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August 8, 2019

NAB accuses Miftah of corrupt practices in LNG deal

National

August 8, 2019

ISLAMABAD: If the official record is any guide, the NAB case relating to LNG terminal-1 against Shahid Khaqan Abbasi and Miftah Ismail appears to have been based only on perception rather than facts.

The NAB questionnaire has been converted into charge sheet against former minister for petroleum clearly reflecting an act of political witch hunting as the facts of the case are quite contradictory to the allegations.

The News has carried out a thorough research to determine whether LNG Terminal-1 contract was awarded on exorbitant rates or it was the best deal at that time. Why the existing LPG terminal was not used for the regasification of imported LNG. Whether the per day capacity charges given to these two companies are higher or these fixed rates are as per the international standards. Whether charges of corruption on former minister for petroleum and natural resources in awarding LNG Terminal-1 contract are based on facts or perception.

The NAB in its charge sheet against Shahid Khaqan Abbasi has alleged that due to exorbitant capacity charges the national exchequer has to bear Rs1.54 billion loss. However, Engro's management claims that the terminal remains operational for 350 days a year on average. This means the terminal operations are shut down only for 15 days for annual maintenance, which is quite usual and clause related to annual maintenance part of the contract. If the terminal is closed for 15 days a year, the government has to pay $3,420,000 annually as capacity charges for idle days. However, both the Engro and previous government’s officials claim the terminal has saved Pakistan approximately $5 billion since the start of the first LNG project, replacing the import of more expensive furnace oil with LNG.

It is alleged that Engro Elengy Terminal Private Limited (EETPL) has been given higher tolling rates. A thorough research carried out by The News reveals that Engro's tolling rates are second lowest in the region and most competitive in the world. Engro Elengy’s price for the year one was $1.24 per mmbtu for 200 mmcfd and for year 2 to 15, the tolling rate was $0.66 per mmcfd for 400 mmcfd. In year one SSGC could only supply 200 mmcfd through its pipes. From year two SSGC expanded its capacity and was able to supply 400 MMCFD through its pipes. Hence, it asked for 200 mmcfd in year 1 and 400 mmcfd from year 2 onwards.

Meanwhile, the SSGC increased its capacity to 600 mmcfd in two years and the price went down to $0.48 per mmbtu for 600 mmcfd.

At the same, if we compare the tolling rates of other countries including regional ones Pakistan’s rates are among the lowest. Indonesia’s Arun LNG is charging $2.58/mmbtu and other terminals are charging $1.5-1.8/mmbtu. The LNG terminals in China are charging $1.5-2/mmbtu whereas India’s Kochi LNG Terminal is charging $1+/MMBTU tolling rates. Similarly, Italy’s Adriatic LNG Terminal is charging $1.47/mmbtu and its Offshore LNG Toscana is charging $1.2/mmbtu. The LNG terminals in Korea and Japan are being paid $0.8-1/ mmbtu.

The NAB in its charge sheet against SKA has also alleged that being a minister he gave undue favours to Engro. However, a perusal of the contract's terms and conditions reveal that contract was awarded on tough terms and conditions. According to contract’s terms and conditions, the company was bound to complete the construction of LNG terminal in 11 months, the contractor (Engro) was asked to submit $11 million performance bond. The company has to pay Liquidated Damages (LD) of $0.3 million per day charges in case of any unprecedented delay.

Similarly, no sovereign guarantee: SBLC for 6 months of capacity payments and no take of pay policy that IPPs enjoy.

Another issue raised in this saga is that why the terminal contract was awarded to a solo bidder. The record shows that total 20 companies had obtained the bid documents but only two firms submitted their bids. One company was disqualified on technical basis and CEO of the disqualified company confessed to The News that their bid rates were higher than the winning company.

Similarly fixed rates or per day capacity charges given by the government is one of the major allegations. However, fixed rate is not a new phenomenon, it is a common practice even every IPP operating in Pakistan is being given per day capacity charges even from Pervez Musharraf’s era. For example, Orient Power Company’s IPP which signed the agreement of producing 225MW electricity during Musharraf’s era has been given Rs5,062,500 per day as capacity charges for the first 10 years and Rs1,829,175 per day for the next 15 years. Similarly, another IPP Sapphire Electric Company also signed the agreement in Musharraf era and it was given Rs6,710,625 per day capacity charges for the first 10 years and Rs2,389,725 for the remaining 15 years. Not just these two but every IPP is being given per day capacity charges.

Whether it was a wise decision by the government to award the contract in dollars especially when the award winning company is local firm and it is operating in Pakistan. Miftah Ismail was asked this question by this correspondent and he said that no company that borrows in dollars and does O&M contracts in dollars can afford to then bid in rupee given the rupee volatility. Secondly oil market does business in dollar whereas the company has to pay the FSRU rent in dollars.

