LNG supply chain

Published March 9, 2020

AS the power sector’s demand for LNG has dropped, the supply chain running from the terminal to the gas distribution companies is facing a near-crisis situation. The plan under which LNG imports were activated and two new terminals made operational relied largely on demand from power generation to keep the supplies of imported gas flowing. But these days, power generation has reduced and many plants are running below their capacity, meaning demand for gas from the power sector has dropped, which has sent a cascading series of consequences up the LNG supply chain. The gas distribution company — SNGPL — responsible for supplies to the power sector in the north, where the two large LNG plants are located, now finds itself holding surplus supplies of gas with no customers to offload it onto, since imported gas is far more expensive than that obtained from domestic fields. With surplus supplies in its system, SNGPL has reduced offtake from its supplier PSO, which has led the latter to slow down the rate at which the vessels berthed at the port discharge their cargo of LNG. And with the decelerating offtake come costs such as demurrage charges, as well as risks, such as suppliers potentially activating their ‘take or pay’ clauses.

The latter is probably not likely to happen anytime soon. LNG suppliers in the global market are lucky if they can find a good buyer these days and are not likely to try strong-arm tactics on a customer like Pakistan. But demurrage charges and others incurred at the port are real, and present a clear case of concern. What is of greater worry, however, are the mounting bills that come with this. Close to Rs100bn are now owed to LNG suppliers, and Rs450bn are receivable, as per reported figures, by the two gas distribution companies; the latter amount includes but is not limited to LNG-related payments. Clearly, the gas sector is drifting in the same direction as the power sector, with a growing mismatch between supply and demand, pricing issues and cascading debts running the length of the supply chain.

Two separate actions are necessary immediately to arrest this trend. First is a more robust leadership for the gas sector, which understands clearly how the sector is put together and how an action taken at one end of the chain can send cascading consequences to the other. It would be a mistake to try and tackle the problems that riddle the sector one at a time with no awareness of how they are interlinked. Reducing offtake of LNG from the power sector is one example of such an amateur mistake. The other necessary action is reform, particularly of the sort that allows a greater role to market forces in pricing and sales. Without these two elements, the gas sector could make its way to a crisis situation.

Published in Dawn, March 9th, 2020

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