Is the govt turning a blind eye to the Rs1.5bn it is owed by two oil & gas companies? 

ISLAMABAD: Two companies involved in the exploration of oil and gas in Pakistan are willfully defaulting on their obligations to pay outstanding royalties to the federal government, according to a recent letter by Transparency International Pakistan (TIP) has claimed. 

The two companies are Spud Energy and Frontier Holdings Limited, which have been ‘defaulting’ on account of royalty payments on the gross petroleum produced by the companies to the government. This has been happening for over a year despite repeated notices of the Director General Petroleum Concession (DGPC). 

The letter was sent to the principal secretary to the prime minister. In spite of the default, Mari Petroleum Company Limited which is partly owned by the government has requested DGPC for the assignment of 35% of its working interest in the Hanna Block to Spud Energy, raising the question of why the government has been letting this go for so long.  

According to documents from Transparency International Pakistan available with Profit, Spud Energy and Frontier Holdings Limited have been found to be in ‘willful default’ of their obligations to pay an outstanding royalty of nearly Rs 1.13 billion. 

As per the details in the letter Spud Energy owes the government an outstanding amount of nearly Rs 835 million whereas Frontier Holdings are liable for a sum of Rs 303 million. 

Contrary to the figure provided by Transparency International, according to documents seen by Profit, the total default on royalty payments on the part of Spud Energy stands at nearly Rs 1.5 billion, (Rs 14 million of Reti Maru, Rs 1.07 billion of Zarghun South and Rs 383 million of Badin IV South).

Company profiles 

Both the companies, Spud Energy and Frontier Holdings limited are involved in the upstream aspect of the oil and gas industry. This means that companies are involved in the exploration and production of oil and gas. 

Interestingly enough both are subsidiaries of a Canadian company called Jura Energy Corporation. The company is listed in the Toronto Stock Exchange, and according to the company website the primary source income is a “balanced portfolio of producing, development and exploration assets spread over various basins in Pakistan”.

What is more peculiar however, is that even though the company only operates in Pakistan, it is listed in the Toronto Stock Exchange. All of Jura’s assets are held and owned through its two Pakistani subsidiaries namely, Spud Energy and Frontier Holdings Limited. 

What is a royalty ?

In the oil and gas sector, royalty interest refers to ownership of a share of a resource or the revenue generated by it. Since natural resources are the property of the state, the government allows certain companies to explore for oil and gas in certain areas and take royalties in exchange. In this scenario the Government bears no operational costs in producing the resource, but they still control a piece of the resource or revenue it generates and are owed royalties. 

When a government grants a company the right, working interest or licence to explore or produce a certain resource, the land is owned by the government but for all intents and purposes is leased to the company for a specific period of time. So in order to generate revenue from that resource the government applies a royalty, even though the government is not incurring any costs.

Considering the fact that the resource could be worth billions, the royalty is a percentage of the revenue generated from the gross production of that particular source. This ensures that the government gets its share of the pie too. 

Letter from Transparency International Pakistan

The letter from TIP highlighted the fact that, “the licence holders Spud Energy and Frontier Holding are under an obligation to pay royalty to the government at a rate of 12.5% of the petroleum produced under and saved (gross production of petroleum)”. 

The letter went on to say that, “it can be clearly seen from their financial statement that instead of paying the outstanding royalties to the government, these defaulters have paid shareholders loans worth millions of dollars using gas sales receipts which is totally not just illegal but also morally incorrect”. 

Another issue addressed through the letter was the request of the defaulting company, Spud Energy, for a working interest share in an additional block, despite the fact that the company is continuing to evade its legal and financial obligations to the government.

“TI Pakistan requests the Prime Minister of Pakistan to kindly look into this matter and if it is found to be correct, then the regulators to first recover the outstanding amount approximately PKR 1.13 billion from Spud Energy and Frontier Holding prior to proceeding further on these contract,” reads the letter sent by TIP to PSPM. 

