LNG muddle

Published May 5, 2015
The writer is a business strategist and entrepreneur.
The writer is a business strategist and entrepreneur.

THE muddle that has been created with the Liquefied Natural Gas (LNG) project reflects both a lack of clear thinking as also clumsy planning and implementation. While much fuss has been made in the media about logistical difficulties, most of these could be put down to ‘teething problems’ allowing for a very generous definition of the term.

Essentially, the muddle is the cause of bad economics, not logistical difficulties.

The economics was very simple to work out, perhaps easier even than the logistics. Before the government embarked on the project it ought to have worked out who the LNG was for and at what price was it going to be offered. It should have looked at the cost of the present fuel to the user and how much saving LNG would bring.

Fuel-switching decisions are economic decisions. The question really was who would be willing to pay $14 per MMBTU for re-gasified LNG? Once we had identified potential takers the question of putting in a supply chain to meet demand was merely a technical one. Let’s look at the major users of gas one by one.

The fertiliser sector uses it as feedstock and is presently being sold gas at the rate of $1-2 per MMBTU (Engro for even less). The domestic consumers receive it for between $1-3 depending on the slab the user falls into.

For decades, gas has been hugely underpriced in Pakistan and that has led to excessive and wasteful demand and it has served as a disincentive to new discovery because the financial reward does not justify the cost of prospecting.

The question of LNG apart, these prices need to be urgently reviewed as they are creating market distortions and leading to poor allocation of resources.


The government ought to have worked out who the LNG was for.


Then there is the CNG sector that gets gas at $6.5 per MMBTU. When oil prices were hovering above $100 per barrel (and on top of that petrol is heavily taxed) CNG pump operators could sell it at 60 or 70pc parity to petrol and still make a hefty profit.

The sharp decline in oil prices has changed that and now only a small rate differential remains between petrol and CNG price. This is despite much heavier taxes on petrol.

If the tax effects were to be levelled there is no question of the CNG sector being able to take up at the present $6.5 per MMBTU leave alone taking up LNG. The principle of neutrality in taxation states that the tax system should be neutral so choice-of-fuel decisions are made on economic merit and not for tax reasons. The Federal Board of Revenue should begin citing this principle when it attends inter-ministerial meetings on LNG pricing.

That only leaves the power sector as a potential taker of Liquefied Natural Gas. But before I go into that, there is another small muddle that needs to be cleared. There is talk of a ‘basket price’ for gas in some quarters — which would be the weighted average cost from all sources, imported and foreign.

Generally, under good accounting practices the fair value of a commodity is the cost of replacing every sold unit with a new unit. In our context, that replacement is done in two ways; either import or make new indigenous discoveries.

The import price is $14 per MMBTU landed at the customer’s doorstep. Meanwhile, the government has offered a price of $6 for new gas discovery. When was the last time that negotiations were held with foreign companies to ask them to look for more gas? The two local companies OGDC and PPL are already owed billions of rupees from circular debt that originates in the power sector. With the local companies in that situation, how can foreign companies be motivated to undertake new discovery?

Other than new discovery there is another faster and shorter term solution. When a gas field begins to deplete, enhanced recovery processes — such as compressors — are used to pull out residual and tight gas. This involves capital investment and to offset that governments typically adjust wellhead prices upwards. There are a few gas fields where this can be done. But that would need some serious work in the petroleum ministry.

So coming back to the last category — the power sector — all the dozen or so Gencos’s (which date back to before the 1994 IPP policy) are capable of being fired on natural gas. So are half a dozen of the more recent IPP’s.

Pakistan should be able realise marginal savings on fuelling power generation if it can bring costs in the LNG supply chain down and neutrality in taxation should be applied by exempting GST on LNG for the power sector since furnace oil is already exempt.

The writer is a business strategist and entrepreneur.

moazzamhusain@gmail.com

Published in Dawn, May 5th, 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play

Opinion

Editorial

‘Source of terror’
Updated 29 Mar, 2024

‘Source of terror’

It is clear that going after militant groups inside Afghanistan unilaterally presents its own set of difficulties.
Chipping in
29 Mar, 2024

Chipping in

FEDERAL infrastructure development schemes are located in the provinces. Most such projects — for instance,...
Toxic emitters
29 Mar, 2024

Toxic emitters

IT is concerning to note that dozens of industries have been violating environmental laws in and around Islamabad....
Judiciary’s SOS
Updated 28 Mar, 2024

Judiciary’s SOS

The ball is now in CJP Isa’s court, and he will feel pressure to take action.
Data protection
28 Mar, 2024

Data protection

WHAT do we want? Data protection laws. When do we want them? Immediately. Without delay, if we are to prevent ...
Selling humans
28 Mar, 2024

Selling humans

HUMAN traders feed off economic distress; they peddle promises of a better life to the impoverished who, mired in...