Thursday, April 15, 2010

Pakistan halts $25bn GDF Suez contract

Pakistan halts $25bn GDF Suez contract
By Syed Fazl-e-Haider

KARACHI - The Pakistan government has delayed an energy deal, due to be signed on April 15, with French company GDF Suez after the Supreme Court took a suo moto notice (that is, on its own initiative) of irregularities in the award of a multi-billion-dollar contract to the foreign firm.

The Ministry of Petroleum and Natural Resources in February awarded a contract worth up to US$25 billion to GDF Suez, the highest bidder, to import 3.75 million tonnes per annum of liquefied natural gas (LNG) for up to 20 years. The LNG was to be imported from Qatar at a price of $1.8 billon in the first six years.

The alleged LNG scam came to surface following local media
reports that the deal cost the country a loss of $1 billion, as senior petroleum ministry officials ignored the lowest bid by Fauji Foundation, an investment group run by former Pakistan military officers, and European company Vitol, for a 3.5 million-tonnes-a-year contract.

Analysts believe that any long-term delay in signing or a cancellation of the deal will hurt the government's efforts to ease the country's energy crisis and further damage efforts to attract foreign investment. Pakistan, with limited gas supplies compared with demand, is expected to face its worst gas shortages in the next three to four years due to gas supply projects being delayed or subject to litigation.

"No contract will be signed until the matter is disposed of by the court," SM Zafar, a lawyer for the petroleum ministry, said. Abdul Hafiz Pirzada, a lawyer for GDF Suez, said the company was extending the deadline for its offer to April 30.

The country desperately needs investment in infrastructure and energy. With violence escalating amid government efforts to curb the Taliban, foreign investment in the country fell by 45.9% in the first eight months of the fiscal year ending in June to $1.02 billion, from $1.89 billion in the same period last year.

"In an emerging economy like Pakistan's, this sort of scandal normally occurs. But unfortunately the intensity of such scandals has increased a lot and that's why it has affected investor sentiment," Reuters quoted Mohammad Sohail, chief executive of Topline Securities, as saying.

GDF Suez is involved in electricity generation and distribution, natural gas and renewable energy around the world. It was formed by the merger of Gaz de France and Suez in July 2008.

Shaukat Tarin, who was finance minister until he resigned in February and was also chairman of the Economic Coordination Committee (ECC), submitted a one-page statement in the Supreme Court this week.

"I believe that there was a clear process lapse when the proposal of Fauji/Vitol was not shared with the ECC," Tarin said in the statement, according to a report in the Dawn newspaper. "The same should be presented at the next ECC [meeting] with proper evaluation by the Price Negotiation Committee (PNC) and independent consultants. Only then the contract should be awarded to the most competitive proposal."

Tarin said in his statement that an incomplete response was received from the ministry on February 18, but in view of his impending retirement as ECC chairman he had sent a hand-written note to the cabinet division secretary to pursue clarification from the petroleum ministry and place it for consideration of the ECC. The next ECC meeting had not been convened by the time Tarin resigned on February 28.

The decision to award the contract to GDF Suez was announced in February after a meeting of the ECC presided over by Tarin. Critics say that although an LNG pricing mechanism is yet to develop in the international market, the price offered by the French company was much higher than that at which India is importing LNG from Qatar.

The local business community is concerned at the possible suspension of gas supplies to industry, which is already struggling with power shortages that are making it difficult to meet orders from overseas buyers.

The country's gas demand is forecast to increase at a cumulative annual growth rate of 7%. With rising electricity shortages, demand for gas by the power sector, which consumes 32% of the country's gas, is increasing. Actual demand for gas by the power sector will rise 65% this fiscal year from 12 months earlier.

"Although the actual demand for gas cannot be calculated due to limitation of data, it is expected that the gas shortage will grow by 1.7 billion cubic feet per day (bcfd) in the current fiscal year 2010," Business Recorder quoted Farhan Mahmood at Topline Securities as saying. "The gas shortage is expected to increase to 2.7bcfd in fiscal year 2014."

The energy crisis in Pakistan has virtually suffocated industry and could result in more factory closures and a rise in unemployment. That will further exacerbate poverty in the country, where up to 40% of the 170 million population lives below the poverty line on the equivalent of US$1 a day or less.

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