While deviating from the earlier decision by the Economic Coordination Committee, the recently revised gas pricing mechanism for Qadirpur Gas Field is set to improve profitability of OGDCL-led consortium. This will create an additional burden of more than Rs2-3 billion per annum on gas consumers.
While the impact may be nominal compared with over Rs50 billion losses on account of about 11 per cent (about 300 million cubic feet of gas per day) system losses, the Qadirpur price revision exposed the manner in which the oil and gas production agreements are signed by the bureaucracy.
The revision in pricing mechanism was necessitated by a controversial clause in the gas purchase agreement with the Qadirpur Joint Venture. A detailed scrutiny of the record suggested that clause 4.1(b) of the agreement did not have the approval of any competent authority and was inserted in the agreement through an act of omission or commission.
A demand by ministries concerned for an investigation to fix responsibility for signing an unauthorised clause was hushed up. The objections by the ministry of finance and Planning Commission over the price revisions based on controversial clause and the reasons to justify deviations from past ECC decisions were also not entertained.
The revisions were, however, allowed on the basis of contractual obligations and renegotiations under which the joint venture partners agreed not to press for Rs15 billion claims they felt entitled to since 2005 under the controversial agreement.
Qadirpur Gas Field, with a production of about 500 million cubic feet per day, is owned 75 per cent by Oil and Gas Development Company, 9.5 per cent by Kirthar Pakistan Exploration, 8.5 per cent by Kufpec Pakistan Holding and seven per cent by Pakistan Petroleum Limited.
The original agreement approved by the ECC in 1993 required the linkage of wellhead price to be changed from 66 per cent to 100 per cent parity with the border price of fuel oil. Discounts, already agreed and linked to the price of fuel oil, were to remain unchanged and price was to be applicable to the entire range of production from the field without any discount on higher production. The ECC also required the protection of giving higher price equal to other foreign producers under comparable conditions to be withdrawn and the agreed formula not subject to renegotiations for 10 years.
However, the final agreement which was signed between the government on behalf of the Sui Northern Gas Pipelines Limited and Qadirpur Joint Venture did not provide the conditions of 10 years embargo. Instead, an unauthorised clause 4.1(b) was inserted in the agreement. It said: “In the event the Marker Price exceeds $200 per ton, the assumed average price shall maintain the step-wise increase as per table-A in Article 4.1 (a), and the parties shall negotiate within six months a new schedule of discounts to be applied to the extended values of assumed average price for the purpose of determining the resultant gas price.
“Till such time as the parties agreed to the new discount level, the discount of 45 per cent shall remain in force for the purpose of price notification. Prompt retrospective price adjustment shall thereafter be made following such determination”.
The gas purchase agreement including this clause was finally signed with JV partners by the then Secretary Petroleum Syed Naseer Ahmad in July 1997, after prior clearance from finance and law divisions. The ministry of petroleum and natural resources did not find any record substantiating the insertion of the controversial clause.
Incidentally, the event of fuel oil prices going beyond $200 per ton (capped at the time of signing of the agreement in 1997) in the international market did not occur in the first 10 years of operations of the Qadirpur field which started production in September 1995. The applicable Marker Price of HSFO exceeded beyond $200 per ton for the first time in July-December 2005 when the six months average price was $208 per ton.
Accordingly, the government started negotiations with the JV partners to arrive at a discount rate. As the negotiation were in progress, the gas price for 2005-06 were notified by Oil and Gas Regulatory Authority on the basis of 45 per cent discount as required under the controversial clause of 4.1(b) under which July-December 2005 prices increased to $2.83 per MMBTU and $3.91 per MMBTU for January-June 2006 from about $2.56 per MMBTU.
As Ogra pricing under the controversial clause entailed a sharp increase in the end consumer prices, the government in July 2006 notified provisional discount beyond HSFO price of $200 per ton under which the maximum price was worked out at $2.69 per MMBTU at HSFO price of $300 per ton. These prices have been in place since then.