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Energy Sector and Legal Considerations: Pakistan ENERGY SECTOR AND LEGAL CONSIDERATIONS: PAKISTAN Catriona Nicol Joseph Dyke 1 2 McNair Chambers, Qatar McNair Chambers is a QFC registered LLC based in Qatar, providing legal services. McNair Chambers specialise in International Arbitration, Commercial Litigation, Public International, Energy and Regulatory Law. Catriona Nicol and Joseph Dyke are Associates in the Doha office of McNair Chambers. www.mcnairchambers.com 3 A. INTRODUCTION ............................................................................................................................. 7 B. OVERVIEW/STRUCTURE OF THE POWER SECTOR .............................................................. 13 Overview of the power sector ........................................................................................................... 14 Structure of the power sector in Pakistan .......................................................................................... 16 C. POWER SECTOR: CAPACITY AND PROBLEMS ...................................................................... 19 Capacity / Sources ............................................................................................................................. 19 The “Circular Debt” in Pakistan ....................................................................................................... 20 Load Shedding .................................................................................................................................. 27 Imports of Electricity ........................................................................................................................ 27 Pakistan‟s potential capacity ............................................................................................................. 28 D. ENTITIES INVOLVED IN THE POWER SECTOR ..................................................................... 35 Public Sector Entities ........................................................................................................................ 35 Private Sector Entities ....................................................................................................................... 42 E. GOVERNMENTAL / REGULATORY / DEVELOPMENTAL INVOLVEMENT IN THE POWER SECTOR ................................................................................................................................ 51 Applicable Government Policies ...................................................................................................... 51 International Development ................................................................................................................ 52 Investment ......................................................................................................................................... 54 F. POWER PURCHASE AGREEMENTS: DRAFTING AND NEGOTIATION .............................. 59 Context and Importance .................................................................................................................... 59 Pre-PPA Considerations .................................................................................................................... 60 Structure of a PPA ............................................................................................................................ 60 (i) Key terms: Effective Date and Term .................................................................................... 61 (ii) Key terms: Construction and Technical Matters ............................................................... 62 (iii) Key terms: Sale and Purchase/Financial Terms ................................................................ 63 (iv) Key terms: Termination .................................................................................................... 65 (v) Key terms: Liability, Risk Mitigation and Indemnification .............................................. 67 (vi) Key terms: Dispute Resolution ......................................................................................... 69 (vii) Key terms: Boilerplate ...................................................................................................... 69 Disputes ............................................................................................................................................ 70 G. ROLE OF LOCAL COURTS .......................................................................................................... 73 H. LNG PRICE REVIEWS ................................................................................................................. 75 Drafting and interpreting price review clauses ................................................................................. 75 Judicial and arbitral authorities ......................................................................................................... 79 4 Key issues for LNG price review arbitrations................................................................................... 82 Annex 1: Sample Power Purchase Agreement...................................................................................... 85 Annex 2: Power Purchase disputes ....................................................................................................... 87 Annex 3: Further Reading ..................................................................................................................... 97 List of maps/diagrams: Fig. 1: Power Stations Map, Pakistan Fig. 2: Oil Refineries Map, Pakistan Fig. 3: Major Planned Gas Pipeline Projects, Pakistan Fig. 4: Coal Potential in Pakistan Fig. 5: Energy Distribution Companies – Pakistan Fig. 6: Overview of the power sector Fig. 7: Circular Debt Fig. 8: Distribution Companies 5 6 A. INTRODUCTION 1. The Islamic Republic of Pakistan, created in 1947, is the sixth-most populous country with a population exceeding 199 million people. It is also the 36th largest country in the world in terms of area (over 880,000 km2) and has a 1,046 km coastline along the Arabian Sea and the Gulf of Oman. 2. As the maps below show, Pakistan also has significant natural resources. Those maps identify: Fig. 1 – “Power Stations Map – Pakistan” (http://www.alhasan.com/sites/default/files/01-9.pdf); Fig. 2 – “Oil Refineries Pakistan” (http://www.alhasan.com/sites/default/files/01- 15_0.pdf); Fig. 3 – “Major Planned Gas Pipeline Projects – Pakistan” (http://www.alhasan.com/sites/default/files/01-14_0.pdf); Fig. 4 – “Coal Potential in Pakistan” (http://www.alhasan.com/sites/default/files/01- 4.pdf); Fig. 5 – “Energy Distribution Companies – Pakistan” (http://www.alhasan.com/sites/default/files/01-6.pdf)1 3. This text, which seeks to provide an overview introduction to the power sector in Pakistan, identifies the sector‟s key stakeholders at each stage (generation, transmission and distribution) of the operation and discusses some of the issues facing Pakistan‟s power sector, including the deficiency known as the “circular debt”. The text ends with an overview of Power Purchase Agreements and a schedule of publicly-known disputes on power purchase matters. 4. This text does not seek to provide a comprehensive discussion of cases concerning the purchase of power, let alone tariff disputes/payment disputes which are within the jurisdiction of the relevant regulatory authorities and courts of Pakistan. 1 The following maps were compiled and produced (and the copyrights are reserved) by ALHASAN Systems Private Limited”. These maps and others are available at http://www.alhasan.com. 7 Fig. 1 8 Fig. 2 9 Fig. 3 10 Fig. 4 11 Fig. 5 12 B. OVERVIEW/STRUCTURE OF THE POWER SECTOR 5. This chapter seeks to give a high-level overview of the power sector in Pakistan. The information is taken from a compilation of available online reports published since 2010. There are many public sector entities involved in the power sector, which is headed by the Ministry of Water & Power. Provincial governments (and their respective energy departments) also play an important role in facilitating the power sector. 6. Pakistan‟s power comes from a mixture of generation resources. There has previously been a heavy reliance on oil and gas resources (which at times have accounted for approximately 64% of power generation). However other resources play an important and increasing role such as hydropower, nuclear and coal. 7. The power sector in Pakistan has required significant investment from the government. Reports suggest that the level of subsidies typically requires around 2% of GDP. The power sector has suffered a series of problems including the “circular debt”, the losses of the distribution and transmission companies, power theft and high investment costs. As at 2012, the “circular debt” was estimated to be $8.47 billion. 8. However, Pakistan has significant power resources at its disposal and is beginning to attract much more investment. Pakistan has received assistance from international funders such as the International Monetary Fund and the World Bank, as well as the US government, and from regional lenders such as the Asian Development Bank. Furthermore, the Pakistan government is committed to facilitating the private sector involvement in Pakistan‟s power generation. 13 Overview of the power sector Fig. 6 GOVERNMENT OF PAKISTAN (MINISTRY OF WATER & POWER) PAKISTAN ELECTRIC POWER COMPANY REGULATES REGULATES REGULATES GENERATION COMPANIES CENTRAL NATIONAL DISTRIBUTION POWER TRANSMISSION (+WAPDA (hydropower only)) SALE SALE COMPANIES PURCHASING
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