FATIMA FERTILIZERS PROJECT: FURTHER DELAY TO COST HEAVILY

Once Fatima Fertilizers becomes operational, the Fatima Group-Arif Habib Group will emerge as one of the key players in the fertilizer industry, only second to Fauji Foundation.

Engr HUSSAIN AHMAD SIDDIQUI
Apr 02 - 08, 2007

In recent times, Fatima Fertilizer Company Ltd, which is a joint venture of Fatima Group and Arif Habib Group, has made headlines on quite a few occasions, though for varied reasons. First, it was projected as the new green-field fertilizer project ventured in the country after almost a decade and, second, when the investors' consortium was declared the successful bidder for state-owned Pak-Arab Fertilizers Ltd, the largest unit in manufacturing sector. Of late, the project was in the news for the non-transparent method under which the government granted special favours to the sponsors of the much-talked-about project.

Fertilizer Policy-2001, which was announced on August 30, was framed to encourage investment, specifically foreign investment, in fertilizer sector, aiming to meet the rapidly growing domestic demand of urea and other fertilizers. It was envisaged that the demand-supply forecast confirms the economic viability of setting up two new fertilizer units, within the 10-year validity of the policy, or undertaking major expansion of existing plants to almost the same capacity size. Consequently, a number of incentives were offered to the investors, including allocation of feedstock gas on priority and sales of gas at concessionary rates. Earliest timeframe for completion of these projects was the core of the policy since the government continues to grant huge subsidies on its imports year over year. The prospective investors were therefore required to sign the Gas Sales Agreement (GSA) latest by June 30, 2005 as per the announced policy.

In response to this policy it was proposed by Fatima Group of Multan to establish a fertilizer project at Sanjarpur, Sadiqabad, District Rahimyar Khan. This was considered acceptable by the government on the principle of the first-come first-served basis, as laid down in the policy. Subsequently, the Economic Coordination Committee (ECC) of the Cabinet, in its meeting held on August 24, 2004, approved allocation of 75 million cubic feet per day (mmcfd) natural gas to Fatima Fertilizers project to produce 1.5 million tons of nitrogenous and phosphate fertilizers annually. This approval, however, was granted with the condition that the project should come on stream within two years from the date of approval of gas allocation, which was committed earlier by the sponsors.

In fact, the government has dedicated Mari gasfield, the second largest national gas resource, for fertilizer industry to ensure a steady and reliable gas supply. Shallow reservoir of Mari gas has low thermal or BTU (British Thermal Unit) value and is considered most suitable as feedstock for urea production. Mari gasfield, discovered in 1956, currently covers a total area of about 1,200 square kilometers under lease. It has total recoverable reserves of nearly 8 trillion cubic feet (tcf) of natural gas and has produced about 3 tcf gas until June 2006. The five phases of the development of Mari gasfield have resulted in gas deliveries to the volume of 446 mmcfd at present. Out of this, about 130 mmcfd is allocated to Engro Chemicals' fertilizer unit at Daharki, 80 mmcfd to Pak-Saudi Fertilizers at Mirpur Mathelo, now owned by Fauji Fertilizers, and 130 mmcfd to Fauji Fertilizers' plant at Machhi Goth. Remaining gas production is being provided to WAPDA's Guddu power station for power generation.

The latest phase of Mari gasfield, known as Phase VI, was completed in 2003 that adds another 500 mmcfd gas to the resource. The gas allocation of 75 mmcfd to Fatima Fertilizers, both as feedstock and as fuel, has been made through this resource. The project sponsors have signed the GSA with Mari Gas Company Ltd for sale/purchase of gas at the field-gate, on July 12, 2005. Though the GSA was not much behind the schedule, it was only in November 2006 more than a year after concluding the GSA that the sponsors signed an agreement with Sui Northern Gas Pipelines Ltd (SNGPL) for the laying of pipeline from Mari gas-field to the fertilizer complex. The 47-km long high-pressure gas transmission pipeline, costing Rs 250 million, is expected to be complete within 15 months.

