KARACHI – The Oil and Gas Development Company Ltd (OGDCL) has signed a Gas Sale Agreement (GSA) with four fertilizer companies to directly sell 130 million cubic feet (mmcf) of gas per day at $ 2.6 per mmbtu from its Kunar Pashaki Deep gas (KPD) field.

This field is expected to generate a total of 210-230 mmcfd of gas after completion of Phase 2 in August 2014. Out of this, 130 mmcfd will be provided to fertilizer producers and rest will be given to Sui Southern Gas Company (SSGC).

According to market sources here Monday, 35 kilometres - long transmission pipeline needs to be constructed from KPD to Sawan field for this purpose, after which SNGPL network will be used to divert gas to specific fertilizer producers. An analyst at Khadim Ali Shah Bhukari (KASB) Securities said that they have confirmed the details with the company.

He said that since 130 mmcfd would hardly meet 54pc of the gas requirement of these four fertilizer plants on SNGPL network, the government still needs to identify some other sources of gas to meet the residual supply to this plant.

Engro Fertilizers, Dawood Hercules, Pak Arab Fertilizer and Agritech, he said that if the government intends to supply 80pc of the required gas to these companies, this will require an additional 62 mmcfd of gas, which can be met through utilisation of 60 mmcfd unused gas currently available at Mari gas field (taking away from Guddu Power station) and 22 mmcfd of gas additions at Mari.

He said the key issues which need clarification at this point is how the government intends to address the risk of gas curtailment involved in diverting the gas from SNGPL system.

Similarly, what price will be charged from the fertilizer industry ($ 2.6 per mmbtu in addition to 17 to 17.5% return charged for use of SNGPL network or will  it remain as per prices already notified for fertilizer companies and in this case the government will pay the difference.

In addition, there is an issue that which company will be responsible for financing 35 kms transmission pipeline, he added.

The analyst said that any development on this front will be positive for the fertilizer sector including Engro Fertilizer, however if accompanied with a cut in urea prices, it would be negative for Fauji Fertilizer, FFBL and Fatima. FFC will be worst affected company where every Rs 100 bag cut in urea prices will imply 13% earning per share (EPS) downside on full year basis.