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Oracle Power’s Thar project could double in size, with the potential addition of a gas-to-urea capability

Oracle Power's partner China Coal has significant expertise in coal-to-liquids

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The scope of the energy development projects that are likely to be undertaken by Oracle Power PLC (LON:ORCP) in Pakistan could be about to get significantly larger, if a plan to augment the existing coal-to-power offering with a coal-to-gas and urea project comes to fruition.

Exactly when or how such a development in Oracle’s plans comes to be formalised remains to be seen, as there has been a certain amount of bureaucratic flux in Pakistan lately, as the coronavirus crisis has had a deepening impact on the economy there.

Not the least affected of the economic sectors has been power, which has suffered to an extent from a drop in revenues as economic activity has slowed, and the servicing of debt has had to be prioritised.

Some power stations are being sold off by the government, and the power ministry has to a large degree been focussed on these issues.

Nevertheless, there is still time, behind the scenes, for positive assurances about Oracle’s Thar project, and in particular the possibility of adding a gas-to-urea capability to the project.

That proposition has been drawn into focus by the unprecedented shortages of urea that have arisen in Pakistan this year, as older plants shut down and natural gas reserves have depleted.

That in turn has meant that Pakistani crop production has been affected, and imports of vital foodstuffs have risen.

Understandably, there is a considerable appetite at government level to rectify this situation, and Oracle’s Thar project may be just what’s wanted.

“This is an area which has become more vital to the government,” says Naheed Memon, Oracle’s chief executive. “We’re very excited about this opportunity.”

Given that Oracle’s investors have been waiting for some time for a Letter of Intent from the Pakistani government to allow it to proceed with the coal-to-power project, such aspirations may seem academic.

But that’s somewhat to miss the point. Because what’s really at stake here isn’t whether or not Oracle gets its letter from the government, but what kind of project it ends up being licenced to build.

“In principle there is no issue,” says Memon, in regard to the Letter of Intent. “It’s a government project. But timelines need to be confirmed.”

To put it another way, the development of Thar has become so critically important to the ongoing development of Pakistan’s economy that it’s hard to envisage any scenario under which it won’t be give the go-ahead. The question is when, not if.

But given that some time has elapsed, there has been opportunity to re-think the scope and scale of the entire proposition.

Adding urea on as an end product would change the nature of Thar itself, would boost its size from a US$3bn to a US$6bn project, according to Memon, and would likely deliver greater commercial profitability.

That last point isn’t yet set in stone, as the hard numbers haven’t been done, and the likely rates of return that would be granted by the government aren’t at this point known. But given that it would be the first project of its kind in-country, the expectation has to be that the terms granted would be favourable.

Such, anyway, is the experience of other companies that have trailblazed in the power sector, and been allowed higher returns initially and then, when proof of concept has been securely established, lower returns for newer projects.

In addition to the possibility of a favourable regulatory and fiscal regime, there’s also the straightforward fact that Oracle’s partner at Thar, China Coal, has expertise in turning coal into gas and then urea.

And lest anybody doubt the viability of having China Coal on the scene, remember that China and Pakistan have firm economic ties, and certain corresponding strategic interests.

“The government want China Coal,” says Memon. “They really value China Coal. The government would ensure China Coal is given enough incentive to go ahead with such a project if it reached that stage.”

In fact, the one real Achilles heel of the Thar project has been that it is so big. To make it work, it requires the attentions of the top echelons of the Pakistani government, and with 2020 having been a crisis year like no other, that attention hasn’t always been available.

“Because our project is so huge,” says Memon, “a project like ours can’t get derailed. But projects like ours can and do get delayed because the top people have to go troubleshooting elsewhere. But we are determined to get this across the line. I’m not twiddling my thumbs, and we appreciate every penny that comes to us. I take this very seriously.”

The opportunity is certainly there. In spite of the headwinds in the power sector as a whole in Pakistan, the country is still crying out for more power. And if Oracle can bring together a multi-billion dollar project with major Chinese backing, and chalk that up as a success, then who knows what the future could hold?

More infrastructure projects, perhaps?

“I would like Oracle to become a project developer of a notable size,” says Memon. “If we get success in Pakistan we would look at another major project.”

This is a woman who is looking a long way further ahead than a Letter of Intent.

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Oracle Power Shareholder Q&A

Oracle Power's (LON:ORCP) CEO Naheed Memon takes questions from the company's shareholders delivered by Proactive London's Katie Pilbeam.  Memon addresses queries on the Thar Block VI Project in terms of key decision makers and government agencies in Pakistan.  As well as the...

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