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Saturday December 04, 2021

$3 bn gas pipeline project: No sovereign guarantee as EPC contractor, Russia tells Pakistan

The legal firm wants renegotiation on some vital issues already settled under the signed amended IGA and Heads of Terms.

November 22, 2021
A representative image
A representative image

ISLAMABAD: The new legal firm hired by the Inter State Gas System (ISGS) has asked the authorities that Pakistan may face problems if the $3 billion Pakistan Stream Gas Pipeline project is completed under the amended Inter Governmental Agreement (IGA) signed with Russia in Moscow.

The legal firm wants renegotiation on some vital issues already settled under the signed amended IGA and Heads of Terms. It is pertinent to mention that the IGA earlier signed in 2015 was amended and signed in May 2021 on the demand of Islamabad with Pakistan having 74 percent shares and Russia 26 percent. Under the IGA signed in 2015, Russia was to complete the project under BOOT basis with majority shares.

Official, legal and financial experts of Pakistan and Russia held secret talks for four days during November 16-18, which remained inconclusive mainly on the new demand seeking sovereign guarantee and security from the Russian Nominated Entity, which will act as lead EPC.

Moscow says how it can give any kind of security and sovereign guarantee being a part of the project. “Had Russia allowed to have had 100 percent financing in the project and also allowed to run the project on BOOT (built, own, operate and transfer) basis, then Moscow would have certainly extended the guarantee and security as well,” a senior official, who was part of the talks while quoting the Russian side, told The News.

“The Russian side says that the nominated entities from both countries will form a joint Special Purpose Company which will execute and run the project.”

According to an insider, now under a new scenario, the legal teams of both sides will meet in the middle of the current week and will each prepare separate legal drafts on this particular issue, which will be debated for consensus document in the next interaction between the two countries.

Earlier, the talks were scheduled from November 9, but the letter written on November 5, 2021 by the Petroleum Division to the Russian Energy Ministry seeking renegotiation of the issues settled under amend IGA and Heads of Terms forced Russia to halt its delegation from participating in the talks, which were due to start on Number 9. However, a Russian delegation came to Pakistan on November 16 and held four days of talks.

The top leadership of the government wants the project to happen as it will usher in a new era of economic cooperation with Russia. It is pertinent to mention that in the past, Russia helped Pakistan build the Pakistan Steel Mills (PSM), and the country’s flagship organisation in the oil and gas sector OGDCL. Pakistan has in the recent past imported wheat from Russia to cater to its food requirements. Pakistan and Russia have already developed strategic partnership in the defence sector. However, at the Ministry level, there are some elements which keep coming up with new demands causing delays in the project.

Amended IGA was signed in May 2021 with the announcement that in the next 60 days PSGP Special Purpose Company will be set up to implement the project and deal with all the technical and commercial issues. But the bitter fact is that five and half months have elapsed but shareholders and facilitation agreements have not so far been signed, which will lead to the formation of the PSGP SPC.

In the letter written to the Russian Ministry, the Petroleum Division says if any shareholder of Russian Nominated Entity (RNE) or their affiliates, associates or subsidiaries are desirous of participating as contractor in the works to be performed for the project, either as the lead EPC Contractor or as a sub-contractor under the lead EPC Contract, in order to avoid conflicts of interest, it is advisable to exclude such a party as a shareholder in RNE.

The Petroleum Division wants additional contractual checks and balances given this special case, including compliance with customary provisions regarding conflicts of interest. The letter also says that the EPC contracting strategy proposed to be adopted should be clearly defined at the outset. In our humble opinion, considering the scale of the project, it is imperative that the project is undertaken through a single lead EPC contract. Splitting the elements of EPC into multiple contracts without one lead EPC Contractor being responsible for the project would not adequately protect against completion risks. Of course, sub-contracts under the umbrella of the EPC contract may be permitted, subject at all times to the EPC contractor bearing the ultimate single point of responsibility for completion of the project.

The sources said that it is a known fact that there is no match of expertise that Russian companies have in terms of laying down the gas pipeline across the world and putting such demands from the petroleum division is tantamount to negation of the new IGA and Heads of Terms.

However, the sources said that 70 percent issues were resolved and the remaining 30 percent issues were yet to be decided. The top officials of Pakistan want to visit the pipes and compressor making facilities in Russia, knowing the fact that it is the prerogative of the procurement committee members of Special Purpose Company that has not been formed so far to visit such facilities.