ISLAMABAD: After four days of negotiations, Pakistan and Russia on Thursday signed Heads of Terms (HoTs) of shareholders’ agreement for construction of about 1,100km gas pipeline from Port Qasim in Karachi to Lahore at an estimated cost of $2.5-3 billion by the end of 2023.

At the signing ceremony, Pakistani side was led by Petroleum Division Secretary Dr Arshad Mahmood while Deputy Director of Department of Foreign Economic Cooperation and Fuel Markets Development of Russian Ministry of Energy Alexander Tolparov led the visiting team. Barrister Asghar Khan of Lincolns Law Chamber and Zaheer Riaz of M/O Ordignum provided legal assistance to Russian and Pakistani team, respectively.

The two sides also signed minutes of the third meeting of the Russia-Pakistan Joint Technical Committee (JTC) for implementation of the Pakstream Gas Pipeline Project – commonly known as North-South Gas project.

The two sides agreed over 74:26 per cent shareholding in the special purpose vehicle (SPV) for the project. This envisages both ‘put option’ and ‘call option’ to Russian side which means its entities can move out of the project if it is not found feasible or increase its shareholding to 49pc if it is able to provide attractive financing arrangements acceptable to Pakistan. In any case, Pakistani entities will maintain majority shareholding.

Karachi-Lahore 1,100km pipeline to be built at a cost of $2.5-3bn by 2023

Leaving out 18pc rate of return in foreign exchange, the two sides agreed over a tariff calculation mechanism on cost plus basis already in vogue. This means all prudent costs both in terms of variable and fixed cost components as already permissible under third party access.

Russian side will arrange funding for foreign exchange component through suppliers’ credit or typical project financing to cover imported items like steel, consultancies, pipelines and related products and materials not available in Pakistan. The concession agreement for the pipeline will remain effective for 25-30 years.

There will be no throughput (gas quantity) guarantees but payment of tariff and return to the Russian entities / consortium will be ensured through normal security package and standby letters of credit as available to international investors, including independent power producers. The pipeline size was agreed at 56-inch diameter to cater for next 30-40 years of energy needs in the country that will ensure 700-800 million cubic feet per day (mmfcd) of free gas flow which can go up to 2,000mmcfd with compressors.

The arrangement will enable the two Sui Gas companies to improve their capabilities to operate the 56-inch pipeline and compete for similar international projects. The post-construction operations and maintenance of the project will be the responsibility of the Sui companies who will be trained abroad during the construction period.

The next steps will be the signing shareholders’ agreement, financial agreement, gas transportation agreement and lenders agreement during which time the Russian side will complete the front end engineering design (FEED) and the Pakistani side will arrange dollar financing of local currency component against Rs321bn worth of Gas Infrastructure Development Cess.

Both “parties defined the principles regarding shareholding structure, corporate structure, capital structure, and financing arrangements, options and guarantees as well as other essential clauses”, noted the minutes of the meeting. Furthermore, both parties reviewed and exchanged the draft of risk matrix of the project with a view to finalise the risk mitigation strategy.

The two sides committed to expeditiously implement the project to meet emerging energy security scenario of Pakistan to ensure investment commitments by coming LNG terminals. The results of the technical studies and route-related work done through international consultant by Russian party were discussed and Pakistan side was impressed with the quality and depth of analysis in the technical studies that would be ground to the FEED.

The two parties agreed to hold joint technical sessions of the nominated entities within 30 days to exchange information on the project implementation status, set technical specifications and prepare a project roadmap after the signing of the shareholding agreement. The format and time of the event shall be mutually agreed to.

Sui Companies shared the preliminary work done on the project and expressed the technical limitations of Pakistan in building 56-inch diameter pipeline and desired to participate in the project via subcontracting or otherwise and be partners in the operation and maintenance (O&M) contracts.

Published in Dawn, July 16th, 2021