MUSHTAQ GHUMMAN ISLAMABAD: The Petroleum Ministry’s much talked about Liquefied Natural Gas (LNG) project, has reportedly, hit snags as the Finance Ministry has refused to extend GoP guarantee due to its limitation under Fiscal Responsibility and Debt Limitation Act, 2005, reveal official documents exclusively available with Business Recorder.
Pakistan continues to face a severe gas shortage exceeding 2,000 million cubic feet per day (mmcfd) and the local production is unable to keep pace with the requirements of the country. As a result, the economic progress of the country is being seriously affected. Import of LNG can mitigate the crisis and enhance gas availability in the country. The imported LNG would be received, stored and re-gasified in LNG terminals and delivered through connecting pipeline(s) to the existing transmission pipeline network as Re-gasified LNG (RLNG).
To meet this challenge, Sui Southern Gas Company Limited (SSGCL) had launched “Pakistan Mashal LNG Project” (PMLP) to import 500 mmcfd LNG and carried out a Request for Proposal (RFP) process under which M/s 4Gas emerged as the potential LNG developer. Accordingly, ECC on February 9, 2019 approved award of LNG supply contract to M/s GDF Suez and terminal to M/s 4Gas. The Supreme Court of Pakistan took a suo motu notice based on a news report and on April 28, 2010 advised to put up fresh summaries on Mashal LNG Project and short term LNG project for consideration’ of ECC of the Cabinet.
On the summary submitted by the Ministry, the ECC, in its meeting on February 2, 2011 decided to reinitiate the process of the projects expeditiously in a transparent manner. Subsequently, Law Division’s advice was solicited as what is to be construed from the word ‘reinitiate’ ie whether the project has to be restarted after shelving the case of 4Gas viz: cancellation of Mashal tendering process and re-bid the project or to commence the proceedings of awarding the contract to 4Gas from the stage where it was left. The Law Division has clarified that the word ‘reinitiate’ in the instant case means to start the project afresh.
In May 2011, SSGCL invited EoIs from private sector companies interested in capacity allocation and willing to develop their own LNG FSRU, arranging their own supply of LNG and having their own buyers of re-gasified LNG (RLNG) which also may include the Sui Companies under 3rd Parties Access (TPA) regime. The TPA rules have been finalized with the consultations of all stakeholders and would be notified shortly. Under this arrangement, the gas utility companies (SSGCL/SNGPL) can also buy RLNG from the private party(ies). SSGCL received 17 proposals out of which 3 companies have obtained construction licenses by OGRA for setting up LNG terminals and allocated them capacities in the pipeline network.
In addition, one conditional construction license and one provisional licence have also been issued. This project is active; however, the main impediment to project implementation is the establishment of buyer-dealer relationship between importers of LNG and users, particularly in view of the huge circular debt, which is affecting the ability of the potential buyers to regularly pay for LNG usage.
In order to expeditiously arrange LNG supplies, the Ministry of Petroleum and Natural Resources intends to initiate competitive bidding via public tenders to be floated through gas utility companies. The process will be open to all parties and will cover purchase of RLNG based on integrated and tolling Project Structure as follows;(i) pursuant to para 2 of the LNG Policy 2011, the gas utility companies intend to purchase RLNG from third parties under an integrated project structure whereby the RLNG supplier will procure LNG, setup the terminal for storage and re-gasification and deliver RLNG. The base-load volume of RLNG will be 800 ‘MMCFD (spread over 2 separate LNG developers - 400 MMCFD each) at delivery point under ten (10) years’ contractual arrangement (extendable); (ii) the advantage of spreading the award to more than one supplier is to avoid dependency on single supplier (e.g. diversification) and to also promote LNG supplies under TPA by utilizing spare capacity, if any. The bidders will be free to install spare LNG terminal capacity which can also be utilized for tolling arrangement. In the calculation of the RLNG price, the bidders shall only apply LNG terminal capacity charges (fixed plus variable) for the portion corresponding to the contracted quantities to the gas utility companies; (iii) all bidders will be required to quote the RLNG price (at SSGC’s delivery point) linked to market benchmarks in US dollars per million BTU (gross). The market benchmarks will be specified by the bidders such as Brent, basket of crude or other market indices (with publication source). Tolling tariff up to the delivery point for spare LNG terminal capacity shall also be quoted separately;(iv) The lowest two evaluated bids will be ranked first and second which shall be subject to negotiation as per para 7 below. In order to award the contract to the bidders on the negotiated prices, relaxation in the corresponding PPRA rules is required; (v) Following may be added at the end of para 9 of the LNG Policy, 2011 “in case RLNG is procured by public sector companies as Government’s designated buyers, the government will provide financial guarantees of payments by the said public sector companies for RLNG; as required to cover share of Government’s purchase quantity.” Further, the government guarantees already issued in respect of Independent Power Plants (IPPs) or others may also be assigned for RLNG payments; (vi) in view of the changing dynamics of LNG markets with respect to expected decrease in prices, the RLNG price will be subject to revision after 5 years on mutually agreed terms. However, if the RLNG price at delivery point, at any time, goes beyond the imported fuel oil price, the