The ministry suggests options to settle the debt

ISLAMABAD:

Amid warnings of a massive oil and gas shortage, the Petroleum Division has offered a comprehensive package to the Economic Coordinating Committee (ECC) as it seeks to settle a circular debt worth $1.6 trillion rupees in the energy chain.

Currently, oil and gas companies are facing a financial meltdown, which could lead to disruption of oil and gas supply across the country.

Pakistan State Oil (PSO), Oil and Gas Development Company (OGDC), Pakistan Petroleum Limited (PPL) and Pakistan LNG Limited (PLL) are the entities mainly trapped in the Rs 1.6 trillion circular debt.

Of the total debt, Rs1.08 trillion is the principal and Rs520 billion is the mark-up. The Petroleum Division has proposed the issuance of Sukuk (Islamic bonds) to cover the entire circular debt along with other measures. It proposed the settlement of the Gas Development Surcharge (GDS) payable by PPL on gas sales to Genco, against the amount to be received by PPL from Sui Northern Gas Pipelines Limited (SNGPL) while allowing SNGPL to settle its claims against the Government of Pakistan for GDS against the amount payable to PPL.

He proposed the adjustment of debt with equity in public sector entities/energy projects/profitable energy chain enterprises.

The Petroleum Division has suggested an adjustment by adding a fixed rate to SNGPL/Sui Southern Gas Company (SSGC) gas prices to realize their claims on the government and other sectors, and to clear their debts. The principal amount, as well as the late payment surcharge/surcharge, has increased over time due to the continued supply of fuel/liquefied natural gas (LNG)/gas to the power, gas and refinery sectors .

In this regard, various government audit teams have pointed out that the increase in financial costs resulting from the delay in the recovery of the electricity sector negatively affects the profitability of public sector enterprises (PSEs) with the risk of bad debts. which could lead to bankruptcy. PSO revealed that Genco-III had spent PSO funds (80 billion rupees) on Nandipur power station and covered fuel losses rather than paying PSO. This further increased PSO’s claims.

Exploration and Production (E&P) companies i.e. OGDC, PPL and Government Holdings Private Limited (GHPL) – being the last entities in the circular debt chain to receive arrears from the sectors of l electricity, refining and gas – have been negatively affected and are now at a stage where they could shut off the supply of crude oil and gas for the foreseeable future. As a result, a massive oil and gas shortage could emerge across the country and the entire oil sector could collapse, if circular debt settlement is not the top priority.

In order to solve the problem of circular debt and improve national energy and economic security, a few possible options have been suggested for debt clearance after exclusion of mark-up, if permitted by applicable laws and rules.

Circular debt in the electricity sector appeared mainly in 2008 due to the lack of cash flow of the distribution companies, which affected their ability to pay the electricity production companies (Genco, Hubco, Kapco, etc. .) for electricity supply.

Consequently, these companies were unable to make full payments to PSO, OGDC, PPL and PLL for the supply of fuel, gas and LNG.

Despite delays in payments from the electricity and gas sectors, PSO claims to have protected the refineries for a long time by making timely payments, forcing PSO to resort to massive bank loans to avoid international defaults and resulting disruptions in the supply chain of petroleum products.

Similarly, OGDC and PPL continued to supply gas to intermediate entities (SSGC and SNGPL) and power plants (Uch and Guddu) without being paid.

In order to find a lasting solution to the problem of circular debt, a committee can be formed, led by the finance division and comprising the energy and petroleum divisions as well as the Securities and Exchange Commission of Pakistan.

The committee will work out modalities for debt clearance through adjustment according to the options or will suggest other methods deemed appropriate. The committee will submit its final recommendations for the circular debt settlement to the ECC for approval within 30 days.

The Petroleum Division believes that inaction can lead to the collapse of some of the profitable entities, leading to major supply chain disruption.

Published in The Express Tribune, November 4and2020.

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