ISLAMABAD: With the loading of the first shipment of liquefied natural gas (LNG) beginning on Feb 28, the country’s two gas utilities are under extreme pressure to enter into a series of agreements. The companies have objected to the agreements in writing because of what they say their long-term adverse financial implications.

At the heart of the problem is the inability of the ministries of water and power and petroleum and natural resou­rces to finalise agreements with independent power producers (IPPs) on the sale/purchase and supply of the commodity and for utilisation of the allocated LNG quantities even though decisions had been taken in this regard by the Economic Coordination Committee (ECC) back in the last quarter of 2012.

Take a look: LNG imports in hot spot again

As a consequence, the gas utilities, particularly the Sui Northern Gas Pipelines Ltd (SNGPL), are being made to take all sorts of risks on behalf of the suppliers, purchasers, facilitators and consumers and that too just before delivery of the first LNG consignment, expected in early March, according to an official of the petroleum ministry.

The SNGPL is already in the red and is required under court orders to return around Rs15 billion to retail consumers for overcharging them in the past.

As things stand now, the imported LNG is more likely to be released into the utilities’ distribution networks, which have system losses of 10-15 per cent, to take the fuel to the CNG (compressed natural gas) stations. This is not in line with the ECC decisions.

The utilities are already struggling to absorb losses on account of local gas priced at $4 or less per MMBTU (Million British Thermal Units) and now they will have to take care of imported LNG having end price of $9-10 per MMBTU.

The SNGPL has been warning about the “impending crisis”. “Any further delay in finalisation of back-to-back agreements with the IPPs may eventually result in supply of LNG to the retail sector, thus leading to sharp increase in gas prices for the public. The ECC of the cabinet had, however, envisioned that such LNG sale will only be made to bulk consumers while protecting the domestic sector,” SNGPL Managing Director Arif Hameed wrote to the authorities about a month ago. In case of non-utilisation of LNG terminal due to deficiencies in the supply chain, the government or its nominated companies might end up paying $272,000 per day from April 1 onwards, he added.

His fears appear to be materialising as agreements with the IPPs, which are supposed to be the main users of imported LNG, have yet to be finalised because they are not ready to assume any additional liability beyond their existing agreements unless they are protected under fresh power purchase agreements to be approved by the lenders and shareholders and passed on to consumers after approval by the National Power Regulatory Authority.

Sources said the three major government-owned companies in the supply chain — the Pakistan State Oil (PSO), Sui Southern Gas Company (SSGCL) and the SNGPL — had not been given a clear commitment by the finance ministry regarding full payments for the imported LNG even though it was indicating diversion of power sector subsidies for advance payments against LNG.

The PSO is responsible for the import of LNG, even though this is not its core business, and for injecting the fuel into the SSGCL network through the Engro’s re-gasification terminal at Port Qasim. The SSGCL is then required to transfer it to the SNGPL at the Zamzama-Sawan gas establishment.

The SSGCL has absolved itself of any financial implication for the short term by informing the petroleum ministry that it does not need additional gas at least for the first year of import.

The SSGCL, sources in the petroleum ministry said, would share one-third of the imported LNG from March next year but is not yet ready to enter into any long-term agreement.

As a result, a recent meeting presided over by Petroleum Minister Shahid Khaqan Abbasi directed the SNGPL to be responsible for the entire 325MMCFD (million cubic feet per day) of contracted LNG from next month and 400MMCFD from October in the first year.

The petroleum ministry told the stakeholders recently that during the period in which the IPPs would not be able to utilise the new fuel, the surplus LNG should be diverted to CNG stations which would act as a buffer to absorb it. The first shipment for commissioning of the Floating Storage and Re-gasification Terminal would be used by the CNG sector in Punjab because of the absence of agreements with the IPPs.

For this to happen, however, the Oil and Gas Regulatory Authority (Ogra) has to approve an LNG price notification. Before the notification, the ECC has to amend a decision taken by it in 2012 to allow LNG consumption in the CNG sector.

The previous decision allocated LNG to bulk consumers, particularly the IPPs, and did not involve CNG stations which are not on bulk supply lines but on distribution lines.

The gas companies are required to work out tariff and seek policy guidelines for change in the Third Party Access Rules after incorporating system losses. These require approval by another regulator, the Securities and Exchange Commission, for additional liabilities on the PSO, SSGCL and SNGPL, which are listed companies.

To top it all, the tariff increases approved by Ogra recently have been blocked by the prime minister. As if that is not enough, Ogra is currently operating on an “acting charge basis” in the absence of full-time members and chairman. Moreover, the PSO officials finalising LNG imports and pricing for 20 years are working on a contract of three months.

Published in Dawn February 23rd , 2015

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