL production, the Petroleum Division had proposed to the CCoE various measures to enhance local production and reduce dependency on imports.
In this matter, a Committee constituted by CCoE under the chairmanship of Deputy Chairman, Planning Commission was preparing its recommendations in consultation with the stakeholders for submission and consideration of CCOE. In this context, while it is important to resume production of LPG at the JJVL plant, the same cannot be to the economic detriment of SSGC when compared to its alternatives. Petroleum Division has no locus standi to become a party to such a commercial agreement and can only give policy guidelines. While remaining within its role of policy maker, and in the best interest of the country to meet the energy demands of the country and reducing .dependence on imports; Petroleum Division is of the view that SSGC ought to consider restarting the production at JJVL, on terms that are not detrimental to its interests, until the final judgment of SC, based on the final AFFCO report (which will have retrospective effect anyway).
Petroleum Division requested the ECC for approval of the following proposals and conditions for resumption of LPG/NGL production from the JJVL plant: (i) SSGC may consider resuming supply of gas to JJVL for production of LPG/NGL on day to day basis, with clear understanding that it may stop anytime, preferably until-final SC's order; (ii) AFFCO, already appointed by SC, to hold a reasonable portion of revenues from the share of JJVL in an escrow account, after regular payments to SSGC, to protect the interests of SSGC and adjustments towards non-payment of Petroleum Levy by JJVL; (iii) while other suppliers are paying PL, JJVL has court injunction and owes Rs94 million (Principal plus LPS) for the period November 2017 to June 2018 and payment of around Rs.300 million (Principal plus LPS) for the period January 2019 to June 2020. (iv) JJVL should either pay the PL and withdraw the cases in Court. Alternatively, and to safeguard their legal rights, they could submit the pending amount in court, such that the funds are secured, if the court finds in favor of the government.
In either case the AG office should be directed to request the court for early disposition of the case; and (v) Pending freight matter (for the period 2005-2013) will be through a final decision by SC.
After a detailed discussion, ECC approved, in principle, the proposal with direction to Petroleum Division to seek guidance from Attorney General on the legal implications of the issue and submit a report thereof to the ECC for consideration.
Copyright Business Recorder, 2020
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