Resolution & termination of pact between PLTL, PGPCL: PD awaiting comments of AGP, Law Div for final round

Petroleum Division is waiting for comments of Attorney General of Pakistan and Law Division to proceed for final round on dispute resolution and termination of agreement between Pakistan LNG Terminal Limited (PLTL) and Pakistan Gas Port Consortium Limited (PGPCL), official sources told Business recorder.

On April 2, 2020, Petroleum Division informed the Cabinet Committee on Energy (CCoE) headed by Minister for Planning, Development and Special Initiatives, Asad Umar that Government Holdings (Private) Limited (GHPL) is a 100% owned company of the Government of Pakistan (GoP) under the administrative control of Petroleum Division.

Pakistan LNG Terminals Limited (PLTL) and Pakistan LNG Limited (PLL) were incorporated in December 2015 as 100% owned subsidiaries of GHPL in pursuance of ECC's decision dated November 25, 2015. The mandate of PLL was to import Liquefied Natural Gas (LNG) while PLTL mandate was to develop and manage LNG Re- gasification terminals.

For establishment of the 2nd LNG Terminal, PLTL entered into an Operations and Services Agreement (OSA) with PGP Consortium Limited (PGPCL) on July 1, 2016 for a term of 15 years to provide and perform LNG services for PLTL. Due to PGPCL's failure to meet their contractual deadlines to commence terminal operations on the commercial start date (July 1, 2017), PLTL on September 25, 2017 imposed Liquidated Damages (LDs) to the tune of $ 30 million. PGPCL gave revised commercial start date of November 28, 2017. Again on account of failure to start commercial operations by the new scheduled commercial start (November 28, 2017), PLTL on February 26, 2018 imposed additional LDs of $ 11.1 million till the actual commercial start date (January 4, 2018) as per the agreement besides imposing $9.485 million on account of gross negligence and willful misconduct of PGPCL. The parties (PGPCL and PLTL) initiated the dispute resolution mechanism.

Clause-37 of the OSA provides that any dispute between the parties must first be referred to the Authorized Representatives (ARs) for an amicable settlement within 90 days and if the dispute is not settled amicably through ARs then the dispute would be finally settled through binding international arbitration by the LCIA.

The dispute ended in February 2020 without resolution. In the matter, on March 4, 2020, PGPCL filed a request for arbitration at the LCIA. Furthermore, due to a delay of more than one year in the provision of an adequate assurance of performance (financial guarantee of $15 million), PLTL terminated the OSA on October 14, 2019. PGPCL again opted for dispute resolution, which ended on January 23, 2020 including extension period of ten days. PGPCL on January 22, 2020 filed an arbitration petition in the Islamabad High Court praying the court to refer the matter to international arbitration. On January 31, 2020, PGPCL also filed a request for arbitration at LCIA. Pending the outcome of dispute resolution, both parties are obligated to perform their respective obligations thus ensuring continuity of operations of the terminal. The matter of appointment of legal counsel for international arbitration is under consideration with the Attorney General for Pakistan.

Petroleum Division further informed that in order to secure the LNG supply chain, OSA provides PLTL with the right, exercisable upon expiry or earlier termination of the OSA, to purchase/lease the following LNG Services Infrastructure: (i) purchase of jetty aside the FSRU from PGPCL; (ii) lease of floating storage & Re-gasification unit from BW; (iii) lease of connecting pipeline and their jetty from FOTCO; and (iv) novation of PQA Implementation Agreement (IA) from Port Qasim Authority.

The CCoE was apprised that option and direct agreements, ancillary to the OSA, have been signed by PLTL with the project parties (BW Maritime, FOTCO and PQA) to ensure these rights. Thus, in order to secure the LNG supply chain, PLTL on January 7, 2020 issued an Option Exercise Notices to purchase/lease the LNG Services Infrastructure. According to PLTL, they have exercised this contractual right to restore confidence of international investors.

M/s Ernst & Young was engaged by PLTL for financial due diligence and subsequent project financing for acquisition of fixed assets of Terminal-2. Total funding required for the project is Rs 13.5 billion. The project will be financed through a mix of 65:35 debt equity ratio, which will require an equity injection of Rs 4.7 billion whereas Rs 8.8 billion will be raised from commercial banks. According to PLTL, from the financial due diligence, the project is found commercially viable with an IRR of 26% with manageable risk and a payback period of 4-6 years. Further, according to PLTL, there is the potential of the benefit to the public by lowering the levelized RLNG tariff to about 38.67 cents. As an alternate to taking over the terminal operations by PLTL, the OSA also decides for appointing a substitute operator through a transparent competitive bidding process. This option ensures that the original mandate is preserved, and public-private partnership is promoted/continued.

After detailed discussion, the CCoE directed the Petroleum Division to resubmit the case, in the next meeting, after obtaining legal opinion/advice from: Attorney General of Pakistan on the issue of International arbitration in the matter and Law and Justice Division on fundamental legal position of the case.

When contacted a spokesperson of Petroleum Division said " as directed by the Cabinet Committee on Energy, Ministry of Energy, Petroleum Division has referred the matter to the Attorney General for Pakistan, being Chief Law Officer of the country and the Ministry of Law & Justice, being the relevant Federal entity under the Rules of Business 1973 to seek opinion on the merits of termination as part of the due diligence process. No response has been received yet from AG as well as from Law Division."