Petroleum Division Seeks Settlement of Circular Debt from ECC

ISLAMABAD: In order to resolve circular debt issue and improve national energy and economic security, federal cabinet’s economic coordination committee (ECC) scheduled to meet on Wednesday is likely to take a decision regarding settlement of Rs 1,601 billion amount of circular debt.

According to well-informed sources, petroleum division has sought settlement of circular debt from ECC and the ECC is likely to take a decision in this regard on Wednesday.

They said that the petroleum division in a summary for ECC has floated some options to resolve the circular debt issue and improve national energy and economic security of the country.

They said the summary was circulated for comments to the concerned stakeholders including finance division, planning division, SECP, OGDCL, PSO, SNGPL, PPL, and PLL. However, power division and SSGCL have so far not given its comments and they are awaited despite the elapse of considerable time (two months).

“The Minister for Energy for Petroleum Division has seen and authorized submission of the summary for seeking approval of the ECC,” said sources.

Sharing details of options floated by petroleum division in the summary of ECC to get resolve long pending circular debt, the sources said that in order to find a sustainable solution to the circular debt issue, a committee may be formed to be led by finance division, comprising of power and petroleum divisions and the Securities and Exchange Commission of Pakistan (SECP).

And, this committee would develop modalities for clearing the debt through adjustment or suggest some other methods as deemed appropriate. Moreover, the committee would submit its final recommendations for the settlement of circular debt to ECC of the Cabinet for approval within 30 days.

The petroleum division feels that inaction can lead to collapse of some of its otherwise profitable entities causing major disruption in supply chain, said sources.

Sources also informed that in order to resolve the circular debt issue and improve national energy and economic security, petroleum division has asked ECC to adopted following options for clearing the debt after exclusion of markup if permissible under relevant law/rules:

i. Adjustment by earmarking a portion of petroleum levy (Rs 3-5/litre) for PSO.

ii. In case of OGDCL, PPL & GHPL, the royalty/sales tax obligation will be discharged on collect and pay model for providing temporary relief to the companies.

iii. (a). Adjustment by adding a fixed rate in gas price of SNGPL/SSGCL for realizing their receivables from government and other sectors and ensuring clearance of their payables.

(b). Settlement of GDS (Gas Development Surcharge) payable by PPL on gas sales to GENCO against the amount receivable by PPL from SNGPL while allowing SNGPL to set-off its receivable from Government of Pakistan on account of GDS against the amount payable by SNGPL to PPL.iv. By issuing SUKUK bonds against the entire circular debt.

v. Adjustment of debt with equity in profitable public sector entities/power projects/companies in the energy chain.

vi. Partial adjustment of debt against both of above methods (IV & V).

Documents available with this scribe disclosed that PSO, OGDCL, PPL and PLL are the entities that primarily financed circular debt of around Rs 1601 billion of the entire country which includes Rs 1081 billion of principal and Rs 520 billion of markup.

The principal amounts as well as mark up have been increasing with the passage of time due to continuous supply of fuel/Liquefied Natural Gas/gas to the power, gas and refinery sectors. In this regard, various government audit teams have highlighted that the increase in the financial cost arising from delayed recovery from the power sector is adversely effecting the public sector enterprises’ (PSE’s) profitability with the risk of bad debts resulting in possible bankruptcy.

PSO has also informed that GENCO-III spent PSO’s funds (Rs 80 bn) on the Nandipur Power Plant and covering other losses in fuel rather than paying PSO. This has further increased PSO’s receivables.

The Exploration and Production (E&P) companies i-e OGDCL, PPL & GHPL being the last entities in the chain of circular debt for receiving their outstanding dues from power, refineries, and gas sectors) are negatively impacted and are now at the stage that they might resort to ceasing supply of crude oil, RFO (Residual Fuel Oil), LNG and gas in the foreseeable future. Resultantly, massive shortage of oil and gas could be created across the country and the entire petroleum sector would face collapse, if the settlement of circular debt is not accorded the top priority.

As per documents, the debt details include Rs 323 bln of PSO, OGDCL Rs 401 bn, GHPL Rs 113bn, PPL Rs 378bn, SNGPL Rs 54bn, SSGCL Rs 293bn, and Rs 39bn of PLL.

The circular debt in the power sector had emerged mainly in 2008 due to the shortfall in the cash flow of power distributing companies (DISCOs) which adversely affected their ability to pay the power generation companies (GENCO, HUBCO, KAPCO etc) for supply of electricity. Consequently, these companies could not make full payments to PSO, OGDCL, PPL and PLL for supply of fuel, gas and LNG.

Despite the delayed payment from the power and gas sectors, PSO has been protecting local refineries since long by making timely payments due to which PSO had to resort to massive bank borrowing to avoid international defaults and consequential disruptions in the supply chain of petroleum products. Similarly, OGDCL and PLL have continued to provide gas to intermediate entities (SSGCL, SNGPL) and power plants (Uch, Guddu) without getting payment.