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Sunday, August 30, 2009

Where there is gas, there will be fumes

By Khalid Mustafa

ISLAMABAD: In clear defiance of two immensely powerful foreign capitals which are fuming over Pakistan's pertinence, Islamabad is going ahead with the multi-billion dollar Iran-Pakistan gas line project and has initiated the process of arranging finances to the tune of $1.245 billion (Rs106 billion) required for laying the 800 km long pipeline from Pak-Iran border to Nawab Shah. This was revealed by the minutes of the last meeting of Steering Committee of the Economic Coordination Committee (ECC) on IP gas line project held in Karachi on August 22.

According to the minutes of the meeting, Pakistan will also be importing 1.05 billion cubic feet of gas per day (bcfd) from Iran, at 78 per cent of crude oil parity price. It is pertinent to mention that Pakistan and Iran have already signed Gas Sales Purchase Agreement (GSPA) for importing 750 million cubic feet gas per day (mmcfd), which will be used to generate 4,500 MW of electricity and would be a cheaper alternative to the present exorbitantly expensive and imported furnace oil being used in the existing thermal power houses.

The Economic Coordination Committee has already approved the import of 750 mmcfd gas, but in the wake of demand of Balochistan for 250 mmcfd gas from Iran for its industry in Gwadar, the government has now decided to import just over one bcfd gas from Iran.

The Ministry of Petroleum and Natural Resources will now reportedly move the summary in this regard seeking permission to import 250 mmcfd more gas for Balochistan at the same rates (i.e. at 78 per cent of crude oil parity price).

In the wake of increase in gas volume from 750 mmcfd to 1.05 bcfd to be imported through IP gas line, the diameter of the planned 800 KM pipeline too has been increased to 48 inches from the previous 42 inches.

Considering the magnitude and strategic nature of the project, the government has adopted a public-private partnership approach for financing the project to lay 800 KM pipeline with debt equity ratio of 70:30 under which the government of Pakistan will be providing 51 per cent equity. This equity would be injected upfront through selected Public Sector Entities (PSE) that include OGDCL (Oil and Gas Development Company Limited), PPL (Pakistan Petroleum Limited),GHPL (Government Holding Private Limited), EOBI (Employees Old Age Benefits Institution) and SLIC (State Life Insurance Corporation).

The debt will be sourced from the market backed by the government guarantees for transportation tariff. Reportedly, in the above cited ECC meeting, Finance Minister Shaukat Tarin mentioning the debt portion agreed that in case of any gap in raising the required debt from market, the funds will be ensured from PSDP allocations.

Mr Tarin in the same meeting on the issue of Return to Investors advised that instead of a fixed 18 per cent return on equity over the life of the project, the investors should be offered "sovereign bond yield plus risk premium of 6 per cent dollar dominated, net of taxes."

The committee agreed to this overall approach to fund the project and advised that a summary to this effect must be moved to ECC for approval. Since the volume of the finances required for the project is considerably high and ensuring the funding available on time is an uphill task under the prevalent depressed international investment climate, the government has also decided to appoint a top notch financial adviser for the project, who would be responsible for arranging private equity and debt financing.

The selection of financial adviser will be made through international bidding and will be given a firm time line for achieving the financial close.

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