THE Competition Commission is preparing to recommend to the government that it should renegotiate the long-term supply deals for LNG signed by the previous government. The recommendation is in a draft report that has been circulated but not yet finalised. The report points out rising oil prices in global markets through 2018 and invokes the example of Indian companies that have renegotiated prices of their long-term supply contracts this year. It also presents an alternative pricing model that it argues is superior to the one being used in current contracts, and suggests that there ought to be a price ceiling in the agreement to protect the buyer in the event of large or abnormal increases in the price of oil during the contract period. The report also argues for greater flexibility in price, pointing out that spot markets are playing a greater role in global LNG supply, including in some long-term supply deals where a hybrid pricing regime is used, relying on spot prices for some of the cargo to be shipped in a contract year, and on an indexed price for other cargo.
The report deserves close study because it goes into considerable depth, and Pakistan’s policy community needs to educate itself further on LNG pricing as the role of imported gas continues to grow in the economy. But there are some dangers to be borne in mind when considering the recommendations. First, the example of Indian companies renegotiating their prices may not be applicable to Pakistan, because India is one of the world’s largest LNG importers and enjoys tremendous clout in the market that Pakistan does not have. Second, those renegotiations traded price reductions with volume enhancements, so unless the government can get more parties within the country to agree to LNG as their main source of gas, it will not be able to replicate the experience of Indian LNG companies. Third, trying to renegotiate commitments made with international parties can land the country in another messy round of international arbitration. The reputational risk of attempting such a renegotiation needs to be carefully weighed against the perceived benefits, as well as the likelihood of success, before any decision is made. The first two long-term LNG supply agreements that Pakistan signed were its first ever, and tinkering with them should only be done as a last resort.
Published in Dawn, November 17th, 2018