ISLAMABAD: The Ministry of Petroleum and Natural Resources is seeking transfer of some critical liabilities of foreign suppliers of the Liquefied Natural Gas (LNG) to local companies and consumers beyond the original agreements to facilitate formal signing of a $16 billion contract for 15 years.

In a summary submitted to the Economic Coordination Committee (ECC) of the Cabinet, the petroleum ministry has requested that the agreement should be allowed to be signed on the basis of take-or-pay liability on Pakistan and 20 per cent liability on LNG supplier for its failure or off-specification supplies.

Also, the ministry has reported that under the original sales and purchase agreement (SPA), one of the ventures of the Qatar Liquefied Gas Company Limited (Qatargas) — QG3 — was to pay port charges at a minimum of $320,000.

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These charges were approved by the Oil and Gas Regulatory Authority (Ogra) in its regasified-LNG (RLNG) price early last month at $8.64 per million British thermal units (mmBtu). This was later notified by Pakistan State Oil (PSO) to gas companies at $10.10 per mmBtu with inclusion of 17pc GST, even though RLNG sale to CNG and fertiliser sector attracts only 5pc GST under the ECC decisions.

However, the Qatar authorities now want LNG supplies through Qatargas 2, whose port charges would be on the higher side. The PSO and the petroleum ministry have now requested the ECC to direct the regulator to allow port charges beyond $320,000 charged to become part of RLNG.

In the summary to the ECC seen by Dawn, the ministry also reported the LNG supply contract with Qatargas would be on a government-to-government basis for 15 years while imports for December would be handled through a side letter to the SPA. The recommendations of the price negotiation committee on exact LNG import price would be presented to the ECC during the meeting to avoid its disclosure.

It said, “The price of LNG is pegged with oil prices and is priced as a direct percentage of Brent and under current prices the value of potential LNG supply under the SPA is about $16 billion”. Moreover, “the SPA is a take-or-pay contract and as such PSO will be liable to pay for all the quantities as per the contract” although some mitigating provisions were also part of the agreement.

Conversely, “the seller liabilities under the contract are capped at 20pc in case of non-delivery of LNG or where off-spec LNG is delivered and is accepted by PSO, subject to the fact that the costs are reasonable and incurred by PSO or billed by the gas companies”, the ministry reported.

In case off-spec LNG is delivered where neither PSO nor seller was aware that LNG was outside specification, then subject to the conditions the cap on liabilities is 25pc for the seller.

An official said the agreement should be fair to entail equal liabilities on both sides, in case of buyer to take-or-pay and in case of seller to supply-or-pay or with even capping on both sides.

Moreover, PSO has the port charges in excess of $320,000 (being the maximum payable by QG2 under the SPA) will be paid by PSO and will form part of price of RLNG or swapped gas as determined by Ogra and notified by PSO. “Ogra be directed to in this regard (to include this new element in price) and to approve the terms of SPA,” the petroleum ministry pleaded.

As if that was not enough, the petroleum ministry also proposed that the “PSO should be exempted from any arrangement under which they have to get the LNG re-gasified and that they shall have no responsibility for blending or dilution” even though it is required under the LNG Policy 2011.

On top of that, an executive order has been demanded to be issued to nullify existing laws by clarifying that “sale of LNG/RLNG by PSO (as LNG buyer) to the gas companies or third parties is not inconsistent with the LNG policy”.

Moreover, the ECC has also been requested to declare that since Sui Southern Gas Company (SSGCL) had already entered into an LNG Services Agreement for receiving, storage and regasification of LNG with Engro Elengy Terminal, the PSO should not be required to enter into such arrangement or agreement. “Accordingly, PSO may be allowed to sell the LNG/RLNG to the gas utility companies or third party consumers,” the ministry pleaded.

Officials said that even though the ECC had declared LNG as petroleum product under laws relating to petroleum marketing and petroleum levy to enable PSO to import LNG because it did not have an LNG related-licence, the oil company had now applied for an LNG licence.

The ministry has also sought approval of the ECC to allow PSO as buyer to execute the sale-and-purchase agreement along with side letter with Qatargas 2 as seller pursuant to government-to-government agreement and also to approve master sales and purchase agreement (MSPA) on freight on board (FOB) or delivery ex-ship (DES) with Qatargas Operating Company Limited.

Under the agreement, QG2 is expected to supply a minimum of 1.5 million tonnes of LNG annually in the first two years (2016-17), which will increase to three million tonnes for third year onward (2018-2030). In the first year, a minimum of 200 mmcfd (million cubic feet per day) of RLNG will be inducted into the gas system which will increase to 400 mmcfd in the second year.

The period of contract will end in December 2030. The agreement, however, has a price review provision which allows either party to seek a price review after 10 years and if not agreed, the SPA may be terminated.

Published in Dawn, November 17th, 2015