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Our LNG flaws

Updated March 25, 2019

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Pakistan LNG Terminals Ltd proposed that the private sector be allowed to import LNG to reduce idle capacity.
Pakistan LNG Terminals Ltd proposed that the private sector be allowed to import LNG to reduce idle capacity.

Last week, rates of liquefied natural gas (LNG) in the fixed spot market for deliveries in May dropped to $4.7 per million British thermal units (mmBtu). This coincided with Pakistan’s public-sector entities finalising the bidding for six cargos with deliveries due between May 1 and June 30.

The lowest evaluated bids ranged between 9.278 per cent and 9.938pc of the Brent price. At the Brent price of around $69 a barrel, the effective bids work out to be between $6.4 and $6.85 per mmBtu, way above spot rates.

That means Pakistan will be paying roughly $4m extra on every cargo. A raw extrapolation — based on more than 70 cargoes under normal circumstances, even though terms and conditions vary for different import arrangements currently in place — would take the annual loss to around $300m. The cost then trickles down to the consumers through electricity rates, fertiliser price and cost of production.

Take a look: LNG demand could triple over next 3-5 years: official

That apparently shows a flaw in Pakistan’s import mechanism that is based on the Brent price besides the inherent inflexibility in the public sector and the procurement rules and procedures. Thanks to oil politics involving big players like Saudi Arabia, Russia and the United States, crude prices have been on the rise of late.

Pakistan LNG Terminals Ltd proposed that the private sector be allowed to import LNG to reduce idle capacity charge by about $12m. This will ‘pave the way for the optimal utilisation at LNG terminals while opening avenues for private participants in the RLNG value chain, which will result in competitive prices and lowered financial risk for the government’

For long-term secured supplies, a Brent-based arrangement might be a compulsion. But it has to change for the short term to improve the overall basket. This is important because some long-term imports are based on 13.37pc and others 12pc or so of the Brent price. Import quantities are rising with each passing day.

Arguably, Pakistan’s entire public-sector is operating inefficiently. Besides, gas companies transporting these expensive imports suffer a 10-11pc system loss that is also built into the consumer price. The gas companies recuperate their high distribution system losses through this 10-11pc extra charge to bulk consumers that are mostly on the transmission system having less than a 1pc loss. This is despite the fact that they claim their profitability on the basis of their return on assets.

Pakistan is reported to have imported about 7-8m tonnes of LNG last year. Imports are expected to be 15-30m tonnes over the next four to five years, according to official estimates. This stems mainly from the fact that Pakistan is adding at least 300,000 small gas consumers every year who consume most of the local production at cheap rates and elbowing out productive sectors to imports.

According to the Oil and Gas Regulatory Authority (Ogra), the country’s gas shortage is estimated to touch four billion cubic feet per day (bcfd) — almost equal to current total supplies — by the next year. It will go beyond 6.6bcfd by 2030. “The shortfall in gas is expected to reach 3.999bcfd by 2019-20 and the gap will reach 6.611bcfd without imported gas by 2029-30,” Ogra said.

It noted that a significant rise in demand and consumption of gas by residential and domestic consumers is owing to the price differential vis-à-vis other competing fuels — liquefied petroleum gas (LPG), firewood and coal.

Over the past five years, more than 300,000 consumers were added to the gas network annually by gas companies and the growth in power, commercial, residential and fertiliser sectors resulted in a shortage, Ogra said. “Demand for natural gas will further increase in coming years,” it added.

For the next fiscal year, the government expects about 1.2bcfd of additional demand. It is trying to secure a third LNG terminal before the 2020 winter to avoid a repeat of the acute gas shortage that would force the closure of industries, fertiliser plants and power units until a couple of years ago. However, it remains unclear how the government will go about it.

Despite having developed a legal and regulatory mechanism, the government has not yet practically permitted private entities to import LNG at their own risk nor has it allowed them to set up LNG terminals. This is despite the fact that five to six major investors have been lobbying in this regard. Some market players believe such a move can reduce LNG prices and re-gasification charges through competition among private parties.

The state-run Pakistan LNG Terminals Ltd (PLTL) has already reported that LNG consumers were affected by a cost loading of $45m (Rs6.2bn) in 2018 only because of the sub-optimal utilisation of the existing two terminals. It forecasts that 53pc capacity of the second LNG terminal will remain idle in 2019 based on the annual delivery plan agreed upon by public-sector entities, with an additional cost of $40m. In 2018, the first operating year of Pakistan Gasport Terminal, the government had to pay an average tariff at the rate of $0.784 per mmBtu instead of $0.417 per mmBtu, or 72pc costlier because of 47pc idle capacity.

PLTL proposed that the private sector be allowed to reduce the idle capacity charge by about $12m and shift a substantial part of the government’s LNG import bill and guarantees for letters of credit. This will “pave the way for the optimal utilisation of LNG terminals while opening avenues for private participants in the RLNG value chain, which will result in competitive RLNG prices and lowered financial risk for the government,” it said.

For that to materialise in a cost-effective contribution to the economy, Pakistan has to open up the entire LNG supply chain to the private sector — from import to transportation and down to retail sale — with simultaneous pricing reforms for domestic gas.

Published in Dawn, The Business and Finance Weekly, March 25th, 2019