The government took some policy decisions last month to facilitate the commercial viability of imported LNG — due in a few days — initially for the CNG sector and subsequently for the power sector.

The decisions included a major policy shift to impose a 5pc tax on the import of furnace oil so that the imported LNG remains cheaper. It has been a longstanding stance of successive governments to exempt furnace oil from tax to facilitate cheaper power generation; all other petroleum products are subject to petroleum levy and GST.

Secondly, the treasury benches used their majority to approve through a National Assembly Standing Committee the Gas Infrastructure Development Cess Ordinance 2014, which was earlier struck down by the superior judiciary on technical grounds. This was deemed necessary to collect the targeted Rs145bn in the budget 2014-15.

Read: Disarray in LNG imports

The government said the GIDC would finance a number of projects, like the Iran-Pakistan pipeline, Tapi pipeline, a number of LNG import projects and the LPG supply enhancement project.

The IP project, involving 750MMCFD gas and a 781km pipeline to Nawabshah, is estimated to cost $1.8-2bn. The Tapi project involves 1.325BCFD gas and a 1,680km pipeline to Multan and is estimated to cost $7.8bn. In addition, LNG projects in both public and private sector and LPG supply enhancement through increased local production and imports are also in the pipeline.

The government believes the infrastructure required for the above projects could not be developed with the GIDC and the nation will have to depend on the import of liquid fuels, which are costlier when compared to gas.

Also read: Reservations over LNG deal with Qatar

Thirdly, the government is reported to have made up its mind to initially go for spot purchases from Qatar given the lower LNG market, and then subsequently enter medium- to long-term contracts. Other sources, like Malaysia, Singapore and others, would be explored in the meantime. Once a couple of ships arrive and the gas is consumed, the government believed things would fall in place.

Existing IPPs have yet to agree on LNG-based power production. For new plants, even after financial close, will take a minimum of 24 months to reach trial production

However, technical and procedural difficulties still remain as far as LNG consumption is concerned. After having lost almost a decade to controversies and scandals, the government decided afresh in September 2012 to dedicate the first round of imports for IPPs and other bulk industrial consumers. However, a delay in finalising agreements with IPPs has forced the government to divert imported LNG to the CNG sector.

Meanwhile, Qatar wanted Pakistan to set up an unloading and re-gasification terminal first to show its seriousness. The tender for building the LNG terminal was floated by SSGC and Engro Elengy won it with the guarantee that after completion of the terminal, SSGC will pay Engro $272,000 per day if LNG is not imported by April 1. Based on the tolling fee, Engro set up the floating storage and re-gasification units at Port Qasim.

Pending issues on ‘mechanical completion’ with Port Qasim authorities, Engro has successfully completed the terminal within the committed deadline. This was reportedly facilitated by about 30pc returns in dollar terms provided by the government. Any project with even 18pc return is considered an excellent investment, so the recovery of the investment in 18 months, based on the guarantees, is even better.

Engro invested $150m in the project. In addition, the cost of the re-gasification ship is also around $150m According to one estimate, the rate agreed by SSGC will result in earnings of $100m per annum.

The rate at which LNG will be purchased from Qatar is officially not known yet. Even if it is formula-based, i.e. 14.5pc of Brent crude, it will be around $ 9-9.5/MMBTU. Tolling charges of about $3/MMBTU, terminal charges of 0.66 cents per unit, $1-2 in system losses and 5pc net profits being claimed by PSO, SSGCL and SNGPL will be on top of that.

The existing IPPs have yet to agree on LNG-based power production. For new plants, even after financial close, will take a minimum of 24 months to reach trial production. Therefore, the gap between the demand for electricity and the supply through LNG would not be bridged and the people will endure longer duration of load-shedding this season.

For the second LNG terminal, the government is asking for a similar technology in which a ship with installed equipment is used to convert LNG into gas (re-gasification unit).

The cost of such a ship is over $150m. The cost of re-gasification can be reduced by half by installing the equipment on land. Called

foster wheeler technology, it is being used successfully in India. Terminal charges can also be halved when compared with Engro’s 0.66 cents per MMBTU.

Published in Dawn, Economic & Business, March 2nd , 2015

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