End to gas deal for RLNG power plants: PSO scuttles Power Division’s move

ISLAMABAD: Pakistan State Oil (PSO) has scuttled the move of Power Division seeking end to utilisation by RLNG power plants minimum 66 percent supply of imported gas on annual basis guaranteed in the deal saying it is simply not acceptable as it will lead to huge financial losses to the national exchequer and public sector companies involved in LNG supply chain.

In a letter written on October 31, 2019 to Petroleum Division which is in possession of The News, the state owned PSO has opposed the Power Division’s proposal branding it detrimental to the huge loss to the national exchequer. PSO says LNG Sales Purchase Agreement (SPA) with Qatar Gas does not have unilateral termination provisions and in case of buyer’s default of not taking deliveries of contracted volumes, it will lead to Take or Pay penalties, which would culminate into material breach of the contract.

‘In such case even if the agreement is terminated by Qatar Gas, certain liabilities including Take or Pay will prevail for the remaining term of the agreement meaning by that till December 2031. On the prevailing prices, the estimated account of take or pay liability would be around US $17.5 billion for the total contracted volumes from January 2020 till the expiry of the contract, which would be far greater than the privatization proceeds of these power plants.

Since the government wants the privatization of the RLNG Power Plants at Haveli Bahadur Shah and Balloki of state owned National Power Parks Management Company Private Limited (NPPMCL) and to run the power plants, the government arranged the RLNG supply for gas power plants from Qatar for 15 years at Haveli Bahadur Shah, Balloki, Bhikki and Trimmu and out of them federal government is going to sale out two RLNG based plants at Haveli Bahadur Shah, Balloki to earn about Rs300 billion. However, after 10 years, both PSO and Qatar Gas Company can review the price or decide to abandon the LNG supply deal.

Power Division wants, prior to privatization of RLNG power plants, end of RLNG supply agreement with RLNG power plants. Power Division in its ECC summary draft copy of which is available with The News has come up with its mind to do away with the agreement under which said RLNG power plants are bound to utilize minimum 66 percent in annual basis of imported gas allocated to them arguing that the continuation of this arrangement of minimum 66 percent undertake or pay provision may expose national exchequer to a cumulative loss of approximately Rs 471 billion till 2025 and onwards to be picked up as subsidy by government or borne by the end consumers of electricity.

In fact, Power Division circulated its summary draft having two options about the RLNG supply agreement with RLNG based Power Pants seeking input from Planning Commission, Finance Ministry and Petroleum Division (PSO, Sui Northern and Sui Southern) prior to pitching it before ECC for approval. Power Division precisely under its first option wanted the withdrawal of existing minimum guaranteed off-take of 66 percent on annual basis. Accordingly, the annual production plan shall continue to be provided without any minimum guaranteed off-take of 66 percent and the same shall be reflected in the revised PPA, GSA and IA to be executed for the purpose of privatization of NPPMCL.

Power Division also aspired under its second option saying in case, the government of Pakistan is contractually bound to adhere to PSO agreement with Qatar Gas up to the year 2025, for withdrawal the existing minimum guaranteed off take of 66 percent immediately after the review period of PSO agreement with Qatar Gas in 2025 and till 2025 one of options shall be incorporated in the revised PPA (Power Purchase Agreement), GSA (Gas Sales Agreement) and IA (Implementation Agreement) to be offered for privatization and to ensure that SNGPL to follow NPCC’s (National Power Control Center) instruction pertaining to diversion of un-utilized RLNG and such instruction shall take precedence over another RLNG supply arrangement of SNGPL with any power sector project operating on RLNG on as and when available basis.

Mentioning about the Option-A, PSO in its letter refused to support this proposal of Power Division withdrawing existing minimum guaranteed off take of 66 percent on annual basis pleading that that PPA (power purchase agreement), GSA (gas sales agreement), and IA (implementation agreement) cannot be revised in isolation without amending the obligations undertaken in long term take or pay commitments in the upstream contracts including SPA between PSO and Qatar Gas.

As the long term Supply Agreements were not entered into for specifically providing fuel to the power plants, removing such guaranteed off take conditions will badly expose all the companies in LNG supply chain, including PSO. This would have huge financial implications, leading to irreparable loss to national exchequer, unless new customers of equivalent volumes of contracted beforehand under take or pay guarantees for utilizing these long terms contracted volumes of LNG at notified price of RLNG so that payments obligations to international suppliers are met.

About the Option-B of Power Division, PSO says it mentions that the government is contractually bound to adhere to PSO agreement with Qatar Gas up to the year 2025. This is not factually correct as SPA is valid for 15 years and will expire in December 2031. There is a price review clause after 10th anniversary which make year 2026 as the year for price review. However, price review is not an exit clause rather a price re-opener to review the price and market conditions of long terms contracts prevailing at the time and accordingly make price adjustment if required, which could be upward or downward revision of prices.

It is pertinent to mention that both parties have to discuss in good faith which a review to agreeing but price adjustment (if any) is required, failing which the termination process may start. Thus this clause may not be construed as an exit clause as a due process is required to take place and terminating contract on this pretext would entail legal and reputational repercussions.