Wednesday, May 31, 2023
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Renegotiating Contracts for Power Projects

The demand for oil, which was already below installed capacity and committed imports, has deteriorated further, almost by an average of 50%.

There are several refineries that are closed. There’s talk of taking force majeure to Qatar LNG and others.

Oil prices have gone down to $30 a barrel and even lower under the combined impact of low demand and the Saudi-Russian price war.

Prices lower than manufacturing costs are harmful, and nobody makes any profit. As well, Pakistan’s own energy businesses are struggling because of abnormally low prices.

Overall, lower energy prices will benefit countries like Pakistan that import energy. This will offset the export deficit. Nonetheless, much will be known about the net impact after the emergency duration is over.

No one knows what kind of world one will face the following coronavirus. The immediate recommendations one should make at this point are as follows:

Moratorium on new projects; negotiating with investors on delaying pipeline projects except for the ones at an advanced stage of construction, and negotiating a moratorium on payment of fixed costs for the emergency period.

It is quite probable that an international agreement protocol may be introduced dealing with issues of financial liabilities, obviating the need for any unilateral action by individual countries.

In the wake of the recent G20 meeting, the IMF managing director has indicated the introduction of relevant financial policies to help developing countries.

The Ministry of Energy has already prepared a staggering bill payment scheme (for consumers of 300 units of electricity and below) under which bills would be paid in installments.

Perhaps, a similar concession may be offered by gas companies as well. An alternative could be 50% payment representing fuel and variable costs, passing on the cash flow concession proposed to be obtained from the independent power producers (IPPs) and Pepco.

The government has already reduced petroleum prices and has expressed its intention to pass on the benefit of further reduction in crude oil prices. Oil is a major revenue earner in the face of usual tax evasion by the wealthy in Pakistan.

It is almost impossible that the government would be able to avoid taking any share in prices in the form of taxation. India has doubled excise duty on oil.

Circular debt is now estimated to be between Rs1.856 and Rs1.92 trillion. There was a dispute between Nepra and the Power Division over the small difference.

Circular debt is actually a difference between the cost of production and sales revenue that has accumulated. This difference represents legitimate and not-so-legitimate costs as there are inefficiencies, leakages, theft, receivables, etc.



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