Mystery still shrouds the circumstances that led to long delay in kicking-off the time-bound project of great national importance, though the foreign contractors were employed for construction of the fertilizer complex much earlier. Sometime in August 2005, the sponsors had announced that the project was being set up, at a cost of US$ 300 million, in collaboration with China National Chemical Engineering Corporation of the People's Republic of China. The contract was thus concluded between sponsors and the Chinese company, based on an earlier Memorandum of Understanding (MOU) that was signed on January 7, 2005. The project cost however was revised to US$ 336 million in December 2005. On these premises, Prime Minister Shaukat Aziz performed, on April 28, 2006, the groundbreaking ceremony of the project, which will be constructed on an area of 400 acres. On the occasion, the investors indicated yet another inflated cost of the project US$ 475 million without disclosing further details whatsoever. Nonetheless, there was no further progress on achieving the project implementation milestones as agreed and the project failed to take-off as scheduled.

Perhaps it was never intended to honour the commitment with the government in the first place, instead it was a strategic decision on the part of the investors to delay the commencement of the project for other reasons. The consortium of Fatima Group (in the name of Reliance Export) and Arif Habib Group were meanwhile declared, in May 2005, the highest bidder for purchase of state-owned Pak-Arab Fertilizers (Pvt) Ltd (PFL) located at Multan. The consortium's bid of Rs 14.125 billion for 52% government shares of the large fertilizer complex was made in competition with industrial giants like Dawood Group, Nishat Group and Al-Ghurair of the UAE. Did the project investors have plans to take optimum advantage of their anticipated investment in the PFL, as reflected in the development of later events? Or, was the sanction of fertilizer project exploited for seeking the requisite pre-qualification for participating in take-over of the PFL management that was called afresh by the Privatization Commission in July 2005? Perhaps only the project sponsors know the answer. This, however, is a matter of fact that valuable human resources of PFL have been made available to the sponsors, simply as a bonus, to effectively undertake implementation of the Fatima Fertilizers project and subsequent plant operation.

Nevertheless, the time limit given by the ECC for the project's completion lapsed, sometime in August 2006. Instead of revoking the gas allocation, as recommended by the Ministry of Industries, Production and Special Initiatives, it was decided by the ECC of the Cabinet, in its meeting held on August 23, 2006, to further extend the deadline, without imposing any penalties on sponsors as prescribed. This time the ECC allowed the investors three months to achieve financial close and two years for project completion i.e. by August 2008. Finally, the project has achieved financial close within the revised timeframe, having finalised the security documents package, as the ECC of the Cabinet was informed on December 27, 2006. A consortium of major local and foreign banks in Pakistan has agreed to provide Rs 23 billion for the project. Once again, the sponsors have escalated total cost of the project, revised to US$ 587 million, which works out to be Rs 35 billion in local currency. Equity for the project is Rs 12 billion. Intriguingly, the financial structure of the company has been changed recently. Fatima Fertilizers Company will now be owned 70% by PFL, 15% by Fatima Group and 15% through public issue underwritten by PFL.

The product range of the proposed plant and the respective capacities include ammonia 1,500 tons per day (tpd), nitric acid 1,500 tpd, urea 1,500 tpd, nitrogen phosphate (NP) 1,000 tpd, nitrogenous phosphoric potassium (NPK) 1,000 tpd and calcium ammonium nitrate (CAN) 1,400 tpd. It is claimed that project's first phase of achieving 1.1 million tons production annually will be completed by March 2008, whereas the plant will be fully operational to the designed capacity by August 2008, as required under the latest directive of the government. The target however is far from being realistic to achieve. It has been reported that second-hand machinery has already been imported for the production of CAN and NPK fertilizers, which is currently being reconditioned, sand blasted and painted before re-assembly and erection at site. Interestingly, the Policy allows relocation of secondhand plant machinery with the same concessions and exemptions as applicable to the new fertilizer plants.

