ECC rejects MTT-WOP over flawed financial assumptions
Recently, the Petroleum Division briefed the ECC that during the visit of Ilham Aliyev, the President of Azerbaijan to Pakistan on 11-13th July, 2024, Pakistan side presented several projects to Azerbaijan for investment including establishment of Joint Trading Company, investment in Petrochemical Refinery, upgradation of PRL, underground gas storage, Machike-Thallian-Tarru-jabba White Oil Pipeline (MTT- WOP) etc.
The Azerbaijan side showed interest in these projects. Much progress has been made since then. On December 9, 2024, SAPM on Foreign Affairs stressed upon the need to address all outstanding issues with Azerbaijan and underscored that preparations be made for the visit of the Prime Minister of Pakistan to Azerbaijan which was scheduled in February 2025, with one of the project listed in the said letter was the MTT- WOP.
MoU signed on consortium formation for White Oil Pipeline project
In line with the urgency of the subject matter, technical team from Frontiers Works Organization (FWO) visited Baku from 23rd to 27th December, 2024 and carried out in-person meetings with their SOCAR counterparts to progress on the White Oil Pipeline Project. As the follow up, the Prime Minister deputed a high level delegation under the leadership of Minister for Communication/ Privatization who visited Baku on January 31, 2025.
During a meeting of the Minister with the President of SOCAR, SOCAR put across the condition of 'Ship or Pay' for investment in the project. Subsequently, the project was also discussed during the visit of the Prime Minister to Azerbaijan on 23rd to 24th February 2025.
In light of interactions and consultations, FWO and PSO (joint consortium partners) through their project company Frontier Oil Company-I (FOC-I) and in consultation with all stakeholders have developed an alternate option of 'Ship or Pay' to address the concerns of SOCAR.
According to the agreed mechanism, OGRA will design a regulatory framework to ensure optimal utilization of pipeline by declaring it a default mode of transportation. Accordingly, FOC-1 submitted a revised tariff petition to OGRA for Machike to Thallian section of White Oil Pipeline which has been acceded to by OGRA whereas work on tariff petition for Thallian to Tarrujabba section was in progress.
The Petroleum Division further briefed the forum that OGRA had requested Petroleum Division to obtain necessary approval from ECC on the following key terms and conditions, which were submitted by FWO and have been agreed between stakeholders for the said project and provisional tariff has been approved based on the said terms.
The ECC being the competent authority was requested to approve the following regulatory framework/ policy guidelines proposed by OGRA for Machike- Thallian section, which would also be applicable for Thallian to Tarrujabba Section: (i) tariff shall be US dollar based instead of Rupee based.
OGRA has already determined the provisional tariff in US dollar;(ii) a regulatory framework shall be developed by OGRA to ensure optimal utilization of pipeline by declaring it a default mode of transportation;(iii) OGRA may be authorized to develop a commercial framework which will require OMCs to commit minimum annual pipeline volumes ;(iv) if committed volumes thresholds will not be met, the shortfall will be covered/ adjusted by OGRA through existing IFEM of each OMC ; and (v) if the committed volumes for the year are below the minimum volumes required, the shortfall will be met through IFEM mechanism of the country. OGRA may be authorized to develop mechanism for enabling above provision.
During the ensuing discussion the ECC deliberated upon the issue in detail and noted that though the project is of vital importance in the overall context of the economy and needs to be initiated at the earliest, however, the dollarized tariff that is being sought for the project is a significant area of concern given the fact that Government is trying to discourage payment of tariff in foreign exchange with fiscal constraints being faced.
The ECC also noted that instead of calculating the Internal Rate of Return for the project on the basis of existing relevant regulations of OGRA, the same has been calculated on assumptions that require further clarity. It was also observed that though foreign investment was welcome, which is only 25% of the total cost and rest was the local component but dollarized tariff was recommended for local partners as well, which was not tenable.
The ECC also took into consideration the observations raised by the Finance Division and Planning, Development and Special Initiatives Division and found that the proposal needs to be resubmitted after due deliberations and calculations in the presence of Ministers of Petroleum and PD&SI.
The ECC expressed concern over the fact that any tariff based on debatable financial assumptions could ultimately impact the consumers adversely in the form of higher tariffs.
After detailed discussion, the ECC did not approve the proposal with the directions that a committee Co-Chaired by the Secretary Finance and Secretary Petroleum and including representatives from OGRA and Ministry of Planning, Development and Special Initiatives review and finalize the financial modalities of the project and ensure that the proposed tariff has been calculated correctly on the basis of realistic financial assumptions.
Copyright Business Recorder, 2025
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