The break-up of per day capacity charges given to two LNG terminal

As per the agreement the government will pay $272,000 per day fixed daily charges to Engro as ‘capacity payments’ to be made in the first contract year only, on a take or pay basis which was part of the tender/LSA floated by GoP. From second year onward, the government of Pakistan will pay $228,000 per day to Engro as ‘capacity payments’. These capacity payments are a general norm in the energy industry for projects of such nature and are designed for recovery of investment and the operating costs including lease of FSRU (Floating Storage Re-gasification Unit) of such large and complex projects.

This correspondent contacted the management of Engro to know where is this huge money being received as per day capacity charges is spent. According to the data received from Engro, out of $228,000, the major chunk $130,000 is being given to FSRU lease charges, $30,000 is given to Port Qasim Authority (PQA) as daily royalty charges, $30,000 is deducted as taxes, $15,000 is the daily O&M, insurance and other costs where Engro is earning only $22,000 to $25,000 per day from this project against such a huge investment.

The News then contacted CEO of Pakistan Gas Port Limited (PGPL), which was awarded the contract of second terminal to get the breakup of per day capacity charges. According to PGPL, the company receives $245,220 per day capacity charges. Out of the total $245,220, major chunk $136,973 is paid as lease to the FSRU, $24,197 is given to FOTCO Pipeline hospitality fee, $13,727 is spent on O&M, insurance, Ogra fee and other operating costs, $23,653 is given as debt servicing, $12,282 is given as taxes, $10,266 as return of equity and $24,117 is the company’s return.

Why SSGC not entrusted LNG related project

One of the NAB charges against the LNG terminal case is that the former minister for Petroleum and Natural Resources (MP& NR) Shahid Khaqan Abbasi misused his authority in entrusting LNG related activities to ISGS for establishment of LNG Terminal-1 instead of SSGCL, which was actual procuring agency as per policy of MP& NR in the year 2006.

The News contacted all the stakeholders to get the answer to this question. “Before PML-N government came into power in 2013, Pakistan, through its gas utility SSGC, had tried four times to setup an LNG terminal and all attempts had failed. This had resulted in the huge energy crisis getting worse. These attempts were made both during the PPP times and also Gen Musharraf’s regime. The last attempt was made in 2012 to set up an LNG terminal but it was also failed. After almost five failed attempts the PML-N government decided to give this responsibility to Inter State Gas System (ISGS) a government owned company and delivered the project within a year”, informed the sources close to Miftah Ismail.

According to Engro management, “The LNG Policy was announced in 2006. Three different governments tried to kick start LNG supply chain on 5 different attempts over the last decade but none of them succeeded to establish the LNG terminal. Mashall project announced in 2006 but it was rolled back in 2011 by Supreme Court of Pakistan. Similarly, SSGC LPG Retrofit Project was announced in 2011 (using existing LPG jetty for LNG handling) but it was also rolled back in 2012. An integrated tender was issued in 2012 and three companies including Engro, PGPL and GEIP submitted their bids but the process was scrapped after some issues related to PPRA compliances arisen. Owing to repeated failure on establishing the terminal might have completed the government to give the responsibility to ISGS”.

Similarly, Pakistan Gas Port Limited management also informed The News that they have been applying for the LNG terminal since 2006 but due to some issues, the previous government could not establish the terminal. The PML-N government then entrusted the responsibility to ISGS, which worked and now there are two LNG terminals operating in Pakistan.

Why was the cost of project increased to $150 million from the earlier quoted $40 million?

The same question was asked by NAB to Miftah Ismail and he had given detailed response to this question. “While we were deliberating Engro’s bid, I learnt from the management that there was a pre-existing LPG terminal owned by SSGC. However, I learnt that a tender for retrofitting that terminal had been floated in the past and was not successful. In the commercial report prepared by QED on ISGS’s instructions, there was a detailed comparison between Engro’s proposal and the earlier proposal by 4GasAsia for retrofitting the terminal. The bid received from 4GasAsia was at an even higher quoted per mmcfd price of regasification than what Engro was offering. There were other significant commercial differences. 4GasAsia was proposing a 30-year old carrier whereas Engro was proposing a 9-year old FSRU. Based on this report, the SSGC LPG Retrofit Project was technically and financially unviable and would have resulted in the loss of Pakistan’s only dedicated LPG import terminal. The price difference was also significant. 4GasAsia’s proposal resulted in a price proposal of $0.83 per mmbtu as compared to Engro’s 0.66 USD per mmbtu. And all this is in addition to the fact that by converting the old terminal, the SSGC would also have lost an existing asset”.

Similarly, same question was asked from Shahid Khaqan Abbasi who replied, “The SSGC had procured a LPG unloading terminal at Port Qasim which generally handles vessels in the 3,000 MT range; this is Pakistan’s only dedicated marine LPG terminal. This terminal was also the subject of an ongoing $750 million litigation against the government of Pakistan in the London Court of International Arbitration in 2013. The SSGC had attempted to set up a 400 MMCFD LNG Terminal at the site of the LPG Terminal in December 2011 and had floated tenders for LPG Terminal Retrofit project. The tender process attracted only one viable bid from a Dubai based company called 4GasAsia at a tolling rate of $0.84/ MMBTU. The bids were opened in August 2013 but the contract could not be awarded, mainly because of limitations of the PPRA Rules and also possibly because 4Gas in Holland, which was the parent company of 4GasAsia went bankrupt. Shortly after bidding on the SSGC LPG Terminal Retrofit project, 4Gas Asia also went bankrupt”.

