By Syed Fazl-e-Haider

KARACHI, Pakistan – A deal potentially worth US$25 billion for French firm GDF Suez to import to Pakistan 3.5 million tonnes of liquefied natural gas (LNG) per year has been cancelled after the country’s top court declared the contract null and void on the grounds that the award process was not transparent.

The Supreme Court held in its verdict that the contract process was awash with irregularities, hence the contract awarded to GDF Suez on February 9 has been declared not binding. The court also directed the government to fix responsibility on persons involved in the “process lapse” and take action against those involved in the irregularities.

The court took up the case after media reports that Pakistan had lost $1 billion when senior Petroleum Ministry officials ignored the lowest bid by Fauji Foundation, an investment group run by former Pakistani military officers, and European company Vitol.
Court proceedings showed that the contract was awarded to GDF Suez and Shell Pakistan Ltd without the French company participating in the expression of interest and bidding process. The Supreme Court last week said in its remarks that the negotiations could be held only with those who participated in the expressions of interest. GDF Suez claims it won the contract to import LNG to Pakistan for the next 20 years through an open bidding process by the Economic Coordination Committee (ECC) of the cabinet.

Analysts say irregularities in bidding for the contract and the subsequent litigation, cancellation and re-initiation of the bidding process sends a bad signal to foreign investors at a time when cash-strapped Pakistan direly needs foreign investment in energy and infrastructure sectors. Foreign investors already have grave concerns about putting money into the country due to deteriorating security.

The Supreme Court was told in a letter that the government will review the LNG import contract with GDF Suez, Geo News, a private TV channel, reported on Wednesday. The federal government told the court that it has decided to send the matter of the contract back to the ECC after declaring the contract not binding. The government also said in the letter that it would re-submit a proposal for the project made by Fauji and Vitol in July 2009.

The court on Monday directed the government to reconsider the LNG deal and asked the Petroleum Ministry to consult Prime Minister Yousuf Raza Gilani on the issue.

In 2005, the country initiated a process to establish an integrated LNG supply and re-gasification project, known as Mashal, to confront the problem of declining reservoirs of natural gas while demand was increasing.

Former finance minister Shaukat Tarin, who resigned his post in late February, admitted on April 12 that there was a “clear process lapse” in the award of the gas-supply contract to the French firm. Tarin, who was also the ECC chairman, stated many times that he was kept in the dark by Petroleum Ministry when a summary of the deal was submitted for approval.

GDF Suez denies any knowledge of the basis on which the award was challenged, though it welcomed the action of the Supreme Court to investigate the allegations made against its contract.

“From July 2009 to January 2010, GDF Suez participated in the Mashal process to supply Pakistan with LNG and submitted its final offer to the price negotiating committee on January 2010,” Armelle Dillar, the company’s spokesperson, was reported by Daily Times as stating in an e-mail. “On February 9, the company was selected as the preferred bidder by ECC of the government of Pakistan for the sale of up to 3.5mtpa [million tonnes per annum] of LNG in the framework of long-term supply contract.”

Paris-based GDF Suez, which is listed on the Euronext exchanges in Paris and Brussels, where it is a constituent of the CAC 40 and BEL20 indices, is involved in electricity generation and distribution, exploration and production of natural gas and LNG project-related activities.

A Business Recorder report said, “When all the parties reached an agreement on reconsideration of the process, counsel for GDF Suez, [Abdul Hafeez] Pirzada requested the court to clarify his position, saying that the French government had 40% of GDF Suez shares and it was blamed for causing a $1 billion loss to Pakistan. It wanted to remove that stigma, he added. “I cannot go with this stigma,” Pirzada said. “What message will go to the world if it will go with it.”

The court was told that the contract was awarded to GDF Suez through negotiations with the consent of Petroleum Minister Naveed Qamar, while ignoring the bidding process. GDF Suez and Shell Pakistan Ltd (SPL) did not attend the Expression of Interest for the short-term LNG project.

Negotiations with the French firm had been initiated on the directives of the petroleum minister, GA Sabri, special secretary of petroleum, was reported by Dawn as telling the Supreme Court. Sabri said a Holland-based consortium, 4-Gas, which the government chose in 2008 to build the LNG terminal required for the Mashal Project, had told the ministry about its designated suppliers – GDF Suez, Mitsubishi, BP and Woodside.

SM Zafar, counsel for the Ministry of Petroleum and Natural Resources, told the court that no violation of any sort was committed in the gas-supply contract process. He also rejected allegations that the national exchequer would loose $1 billion by awarding a contract to the French company.

Last week, Zafar rejected the impression of any wrongdoing in the Mashal Project bidding process, which was started with advertisements in the national and international media. He said 53 parties gave expressions of interest and 34 were short-listed after evaluation. Zafar argued that the best 14 among the short-listed were selected for the tendering process and 4-Gas was finally given permission to build the terminal, with GDF-Suez as its designated supplier. All milestones were covered before awarding the LNG contract, he argued.

Sui Southern Gas Co Ltd (SSGC), a government-majority-owned gas distributor and facilitator of the Mashal Project, raised in a report to the court the question of who had recommended Shell for the LNG contract as 4-Gas had not designated it as a supplier for the Mashal Project, according to Business Recorder. 4-Gas had designated GDF, Mitsubishi, BP and Woodside as its designated suppliers. The report submitted by SSGC to the court has not shown how Shell was inducted into the project and or how its offer was submitted to the ECC, as the second lowest bidder.

The Mashal Project is not being constructed by government funds, but by 4-Gas, a private company that is investing in the project and taking the risks.

“There is nothing illegal about the Mashal Project,” the SSGC report said, according to Business Recorder. “This honorable court has no jurisdiction, and there is no law to scrap this project if the ECC has approved it and still wants the same to go ahead with it. There is no reason to end this project. Submission of incomplete summary by the Petroleum Ministry to the ECC or holding back information from the ECC is the fault of the ministry and not of the gas suppliers or terminal operators.”

The gas shortage in Pakistan is increasing annually due to rising demand. Significant shortages are exacerbated by Pakistan’s precarious financial situation which, in turn, has been worsened by high prices of the imported fuel oil that a large proportion of the country’s power system runs on.

Syed Fazl-e-Haider (www.syedfazlehaider.com ) is a development analyst in Pakistan. He is the author of many books, including The Economic Development of Balochistan (2004). He can be contacted at sfazlehaider05@yahoo.com