Engro Fertilizers Limited (EFL) has reportedly acknowledged revenue loss to the government in the event that gas is supplied to Engro at concessionary rates but argues that the loss will be bridged through revenue earnings from SNGPL, well-informed sources in Ministry of Industries and Production (MoI&P) told Business Recorder.
Mari Petroleum Company Limited (MPCL) and Sui Northern Gas Pipelines Limited (SNGPL) are resisting gas supply to EFL at concessionary rates, saying that any such decision of the Economic Co-ordination Committee (ECC) would negatively impact on their revenue. EFL also maintains that other fertiliser plants such as Fatima Fertilizers are also getting gas at concessionary rates, the sources added. “Being allocated gas at concessionary price is not unique to Engro Fertilizers with Fatima Fertilizers currently being supplied gas for 20 years and for 10 years on a concessionary basis, the sources quoted Chief Executive Officer (CEO) Ruhail Muhammad as saying in a letter to the Minister for Industries and Production.
EFL argues that it is contractually obligated to receive uninterrupted gas for 20 years and at concessionary prices for 10 years as per the Gas Sales Agreement (GSA) it signed with the Government of Pakistan for setting up the world”s largest urea train plant.
In December 2006 under “Fertilizer Policy 2001” the government invited bids for allocation of 100 mmscfd gas to enhance local urea production and to reduce reliance on imports. This was the first time that gas was allocated through an international competitive bid and Engro Fertilizers was awarded this gas in a transparent and competitive bidding process involving four local and international parties.
Engro Fertilizers invested $1.1 billion, the largest private investment ever in the history of Pakistan, on the commitment of the government of Pakistan to guarantee gas supply on an interrupted basis for Engro Enven, its state-of-the-art plant which was established in 2010 and is the world”s largest urea plant. The terms of GSA were agreed upon prior to the bidding process and have not been changed in any way since then. Under the GSA, the obligation to provide 100 mmscfd is absolute.
However, in April 2010 the country started facing gas shortages which resulted in gas curtailment to the fertiliser industry. Due to low priority given to the fertiliser sector in this gas deficit scenario, Engro Enven only received gas for 189 days in 2011 and 45 days in 2012. Engro Fertilizers suffered severely with a combined margin loss of Rs 45 billion in 2011-12 and also reported a pre-tax loss of Rs 3.9 billion during 2012. The company was forced to approach its lenders to re-profile its long-term obligations, as the company was in danger of facing bankruptcy. Engro Fertilizers has filed a claim of Rs 53.63 billion as of April 2013 against Sui Northern Gas Pipelines Limited (SNGPL) due to losses from gas curtailment, and this claim increases by Rs 2.5-3.0 billion for each month till gas is restored.
In October 2011, Sindh High Court ordered immediate restoration of gas to Engro Fertilizers under the contract upholding the sovereign guarantee and the GSA but this decision was not implemented. Because the supply of gas by SNGPL was intermittent, the benefit of concessionary priced gas was unable to be passed onto Engro. Hence, a proposal was made that would allow Engro”s new plant to get the concessionary price by using the company”s old plant”s gas, which SNGPL would buy from Mari Gas and supply to Engro. Engro Fertilizers benefits under this scheme are lower than that stipulated in the GSA, as the concessionary gas volume is lower than in the original contract, the CEO added.
He further stated that contrary to what is being portrayed in certain sections of the media, the pricing of gas for Mari Gas is the domain of the Ministry of Petroleum as per Ogra rules. If the current proposed scheme of pricing is followed the revenue lost to the government through Mari would be made up through the revenue increase to SNGPL (through lower gas purchase price).
EFL has proposed that using Enven as a production site is beneficial for the country as Enven is the most energy efficient plant of its size and capacity, with the lowest gas consumption per ton of urea in Pakistan. If production capacity runs at 1.3 million tons and prices remain at the current levels, the GoP will save around Rs 20 billion in the form of subsidy and around Rs 43 billion in the form of foreign exchange outflows every year. With an outflow of massive foreign exchange in the form of imports of plant and machinery during construction, the benefit of the plant being functional is not being realised in the form of reduced subsidy savings on imported urea and savings in foreign exchange.