“The bidders under the competitive tender process for the LNG Terminal project were free to select any site, subject to compliance with all PQA requirements. The permission/approval/licence was granted by PQA to EETPL (Engro). The MP&NR did not have any role in this as the bidder was solely responsible to meet all legal/procedural requirements and meet the timelines given in the bidding documents and any modalities for setting up the LNG terminal including conversion of any LPG terminal if it was advantageous to their bid. No bidder chose to pursue conversion of a LPG terminal, probably because there was no cost advantage to be gained by any such conversion”, said SKA in his reply submitted to NAB.

Why LNG Terminal-1 contract awarded to solo bidder?

When ISGS announced the bid for Terminal-1, over 20 firms including many foreign firms participated in the discussions and obtained bid documents. But in the end only two bids were received. One was by Hussain Dawood’s Engro-owned company called Elengy and the second by PGPL, sponsored by associated group of Iqbal Z Ahmed, Fauji Foundation’s Fotco and a Swiss company Gunver. However, PGPL was declared disqualified on technical basis and it did not challenge the decision on any forum.

This correspondent contacted Fasih Ahmed CEO of PGPL to know whether their disqualification was justified or the government extended undue favour to their rival company, Mr Fasih said their disqualification was justified. “Even if our company was not disqualified on technical basis we would have lost the bid on later stage as our rates were higher than Engro”.

“The QED consultant evaluated the bids for Terminal-1 project. Our bid secured 68 or 69 marks during the evaluation whereas 75 marks were needed to clear this first phase”, informed Mr Fasih.

It is pertinent to mention here that in one of the questions, NAB has asked Miftah that QED had disqualified Engro in 2012 but awarded the contract to the same company in 2013.

In order to know the answer of this question this correspondent contacted Engro management. According to Engro, EETPL was disqualified in one of the tenders because in QED’s view EETPL commercial bid deviated from the guidelines of the tender despite being the lowest. However, later the tender was scrapped by Supreme Court of Pakistan. In 2013 the EETPL fully complied with the tender guidelines and due to being the lowest bidder they were awarded the contract.

Talking to The News sources close to Miftah Ismail said, “While the terminal was being set up in the record time of 11 months, the government started negotiating with the government of Qatar (GoQ) for a G-2-G LNG contract for 3 million tons per year for 15 years. The GoP negotiated a price of 13.8 percent of Brent with the GoQ. Simultaneously it has asked PSO to run two tenders for the supply of 750,000 tons of gas per annum each for 5 years. The best price for the first tender was offered by a Swiss company called Gunver for 13.37 percent of Brent. The best price for the second tender was offered by Shell for 13.78 percent of Brent”.

The government awarded Gunver one contract for 750,000 tons and asked Shell to match the price offered by Gunver. Shell refused. That tells you how tight was the price offered by Gunver.

“The GoP then went back to the Qataris to request them to match the Gunver offer. They did. So instead of 3.0 million tons at 13.8 percent, the GoP awarded Qatar a contract for 3.75 million tons at 13.37 percent of Brent for 15 years with a price adjustment after 10 years. (Normally longer contracts are more expensive so it is surprising that Qatar agreed but that’s good for Pakistan). After that when the second terminal was coming GoP did other tenders and awarded another 5-year contract to Gunver for 11.62 percent and a 10-year contract to ENI for 11.99 percent”, informed the source close to Miftah.

Sher Afgan Khan Additional Secretary and Spokesperson of Ministry of Energy Petroleum Division while talking to The News said the present government had taken up the issue of LNG terminals in the Economic Coordination Committee (ECC) meeting. Former Finance Minister Asad Umar wanted to investigate the LNG terminals matter. However, after the NAB initiated inquiry into this matter the government stopped following this issue.

When this correspondent asked the Spokesperson whether the previous government awarded the LNG Terminal contract on exorbitant tolling rates and whether there is any dissenting note by the ministry officials on the per day capacity charges, Sher Afgan said the present setup has not worked on this issue or on these lines. He said the case was not pursued further by the PTI government after the NAB action.

To a question whether Ministry of Petroleum is assisting the NAB on technical matters related to LNG terminal, the Additional Secretary said ministry has appointed a contact person for coordinating with NAB. However, he said the ministry is not assisting NAB on technical matters.

The News also contacted NAB Spokesperson. However, instead of responding to any question he said he is forwarding this scribe NAB’s press statement in LNG terminal case. NAB’s press release reads, “Upon rejection of pre-arrest bail from IHC, NAB Rawalpindi has arrested Mifta Ismail Ahmed S/o M Ismail Ahmed and Sheikh Imranul Haq S/o Sheikh Nisarul Haq who have allegedly committed offence of corruption and corrupt practices in LNG case. NAB has called a team of doctors for medical examination. The accused will be produced tomorrow before Accountability Court Islamabad for remand as per law”.

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