LPG consumers overcharged Rs10 bn in last two years

ISLAMABAD: Liquefied Petroleum Gas (LPG) consumers in Pakistan were overcharged close to Rs10 billion for LPG produced by government owned exploration and production companies in the two years since approval of LPG (Production & Distribution) Policy of 2016 by the Council of Common Interests (CCI), top official of Petroleum Division told The News.

The 2016 Policy, approved two years back, had done away with LPG price deregulation observing in its introduction: “the price deregulation policy has failed to achieve its intended objective of enhancing availability of LPG at affordable prices.”

The policy deprecated sale of local LPG at international prices but two years into the fixed-price regime, producers continue to sell local LPG at international price plus premiums of 15 to 30 percent.

Oil and Gas Development Company Limited (OGDCL), the exploration and production giant that produces a quarter of all indigenous LPG, admitted in its annual accounts for the financial year ended 30 June 2017 that it had charged signature bonus of Rs2.5 billion over and above the maximum permissible price of LPG sold.

Signature bonus on sale of LPG is a controversial levy, and is currently under challenge in petitions before the high courts of Lahore and Peshawar. The levy has been challenged on several grounds, most important of which is the fact that it is a misleading description for a part of price “over and above the fixed price”.

This correspondent has obtained documents and records that show how the term ‘signature bonus’ has been employed by OGDCL and PPL to overcharge by 15 to 30% for LPG sold to the marketing companies. Latest in such instances is an offer by OGDCL for sale of LPG produced at its Nashpa field which offers the product to enlisted companies “at pro rate signature bonus of Rs7,000/ M. ton (over and above prevailing LPG base price)”.

Interestingly, say industry experts, the terms pro rate and signature bonus are technical sounding terms, which have been used misleadingly as Nashpa is a virgin field where no auction has been carried out and therefore there exists no basis of pro rata charging of any signature bonus.

Oil and gas industry experts say they are amazed by the “brazen criminality” in the usage of the term signature bonus for charging more than the fixed price. They say over-charging by OGDCL and PPL is a “replica” of the NAB case against drug pricing committee where pharmaceutical companies and public officials are accused of corruption for allowing unlawful increase in prices of drugs and thus causing loss of Rs692.96 million to the general public.

Conflict of interest and collusion between the regulator and the regulated is more than obvious. The 2016 LPG Policy was approved by CCI on 29 February 2016, and notification of its approval was accompanied by determination of maximum producer price for March 2016. The fixed price was never enforced because Oil & Gas Regulatory Authority (Ogra) insisted that its rules did not permit enforcement in line with the policy. The rules were not amended until 18 months later, and the price ceiling was still not enforced on the pretext that the price fixed was prior in time to the amendment in rules. It took the authorities a year and 11 months to agree that the price fixed on 01 February 2018 was the price to be enforced. Within five days of that OGDCL offered its LPG at the maximum price plus Rs7,000 and no action has been taken against OGDCL to this day. While the regulator, Petroleum Division and producers under its control dilly dally, consumers are forced to make OGDCL and PPL richer by billions of rupees in excess of the maximum price on quarterly if not monthly basis. When asked if it had taken any action against OGDCL, an Ogra official stated that they expected a case on legality or otherwise of signature bonus to be decided on the coming Tuesday so the Authority chose to wait it out.

It is not just the collusive conduct of the regulators that makes the case of signature bonus intriguing, the use of the term ‘signature bonus’ for a part of the price charged by E&P companies is also quite curious. The term is derived from the ‘signing bonus’ as used in employment contracts, and has been used in the oil and gas industry for a payment to the state for obtaining a petroleum concession.

The concept of signature bonus for grant of petroleum concessions by the president of Pakistan was introduced for the first time in the Petroleum Policy of 2007. The policy provided that bids for grant of petroleum rights after the expiry of lease period in relation to any producing field will be called on the basis of signature bonus. “The bids will be evaluated on the basis of Signature Bonus, which would be spent for social welfare of the area in which the field is located,” the Policy had then provided for the first time.

Completely contrary to the spirit of the signature bonus, which was to be charged from the exploration and production companies such as OGDCL and PPL and used for social welfare of the area, signature bonus charged by OGDCL and PPL is paid by the consumers and is shown in the books of the companies as profit.

Industry experts say that the current method of sale of LPG on the basis of signature bonus is in fact a white collar crime as both OGDCL and PPL continue to represent before the courts that signature bonus is not a part of LPG price but book it as income in their accounts. “The criminality is on two counts: using the term to charge more than the maximum price; and representing in the books of accounts that it is a profit earned while knowing that the receipt is devoid of lawful consideration,” says a legal expert with more than 20 years’ experience in handling litigation involving white collar crimes.

“Share prices of OGDCL and PPL will nose-dive if it was found one day that the billions collected by the two companies were liable to be returned either to the consumers or to NAB,” says a stock analyst when asked to comment on the likely scenario.