On August 10, 2006, Sojitz Corporation and Kawasaki Plant Systems Ltd jointly confirmed receiving an order, valuing US$ 110 million, from Fatima Fertilizers to put up a 1,500 tons daily urea production facility. Kawasaki of Japan will supply plant machinery based on state-of-the-art urea technology from Stamicarbon of Holland. Commercial operation date (COD) has been agreed between the investor and plant supplier as 42 months from the date of letter of credit. The urea production plant will thus be operational by May-June 2010 against investors' commitment, and the government's deadline, of August 2008. In any case, the project of this magnitude and financial outlay is likely to be behind schedule due to local conditions and problems in test and trial runs in this case Stamicarbon's advanced urea technology being introduced in Pakistan for the first time. The role of Sojitz Corporation, a business partner of Fatima Group in Japan for last two decades, will be that of the middlemen, which perhaps explains the highly inflated cost of project, which was revised a number of times without change of project parameters at any stage. Given the current prices of plant machinery in international market and the fact that part machinery procured for the project is second-hand, the latest project cost is termed very high, by any standards.

Pakistan's fertilizer industry is well established and based on advanced technology with an investment of Rs 87 billion. There are ten production units in operation, nine in private sector including those privatized recently and only one in public sector that too is in advanced stage of divestment by the government. The sector has an annual installed capacity of 5,989,000 tons of a wide variety of fertilizers. These include urea, nitrogenous phosphoric potassium (NPK), single super phosphate (SSP), triple super phosphate (TSP), nitrogen phosphate (NP), calcium ammonium nitrate (CAN), di-ammonium phosphate (DAP) and others. Lately, the industry has witnessed slowdown due to capacity constraints and the on-going privatization process of the public sector units. Table below gives the production of fertilizers during July 2005-May 2006 period, showing 95% capacity utilisation compared to 100% in previous years. It is also reflected in the fact that natural gas consumed by the fertilizer industry has declined from 190,412 million cubic feet (mmcft) in 2004-05 to 148,470 mmcft in 2005-06.

TABLE
PRODUCTION OF FERTILIZERS DURING 2005-06

NAME OF UNIT

LOCATION

PRODUCT

2005-06
(JULY-MAY)

PRIVATE SECTOR

Dawood Hercules

Sheikhupura

Urea

435,624

Engro Chemical

Daharki

Urea

906,442

Fauji Fertilizer

Sadiqabad

Urea

2,138,581

Pak. China

Haripur

Urea

0

Fauji Fertilizer Bin Qasim

Karachi

Urea

473,560

. .

DAP

396,957

Engro Chemical

Daharki

NPK

129,720

Pak Arab (PFL) *

Multan

Urea

111,765

. .

Amm.Nitrate

297,460

. .

Nitro Phosphate

326,945

Private Sector Total =

. .

5,217,054

PUBLIC SECTOR

.

Pak Arab (PFL)

Multan

Urea Amm.Nitrate Nitro Phosphate

Pak Saudi (PSFL)

Mirpur Mathelo

Urea

0

Pak.American (PAFL)

Daudkhel

Urea

322,788

Lyallpur (LCFL) **

Faisalabad

Super Phosphate

0

Lyallpur (LCFL)

Jaranwala

Super Phosphate

68,523

Hazara (HPFL)

Haripur

Super Phosphate

82,480

Public Sector Total=

. .

473,791

Grand TOTAL=

. .

5,690,845

** Lyallpur Chemical Fertilizer Limited (LCFL)
Faisalabad has ceased to exist since August, 1996.
Pak Saudi (PSFL) handed over to FFC, Sadiqabad from January 2003.
*. Privatization of Pak Arab (PFL) Multan, in July 2005.
(SOURCE: 2005-06 Yearbook, Ministry of Industries, Production & Special Initiatives)

The widening demand-supply gap is being met through imports of fertilizers, which were to the level of 1.7 million tons during July 2005-March 2006, which is about 50% higher than that of the corresponding period of last year. Once Fatima Fertilizers becomes operational, the Fatima Group-Arif Habib Group will emerge as one of the key players in the fertilizer industry, only second to Fauji Foundation. With a combined installed annual capacity of 2.3 million tons of fertilizers, the two joint venture companies will contribute largely to meet total domestic demand in future.

It is imperative that the sanctity of the decision of the ECC shall be upheld this time, ensuring completion of Fatima Fertilizers project in time, else imposing strictly the penalties as per laid down conditions, and performance guarantees be obtained from the investors for the purpose. Further delay in commencement of production at the new plant will cost the national exchequer an estimated three billion rupees annually in terms of import subsidies only, besides resulting in project cost over-runs and belated socio-economic benefits to the nation.