Thursday October 06, 2022

Law Division finds Hubco undertaking inadequate

July 24, 2022

ISLAMABAD: Ministry of Law has termed the Hubco undertaking provided to transfer control of Eni Pakistan to Prime International Oil and Gas Company Limited (PIOGCL) as inadequate for future commercial operations.

The ministry also advised the Petroleum Division to seek an original undertaking from Hubco to secure payment obligations.

On March 8, 2021, Eni Pakistan entered into a sale-purchase agreement with PIOGCL in respect of the sale of the entire share capital. But, since then, the transfer of Eni shares to PIOGCL has been delayed due to the questions raised over the financial health of the new entity.

The deal between Eni and PIOGCL matured at $16.4 million. M/s PIOGCL is a consortium comprised of Hub Power Holding Limited (HPHL) and Eni Employee Buy-Out Group (EBO Group).

To effectuate the subject change of effective control/disposition of shares from Eni to PIOGCL, Eni requested the government of Pakistan for its consent under the applicable petroleum rules.

The Petroleum Division sought the advice of the Law and Justice division, which said: “The referring Division (Petroleum Division) is advised that the undertaking provided by Hubco (HPHL) is not adequate in respect of covering the future operation of petroleum exploration licenses, development and production leases, etc, decommissioning cost to be incurred upon the expiry of licenses and leases.”

The Law Division added that in case the undertaking was issued in favour of the government, the government should “keep the original undertaking in its record”.

To establish the financial strength of the sponsors of PIOGCL regarding the future operations of petroleum exploration licenses and development and production leases, the Petroleum Division had asked Eni Pakistan to provide an undertaking of Hubco, so in case PIOGCL fell short of meeting the financial obligations in respect of running the operations in future, Hubco would provide such financial support.

Calling the demand for such an undertaking very open ended, Hubco CEO Kamran Kamal said that in the April 1 letter, DGPC requested for HPHL undertaking to provide financial support to PIOGCL in case it was not able to meet its financial obligations.

“HPHL is required to disclose the nature, period and amount of its investment under the Companies Act and providing such an undertaking might fall within such disclosure requirements as it was in relation to investments made in associates.”

However, the CEO said that being so much open-ended, it could jeopardise the compliance requirements of the Companies Act. If the undertaking was made specific to the requirements of petroleum concession agreements, HPHL might be willing to provide it.

Following this, the Petroleum Division sought the advice of the Law Division in this regard.

The Law Division further said that “it is the norm in the petroleum exploration and production business that companies holding petroleum rights dispose of their shares pursuant to their business planning etc. Also, the respective petroleum exploration and production rules do not provide for a mandatory lock-in period for holding interest in the companies for a certain time period.”

The document with The News further said that it was in the government’s interest that if no viable option was available with the buyer, the shareholders should undertake to fund the shortfall. The government would have the option to enforce the undertaking against HPHL if it fails to meet the funding shortfall of the buyer, it added.

The only requirement from the government was that the buyer of interest should be technically and financially sound to undertake petroleum exploration and production business and has undertaken all obligations and liabilities of the seller(s) in regards to the petroleum right.

This aspect rests with the Petroleum Division and Finance Division.

Hubco CEO said that the company, along with EBO met the “technically and financially sound” requirement. He said that the demand for undertaking was made because DGPC had not provided any details (precedence, rules or regulations) which justify such a requirement.

Law Division has further questioned the aspect of government’s interest DGPC desires to protect.

On a question as to why the undertaking was in favour of PIOGCL and not the government, Kamal said that DGPC in a letter dated April 1, 2022 requested HPHL to provide an undertaking in favour of PIOGCL. Therefore, HPHL issued the undertaking.

“It seems that DGPC did not provide this letter to the Ministry of Law,” he added, pointing out that under petroleum rules, there was no such requirement. However, the undertaking was provided to expedite the approval process.

Answering another question, Hubco CEO said that HPHL in its letter dated June 7 categorically stated that where required under the petroleum rules, guarantees would be submitted for the outstanding work commitment in respect of exploration licenses to replace Eni’s guarantees.

“Ministry of Law is referring to the fact that there are no restrictions under the Companies Act because DGPC is not requiring any investment,” Hubco said.

Petroleum division had requested the Finance Division and Ministry of Law and Justice to advise specifically about the adequacy of the undertaking to cover the obligations of the (buyer) ie work commitments and other financial obligations, including but not limited to decommissioning cost to be incurred upon the expiry of licenses and leases.

It also requested the Ministry of Law and Justice whether a copy of the undertaking provided was sufficient or original undertaking would be required for government record.

Law Division said that the Petroleum Division had requested (Hubco) HPHL to submit an undertaking on a judicial stamp paper in favour of the buyer.

From the material available to this ministry on the file, it appears that the undertaking was required to secure payment obligations of buyer in respect of completion of the transaction and future obligations of the buyers in case of funding shortfalls.

Regarding the adequacy of undertaking for future financial obligations, subject to confirmation and/or comments by the Finance Division, the Law Ministry believes that the existing undertaking language does not provide for commitment.

Justification of HPHL in respect of compliance with the Companies Act, 2017 was not of relevance for the purpose of the undertaking. DGPC has not required to actually make any investments in the buyer.

“If there is any funding shortfall with the buyer, it shall obviously look for funding options, including those briefly mentioned in HPHL’s referred letter,” the Law Ministry said.

It is to be noted that the Petroleum Division has also written a letter to the Securities and Exchange Commission of Pakistan, and sought advice to suggest a foolproof mechanism of requisite funding from Hubco for the transfer of control from ENI Pakistan to PIOGCL.