New block for defaulter? 

Additional documents available with Profit also disclosed that MPCL has requested the DGPC to allow the company to assign 35% of its working interests in Hanna Block to Spud Energy from its 100% share and also submitted a draft Deed of Assignment (DoA) with annexures for this purpose.

The petroleum division forwarded a summary titled ‘Assignment of Working Interest in Exploration Licences/Blocks’ to the Prime Minister, in which it was requested that the premier authorise submission of the summary to the Cabinet.

The fact that the petroleum division forwarded this summary in itself begs a lot of questions. For starters why was the summary forwarded despite the fact that the government is aware of the ongoing back and forth regarding the royalty payments. This would only give more assets to a company that is already in conflict with the law. 

The Prime Minister however raised objections on the proposal that sought the assignment of the working interest and sent the summary back to the petroleum division with certain observations.

Profit reached out to both the managing director MPCL and Chief Executive Officer of Spud Energy in regards to questions about the proposed assignment of the working interest in the Hanna block and default on the part of Spud Energy. But, both companies failed to respond despite repeated attempts by Profit to get their side on the matter. 

Response of (and to) the government

The DGPC has issued repeated requests to both companies to clear the pending royalty amount and the ‘final notice’ was served last year on the 20th April, 2021.

Spud Energy responded in August of the same year. After depositing Rs 50 million of the overdue amount, the company said they are pursuing collections from Sui Southern Gas Company Limited (SSGC) and will settle the remaining outstanding amount within 6-8 months. 

After 6 months in response to the continued violation, DGPC issued another letter on the 17th February, 2022, addressed to the executives of SSGC, Pakistan Refinery Limited and Engro Fertilizer Limited ordering them to withhold the payments of both the defaulting companies on account of oil and gas purchases. 

The letter read that, “the Competent Authority has decided to recover the outstanding royalty amount by directing the nominated buyers to withhold the entire payment to the defaulter of its share in the gas produced from the lease till satisfaction of entire claim and also to deduct at source the royalty amount at the rate of 12.5% from (…) future invoices”. 

The DGPC in response to questions by Profit stated the government has taken efforts to recover royalty payments and in line with this goal SSGC was ordered to withhold payments for gas purchased from Spud. 

However, while talking to Profit sources claimed that, SSGC has so far paid no heed to the repeated requests of DGPC and refused to start withholding payments against shares of Spud Energy. 

Elaborating on the matter further, he said the outstanding amounts can be recovered according to the procedures mentioned in Petroleum Concession Agreements and Pakistan Petroleum Rules, which includes but are not limited to encashment of Performance Guarantees, issuing of Show Cause Notices, Revocation of Petroleum Rights, Blacklisting of defaulting Companies etc.

He added that in regards to blacklisting of a company is concerned, actions are being taken in accordance with the applicable “Petroleum Rules” against the defaulting company.

When the DGPC was contacted by Profit to get his stance on the proposed assignment of 35% working interest of MPCL to Spud energy which is a defaulter of government payments on account of royalty. 

The director said, according to the applicable rules and regulations, there are specific mechanisms and procedures for payment of financial obligations. Spud has been advised to clear their outstanding financial obligations. However, Spud has not cleared its outstanding obligations yet.

Why isn’t SSGC listening?

While responding to the questions sent by Profit regarding the directions of DGPC to withhold the payments of gas purchased from Spud, the SSGC stated that the company has obtained a legal opinion on the issue.

Elaborating on the matter the spokesperson said, as per the legal opinion, in the absence of a provision in the General Security Agreement (GSA) or the rules which obliges or authorises SSGC to deduct royalties from payment to the seller, the company is not authorised to make such deductions. SSGC cannot blacklist Spud as the federal government is authorised to blacklist a defaulter company.

This means without appropriate legal coverage it is not within the purview of SSGC to blacklist the defaulting company and to withhold payments or deduct the appropriate royalty amount at the “source”.