$300-400m pipeline to ensure gas to fertilizer plants

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Highlights - Corporate News

It has seemingly transpired to have occurred under the contemporary circumstances that the ill-minded heads at the Ministry of Petroleum and Natural Resources (MPNR) are not ready to mend their fences, at any cost.

The prior statement has its justification coming from the utmost fact that in a devilish bid to avoid, better name it ‘hush up’ a likely loss of the worthy Rs100 billion to GDP, the MPNR has decided to ensure continuous gas supply to the four fertilizer plants located in SNGPL region through a dedicated transmission system including construction of 1,000km long pipeline which will cost around $300-400million.

Available summary drafted by the MPNR comprising both long and short term plans, secretively obtained by this newspaper, in a highly exclusive exercise, has disclosed that the MPNR is set to seek approval of the Economic Coordination Committee (ECC) of the cabinet to make certain uninterrupted gas supply to the fertilizer plants. Viewing the urea production loss on account of non-supply of gas, the MPNR has further projected two plans in the summary to warranty the smooth gas supply to the fertilizer plants. Even, the ministry has called for diverting 45-55MMCFD-gas supply from the industrial sector to Pakarab Fertilizer and Dawood Hercules, which will further increase gas outages by one day a week as the industrial sector is already bearing heavy brunt of two-day gas holidays in a week for a long time.

The MPNR has so far circulated the summary to Finance, Law & Justice and Planning Development Divisions and Ministries of Water & Power and Industries.

Though the entire pipeline will be established by the four fertilizer plants yet the MPNR decision to assign the responsibility of operation and maintenance (O&M) of pipeline to the gas utility is likely to cause extra burden to the gas consumers all over the country no matter either they are consumers of that supply of the gas or not because the MPNR itself has also projected in said summary that rules can be amended if required.

“As per estimates of fertilizer industry, length of entire pipeline will be approximately 1,000km, which will cost around $300-400million,” the MPNR summary said, adding, “The laying and maintenance of pipeline will be done by the gas utility companies, as third party contractors, at a cost to be negotiated and Ogra will allow this income (O&M charges) to the companies and make amendments in rules, if required.”

Asking the ECC to reconsider the policy to stop gas supply to fertilizer industry, the MPNR has said that the country was heavily reliant on agriculture, which required uninterrupted supply of fertilizer from the domestic industry, as imports were costly.

According to estimates of the fertilizer industry, suspension of gas supply to the four fertilizer plants has caused annual production loss of around 2.7 million tons of urea. In the wake of closure of the plants, the government will have to import urea, costing an estimated Rs140 billion ($1.3 billion). On these imports, the subsidy burden will be Rs61 billion for sale of the imported commodity to the farmers at prices matching rates in the domestic market.

The MPNR has also asked to the ECC that the fertilizer industry is highly leveraged and closure of plants for prolonged period will lead to default on bank loans of around Rs150 billion. This situation would hurt the entire financial market of the country as the loans would eventually be converted into non-performing loan (NPL) ultimately impacting the entire financial markets of the country, the summary said drafted by MPNR seeking the ECC approval.

In pursuance to the ECC decision on 16-08-2012 over the MPNR summary suggesting allocation of upcoming gas from existing fields and /or new discoveries for fertilizer sector vide case No.ECC-106/11/2012, the MPNR initiated a consultative process with various stakeholders to finalise a comprehensive plan. The fertilizer industry/companies have proposed both long term and short-term plan to guarantee the gas supply to the said fertilizer plants, which are currently closed.

In accordance to this plan, total 202MMCFD gas of five different gas fields including 130MMCFD worth approximately $2.70/MMBTU of Kunnar Pasakhi Deep-KPD of OGDCL (Oil and Gas Development Limited), 22MMCFD worth $3.30/MMBTU of Mari Field (Additional) of MGCL (Mari Gas Company Limited), 15MMCFD worth $6.00/MMBTU of Bahu (new find) Low BTU field of OGDCL, while 10MMCFD worth of approximately $6.00/MMCFD of Reti Maru (new find) of OGDCL and 25MMCFD worth of $6.00/MMBTU and 25MMCFD worth of $6.00/MMBTU of Makori East (TAL Block-new find) of MOL have been identified as gas supply sources for four fertilizer plants.

The gas pricing for above field would be in accordance with applicable petroleum policies or equal to gas price for other fertilizer plants whichever is higher. The above said gas, at above-mentioned prices, will be distributed from the common header, amongst the three fertilizer plants (Engro 79, DHCL 40 (Dawood Hercules Corporation Limited), and PFL 58 (Pakarab Fertilizers Limited) with a common pipeline. Agritech will be supplied through the northern fields, which will get gas at weighted average cost/price. In case processing is due by fertilizer plants then discounts will be negotiated between the parties (fertilizer plant and gas utility). The fertilizer plants would be allowed to directly negotiate gas supply arrangements with the gas producers. The fertilizer plants will establish standby letters of credit equivalent to one month’s gas supply value to guarantee their gas supply payments.

Further, dedicated transmission system (including compression and ancillary facilities) will be established by the above said four fertilizer plants, as a common header, for transportation of the above gases to the respective fertilizer plants. A separate designated bank account will be operated for the purpose. The investment made by the fertilizer plants for development of transmission infrastructure will be adjusted against recovery of Gas Infrastructure Development Cess (GIDC) of the fertilizer industry, subject to verification/audit. By any of big four firms of chartered accounts i.e Fergosan, KPMG, Deloitte, Ernst and Young, the MPNR summary also said.

While the above stated infrastructure development will take time, a short-term plan has also been proposed to enable the closed plants to start operations on immediate basis. Under the plan, it has been recommended that 60 million cubic feet per day (mmcfd) of gas, being supplied to Gas Turbine Power Stations (GTPS) on Wapda’s grid, should be diverted to Engro Fertilizers.

“Since April-2012, GTPS is not consuming its full allocation of 200 mmcfd from Kandhkot gas field resulting in curtailed production from the field. Kandhkot can enhance its production to 225 mmcfd, which would be sufficient to compensate the proposed withdrawal of 60 mmcfd. Accordingly, full 225MMCFD gas from Kandhkot field may be supplied to GTPS,” the summary reads.

According to the plan, Sui Northern Gas Pipelines Limited (SNGPL) may curtail gas supply to the overall industry and arrange around 45 to 55 mmcfd for two other fertilizer plants - Pakarab Fertilizer and Dawood Hercules - to enable them to operate on rotational basis.

In addition to all this, the ministry has recommended that supply of 22 mmcfd from Mari Gas field to Engro Fertilizers, which will take the total to 82 mmcfd. Agritech Fertilizer is likely to be provided 25 mmcfd from Makori field, owned by MOL.

It is pertinent to mention here that the ECC vide case No. ECC-106/11/2012 dated 16-08-2012 has, in principle, approved the proposal of the Ministry of Petroleum and Natural Resources suggesting allocation of upcoming gas from existing fields and new discoveries for fertilizer sector especially the four fertilizers on SNGPL system, presently closed.

The ECC (the Economic Coordination Committee (ECC) of the cabinet) has directed to work out a detailed plan in consultation with relevant stakeholders, including Ministry of Water & Power for submission to ECC for consideration/approval. The rationale for the purpose was to allocate gas quantities/volumes from some alternative dedicated gas supply sources by dismantling respective GSAs (Gas Sales Agreements) of fertilizer plants with SNGPL (Sui Northern Gas Pipelines Limited).


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