RLNG price formula will also be reviewed. Any disputes or disagreements on the price revision will be settled through International Arbitration involving an LNG market consultant of international repute; (vi) Overseas Private Investment Corporation (OPIC) which is working with two RLNG project developers for project financing, has expressed its reservations with regard to proposals of ten (10) years contractual arrangement and five years for price review. Government of Algeria and Qatar propose 15+ years contract for supply of LNG. Therefore, ECC of the Cabinet is being requested for a decision to determine the term of contractual arrangement and price review, which have been proposed by OPIC as 15 years and 10 years respectively; (viii) In case the RLNG suppliers procure any LNG cargoes from the spot market against base-load volumes, suppliers shall declare such cargoes and any price advantage arising out of such spot cargoes (compared to contract price formula) shall be adjusted in the RLNG price accordingly for Sui Companies; (ix) bid(s) may be rejected if the lowest evaluated bid(s) result in a delivered RLNG price at SSGC’s delivery point higher than BTU parity with imported fuel oil price or any other valid reason as per normal business practices; (x) the prospective bidders will submit their proposals as per the broad guidelines based on which the gas utility companies will develop the REP. A bid bond will be required to ensure seriousness of the bidders. To ensure compliance with the contract, a performance bond (by the winning bidders) and penalties for non-performance will be specified; (xi) single stage — two envelope bidding procedure” will be adopted in terms of rule 36(b) of the Public Procurement Rules, 2004 for the project. The first envelope will include the technical proposal (including bidder’s information) to ascertain the capability of the suppliers or terminal operators to ensure sustainability of supplies after the contract award. Commercial offers (envelope-2) of only those bidders would be opened who qualify; (xii) the capacity allocations made to companies for direct sales to other consumers (under the third party access regime of EOIs) will continue subject to OGRA rules and regulations; (xiii) the government will encourage the participation of multi-lateral development banks (MDBs) in LNG import projects to facilitate the financing of such projects through equity participation by MDBs and MDB instruments such as political risk guarantees and partial credit guarantees; (Para 3.1(c) of LNG Policy, 2011 provides that LNG imports can also be made on spot purchases based on market and commercial considerations. Gas companies will be allowed to purchase LNG from spot market without competitive bidding for which waiver of PPRA rules will be solicited separately in national interest for lower cost.
Petroleum Ministry maintains that the government may consider option of utilization of spare capacity available with the bidders for LNG purchases on government to government basis or on spot purchases. A MoU has been signed with Qatar Gas and they have provided a term sheet subject to negotiation. Qatar Gas has also required guarantees by a satisfactory credit support and/ or an acceptable performance guarantee. The Governments of Qatar & Algeria and other LNG suppliers only want to deal on G to G basis for assured supply.
The RLNG price will be factored in the Weighted Average Cost of Gas (WACOG). A separate summary will be submitted to the ECC for seeking policy guidelines for fixation of category wise consumer prices once LNG prices are known. However, it is recommended that the RLNG volumes (and price) are primarily allocated to large consumers connected to the main distribution and transmission network to replace liquid fuel consumption and meet un-served demand.
The RFP will be prepared by the Sui Companies and will be approved by the LNG Committee comprising of Member Energy Planning Commission, Director General (Gas), Joint Secretary (Corporate Finance), MD SNGPL and MD SSGCL. The same Committee will be responsible for evaluation of bids and recommendations to ECC of the Cabinet for final approval for award of the contract.
In addition to this, services of a consultant having international experience in LNG business, may be hired by the Sui companies to assist the Committee. A higher level Committee comprising of Minister for Petroleum, Deputy Chairman Planning, Finance Minister, Secretary P&NR, MD SNGPL and MD SSGCL may be authorized to negotiate the prices with the bidders, for which a relaxation of rule 40 of the PPRA Rules, 2004 will be requested separately from the competent forum. This relaxation would be necessary in view of the volatility of LNG market dynamics and it would otherwise not be possible to get best possible pricing terms.
Petroleum Ministry circulated its proposal to Finance, Planning & Development Division (Planning Commission), Law and Justice, Cabinet Divisions and OGRA. Important comments from the said Ministries/Divisions are as follows : (i) contract period should be 10 years with a 5 years price review; (ii) the suppliers should be given preference who can offer the option of LNG prices linked to international gas price indices to offset any impact of possible surge in oil prices; (iii) RLNG price should not exceed 70-80% of imported fuel oil in line with other import options; (iv) the timeline of 100 days for financial close should be removed or at the very least increased to one year; (v) Finance Division is not in a position to give guarantee in this case because of its limitation under Fiscal Responsibility and Debt Limitation Act, 2005; and (vi) in terms of Article 154 of the Constitution of Pakistan, the policy formulation and legislations relating to Authorities can only be carried out with the prior approval of CCI and in this regard the ECC of the Cabinet is not the proper forum.