LNG imports

16 Feb 2014

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THE Latin phrase ‘caveat emptor’, or ‘let the buyer beware’, is commonly used to place the burden of a good before purchase on the buyer. In this context, it serves as a cautionary reminder that a buyer must examine the conditions, the contract and, of course, the good itself before signing on to a long-term deal, such as a long-term LNG contract that normally spans two decades.

Liquefied Natural Gas, or LNG, has been on the radar for all in the natural gas sector for a while now. Asia accounts for more than 68pc of the total LNG market at present, and as demand for natural gas continues to soar in this part of the world, LNG may play an even larger role in the future. LNG contracts are often long term because they need a significant investment of capital, not limited to extraction, transportation, storage, re-gasification, and other components of the supply chain. While spot and short-term LNG trade provide greater flexibility in terms of different market prices and options, they do not grant the security that a long-term contract provides.

This country seeks to import two billion cubic feet of gas per day from Qatar on a long-term contract, and it is said that both countries will be in talks on pricing and volume of gas later in February in Doha. Earlier this month, the Sui Southern Gas Company approved plans for the construction of a new LNG terminal at Port Qasim. On the surface, it seems like things are moving forward. However, one must look closer and address some underlying problems, on pricing, and its impact, something that seems to be missing in our power corridors.

The price for imported LNG from Qatar is indexed to Brent Crude Oil, and oil-indexed natural gas prices will increase with rising oil prices. The price was negotiated to $17.437 per million British thermal unit (mmBTu), but that too will be too high considering trends in the global gas market. Amidst a ‘shale gas revolution’ in North America, global gas spot prices in the Henry Hub, a major gas distribution centre, are going down as natural gas supply increases.

The trend in the global gas market is towards a divorce of oil and gas prices, as shown in recent cases filed in the International Court of Arbitration. In an uncertain future, as oil prices soar, it will be unwise to agree to a long-term contract indexed to Brent Crude Oil prices at a high parity. In fact, India faced the same dilemma with an LNG deal with Qatar in 2012, and favored LNG produced from shale gas in the US, which was linked to the Henry Hub with a premium.

Under a long-term ‘take or pay’ agreement with Doha , Pakistan, must pay for the agreed quantity of LNG, regardless. The caveat is that the base price and price index, once inked in the contract are subject to little or no change. What is more problematic is the projected additional costs of shipping, receiving, storage, re-gasification, which would make the cost of LNG around $19.50/mmbtu, an exorbitant price for Pakistani consumers. Moreover, pipeline tariffs for SNGPL, SSGC and other local levies could make the cost about five times the price of domestic gas, and therefore the economic impact of LNG cost must be analysed.

Pakistan cannot bury its head in the Arabian sand and deny the changes in the global gas market. Putting all its eggs in the Qatar LNG basket is neither astute nor rational. When it comes to international price negotiations, we have a terrible record and a lack of transparency, a trend that must be changed.

Firstly, if Pakistan is unswerving on LNG, it must seriously renegotiate the price. India has already set the benchmark in LNG pricing in the region when it struck a deal with the US at $10.50 in July 2013. This should be a transparent process, under democratic principles.

Secondly, it is imperative for Pakistan to include a price review clause, especially when international gas prices are nose-diving at the biggest natural gas hub. Moreover, the Ministry of Petroleum and Natural Resources will need to assess the economic impact, when the domestic gas price is only $3-5 per mmbtu.

Thirdly, instead of just focusing on its LNG and pipeline contracts, Pakistan must foster a self-sustainable natural gas sector by unlocking shale gas, to generate employment, and heal an ailing domestic natural gas sector.

In conclusion, natural gas policy must focus on the principles of energy security — creating reliable energy supply at an affordable cost. Will Pakistan have the wisdom to move towards a regional gas pricing hub for Asia?

The writer is an energy analyst at the Sustainable Development Policy Institute.