Winter is coming, but the Starks seem hardly prepared for it.

Gas shortages are going to hit the country soon as demand from the domestic sector rises amidst falling temperatures. Subsidised rates for household consumers will further drain the coffers in spite of growing gas imports.

“Serious gas shortages are expected this winter,” said Anser Khan, CEO of Energas Ltd, which is building a private LNG terminal of approximately one billion cubic feet per day (bcfd) at Port Qasim.

Natural gas contributes about 48 per cent to the country’s primary energy supply mix. With a share of about 14pc, the residential sector is the second-largest contributor to overall gas demand of over seven bcfd.

“The government should encourage multiple private players to set up new LNG terminals to promote competition. This will rationalise costs, increase storage and reduce shortages,” he said.

With the depletion in gas reserves, the energy sector regulator expects the gap between demand and local supplies is going to be 3.72 bcfd in the current fiscal year.

The deficit persists despite the establishment of two LNG re-gasification terminals in recent years.

LNG import infrastructure

Engro Elengy set up the first terminal of 690 million cubic feet per day (mmcfd) at Port Qasim that the government uses to import gas through Pakistan State Oil (PSO).

The second terminal, built by PGP Consortium Ltd, is also located at Port Qasim. The government uses Pakistan LNG Ltd to import gas through the 750 mmcfd terminal.

The first and second terminal operators collect a levelised tariff of 47 cents and 42 cents per million British thermal units (mmBtu), respectively.

New investors insist new fees have increased the cost of setting up a terminal by up to 25pc

Both terminals operate under a take-or-pay contract, meaning the government must either take delivery of imported gas or pay the operators in full. The government has contracted the two terminals for $100m and $90m per annum for 15 years.

In addition to Energas, three other developers have received licences to build LNG terminals. But the government has made it clear that all future terminals will be built without state guarantees. This means the terminal developer will not only arrange LNG imports but also find its buyers by itself.

This arrangement is in contrast with the prevailing ‘unbundled’ model in which the developer, importer and buyer of LNG are all different parties.

New fees add to cost

Although the entry of the private sector has paved the way for cost rationalisation in the long term, new investors insist the government has imposed new fees that effectively raise the cost of setting up a terminal by up to 25pc.

This will make private players uncompetitive and substantially increase the gas import bill besides incurring demurrages owing to a lack of storage, they say.

A new terminal costs in the vicinity of $150m, excluding the leasing cost of a floating storage re-gasification unit (FSRU), which is up to $100,000 a day. The government has demanded that the new players pay a concession fee of $10m. The first terminal didn’t pay this fee while the amount was around $1m for the second terminal.

Similarly, the new terminals are also required to furnish throughput and performance guarantees, which will increase their annual costs by many millions of dollars.

“Our levelised tariff would be less than 40 cents per mmBtu had the government not imposed additional fees,” Mr Khan said, noting that the tariffs for the new terminals were expected to be between 38 and 70 cents per unit.

Captive demand

Energas is a buyers’ consortium, which means that its stakeholders are building the terminal primarily to meet their captive gas requirements.

Yunus Brothers Group, Sapphire Group, Halmore and Energas — which are ‘almost equal’ shareholders — collectively own 2,000 megawatts of power generation capacity and contribute 15pc to the country’s total exports. The combined gas requirement of the shareholders’ power plants and textile units is 300 mmcfd.

Contrary to some media reports, US energy behemoth ExxonMobil is not an equity partner in this project. “Energas is a 100pc Pakistani buyers’ consortium and ExxonMobil is a strategic partner so far. It is providing us with technical, commercial and regulatory support,” he said.

ExxonMobil recently signed an agreement for LNG supplies with Universal Gas Distribution Company, which represents CNG station owners and operators. Demand from the CNG sector is expected to be 476 mmcfd in 2019-20, according to the energy regulator.

ExxonMobil is mainly focusing on the downstream CNG sector, which can potentially absorb between 200-300 mmcfd over and above the demand that Energas has contracted.

This will leave Energas with around 400 mmcfd of excess capacity. Mr Khan wants to sell the remaining gas to a number of smaller parties that require one to two mmcfd.

“A wholesale model will allow multiple aggregators to buy from us and sell it to multiple buyers. It means we will become market-makers.”

Published in Dawn, The Business and Finance Weekly, November 12th, 2019

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