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    South Asia
     Aug 3, 2011

BP assets sale stalls
By Syed Fazl-e-Haider

KARACHI - The sale by oil and gas major BP of assets in Pakistan has been stalled as the company is unable to enter in any sale agreement or change in the pattern of shareholding until it secures a "novation agreement" from stakeholders.

Novation is the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party.

BP announced last December that it had entered into an agreement to sell almost all of its exploration and production

assets in Pakistan to the Hong Kong-based United Energy Group (UEG) for US$775 million.

The government has asked BP to provide the details of the agreement with UEG, which the British company has not yet submitted, according to The News. The government is also seeking assurances from BP that the London-based parent company will be held liable if any financial obligations come to light after the transaction is closed. UEG will also bear part of the liability.

"BP has to have novation with Oil and Gas Development Co Ltd (OGDCL) and Pakistan Petroleum Ltd (PPL), as these companies have stakes in the BP's assets in Pakistan," The News reported. A novation is valid only with the consent of all parties to the original agreement. OGDCL, the country's largest oil and gas producer, is a 12% partner of BP in Pakistan.

State-run OGDCL and PPL, the two largest exploration and production companies in Pakistan, having a combined share of over 60% of the country's oil reserves, failed in their own bid to acquire BP's assets.

BP has not so far entered into a formal sale-purchase agreement with the UEG. The deal, a part of BP's ongoing divestment plan to pay for the devastating Gulf of Mexico oil disaster, was expected to be completed in the first half of 2011. Bureaucratic hurdles are helping to delay completion of the documentation.

The Pakistani government wants the two parties to route payment for the assets through the Pakistani banking system. Pakistan is set to lose around $170 million in duties, taxes and liabilities if BP receives payment for its assets outside the country, The News reported last month.

The Federal Board of Revenue (FBR) "has expressed serious concerns over transfer of money between BP and UEG, over the sale of BP assets abroad," according to The Express Tribune.

Under the Companies Ordinance of 1984, foreign companies and investors are allowed full repatriation of profits and face virtually no restrictions on movement of money in and out of the country.

In the past, BP had bought assets of a company in Pakistan, and the money transfer was made overseas, which was also a cause of serious concern for the FBR. BP had acquired its assets in Pakistan from US-based Occidental Petroleum in 2007 and that too without the novation agreement.

"UEG is not legally bound to transfer the money through Pakistan, but I have requested the UEG chairman to transfer the funds through the Pakistani banking system," The Express Tribune reported Petroleum Minister Asim Hussain as saying. "We need to have a definite plan from the new buyers. I had written to the Federal Board of Revenue about assets acquired by BP in the past. It was my concern to look into the past deals of BP."

In 2000, BP acquired the Pakistan operations of ARCO (Atlantic Richfield Co), which had purchased assets of Union Texas in 1990. The company's upstream assets and related operations, which it divested, include nine producing and exploration onshore blocks and four offshore exploration blocks in the Arabian Sea.

The purchase of BP interests is UEG's first venture in Pakistan. Under the deal signed in December, UEG agreed to pay BP a cash deposit of $100 million with the balance of the proceeds due after completion of the sale.

Last month, the chairman of China's Orient Group and the biggest shareholder of UEG, Zhong Hongwei, met Hussain in Islamabad and told the minister that UEG was investing more into the recently acquired BP projects in Pakistan so as to increase production of oil products. Billionaire Zhang is also chairman of Jinzhou Port Co, a port services company.

UEG is an investment holding company principally investing in the oil and gas business and primarily targets investments in oil and gas fields with proved or probable reserves and significant upside reserve potential. It holds interests in an oilfield project in China's Bohai Bay Basin and is seeking to expand its portfolio include opportunities in Asia Pacific, Africa, Latin America and elsewhere. The government is concerned that UEG may stop investing in Pakistan or otherwise cease production from its domestic oil assets.

The deal is relatively more important for PPL, which has 7% share of the country's oil production, as output from its mainstay Sui gas field in Balochistan has been steadily declining. Had PPL acquired 50% of BP's assets in Pakistan, its earnings per share would have gone up by 3 rupees (3.4 US cents) a share to 5 rupees per share. The shares are trading at around 208 rupees.

OGDCL and PPL were keen to buy BP's producing fields, particularly Badin gas field in Sindh province, which produces 143 million cubic feet of gas per day, and physical assets such as compressions plants.

BP announced its plans to sell its upstream assets in Pakistan in July last year, as part of a $10 billion global asset sale aimed at raising cash to pay for its Gulf of Mexico oil spill. BP has so far divested fields worth about $21 billion after the worst US oil spill forced the company to set aside $40 billion for cleanup and litigation.

Syed Fazl-e-Haider (http://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.

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