Law ministry

Sale of Eni: the Ministry of Justice finds the commitment of HUBCO “inadequate” and questions the intention of the oil division

ISLAMABAD: The Ministry of Justice has described as insufficient a commitment provided by Hub Power Holding Limited (HUBCO) in connection with the acquisition of Eni Pakistan, a subsidiary of multinational oil and gas giant Eni, operating several gas fields in the country .

The Department of Justice’s opinion follows the Department of Energy’s (Petroleum Division) request for a legal opinion on the adequacy of the undertaking, which was provided by HUBCO to Prime International Oil & Gas Company Limited (PIOGCL) in connection with PIOGCL’s bid to acquire Eni Pakistan Limited. In addition, the Ministry of Justice has also raised questions about the need for such company in the first place.

The commitment was claimed by the Direction Générale des Concessions Pétrolières (DGPC), a department of the Ministry of Energy Petroleum Division which also fanointing as regulator for all upstream exploration and production activities in Pakistan.

To establish some context on the matter, the DGPC in a letter dated June 30 had requested the opinion of the Ministry of Law and Justice on “the adequacy of the commitment (by HUBCO) to cover the obligations of PIOGCL”. According to the DGPC, the reason for requesting an opinion on the matter was to protect the interests of the government.

The note from the Ministry of Law and Justice of July 13, 2022 in response to the DGPC stated that “the commitment provided by HUBCO is not sufficient to cover the future exploitation of oil exploration licenses, development and production leases, etc., decommissioning costs to incur upon expiration of licenses and leases”.

The Department of Justice gave two reasons. First, he stated that “the current wording of the commitment does not provide for a commitment”. Second, the covenant is in the name of the buyer in this case PIOGCL, so the government would not have the ability to enforce said covenant.

The undertaking provided by HUBCO stated that it would provide “all reasonable support” to PIOGCL.

When Profit contacted HUBCO, he stated that “HPHL is required to disclose the nature, period and amount of its investment under the Companies Act and provided that such engagement may fall within the disclosure requirements as it is in relation to investments made in associates. Being so open that it may jeopardize the compliance requirements of the Companies Act 2017.” The company further added that “if the undertaking was specific to the requirements of the agreements oil concession, HPHL might be willing to provide it”.

The Department of Justice, on the other hand, is of the view that since HUBCO is not required to make an investment in the PIOGCL, therefore, the justification given by HUBCO with respect to compliance with the Companies Act 2017 is not relevant for corporate purposes. Therefore, the wording of the undertaking is not sufficient to protect the government’s interests.

Similarly, the Department of Justice also advised the Petroleum Division that the covenant should be in favor of the government, not the buyer (PIOGCL) and that the government should keep the original covenant on file.

This is because since HUBCO’s commitment is to PIOGCL, the government will not be able to enforce the terms of the commitment if the financial and technical need arises. This basically means that the government requires an overall commitment that would provide sufficient financial cover for its interests.

A senior HUBCO official in conversation with Profit said they have assured CPB that HUBCO will meet its future financial obligations in accordance with applicable rules and regulations.

The official further pointed out that the DGPC has put forward this requirement without there being such a procedure in the Petroleum Rules and Regulations. He said the main criterion for a buyer of oil exploration and production activities is to be financially and technically sound, which HUBCO-EBO Group fully satisfies in the said transaction.

It should be noted that in March last year, Eni Pakistan Limited entered into an agreement to sell its interests in Pakistan to PIOGCL, a newly established company formed by former local employees of Eni and HUBCO, Pakistan’s largest independent power producer. In order to effect the change of subject of effective control of the shares of Eni Pakistan Limited to PIOGCL, Eni had requested the government’s consent under the applicable petroleum rules.

Following this request, the DGPC, in a letter sent to Eni on April 1, 2022, requested a commitment from HUBCO. The commitment was to state that in the event that PIOGCL fails to meet the $16.4 million acquisition price and manage Eni’s block operations, HUBCO would unconditionally provide all such financial support, including the part of the group of Eni employees.

HUBCO had submitted the engagement with the oil division but lacked the required unconditional financial support from PIOGCL. On this, the oil division sought the opinion of the Securities and Exchange Commission of Pakistan, the Ministry of Finance and the Ministry of Law and Justice.

Sources said Profit, on condition of anonymity, that serious questions have been raised over the sale of Eni Pakistan’s assets to PIOGCL for just $16.4 million while the former retains oil and gas reserves worth approximately $407 million. Sources said that the technical and legal departments of the oil division have also raised several issues regarding the non-compliance of the bank balance of PKR 5.5 billion by the PIOGCL, which will be required to shut down Eni Pakistan after complete exhaustion. oil and gas reserves.

Sources further claimed that an audit of PIOGCL’s accounts made it clear that it did not have the necessary funds to manage the operations of Eni Pakistan’s oil and gas reserves. Pakistan Petroleum Limited (PPL) has also requested not to release Eni Pakistan’s bank guarantee for the offshore Indus Block C.

It was further added by sources that it is essential to determine the real value of Eni Pakistan’s assets using a foreign company, as determining the real value of its assets can benefit the country’s treasury from a worth billions.

Conversely, HUBCO officials claim that the underlying assets and liabilities of Eni Pakistan’s business, as well as the transfer of control, would only be recorded on PIOGCL’s books when the transaction is completed and control will be transferred. Currently, PIOGCL’s books reflect the amount contributed by its shareholders to meet its day-to-day expenses and other costs associated with the acquisition of assets and the transfer of control. “The true image of PIOGCL can only be reflected in its financial statements after the completion of the acquisition transaction and the transfer of control in its favor”, explains an official.

The company also expressed concern about how the $407 million estimate was made. According to HUBCO “the valuation of reserves cannot be considered in isolation, because the expenses for drilling and exploitation are also very important. Comparing the unconfirmed value of the reserves with the transaction value does not make sense. »

That being said, it is absolutely essential to understand that the Department of Law and Justice does not assess or undertake to comment on the financial and technical capacity of HUBCO. Therefore, the department’s response is limited to the legal aspect.

It is relevant to note that the legal division also questioned the need for such a commitment, as the DGPC did not provide any details (priority, rules or regulations) justifying such a requirement. She also wondered about the aspect of the government’s interest that the DGPC says it wants to protect. Traditionally, a commitment is provided by the buyer, in this case PIOGCL, and not by the sponsoring company, HUBCO, in such transactions.