THE government finally decided last week to auction the unutilised capacity of liquefied natural gas (LNG) terminals that it owns. It decided to allow third-party access (TPA) to private firms to import the product for self-consumption or onward sales to other consumers.
Private companies had been demanding it for a couple of years. At least three firms had already secured licences from the regulator.
The decision coincided with the lowest-ever bid for LNG cargo that state-run Pakistan LNG Ltd (PLL) received from State Oil Company of Azerbaijan Republic (SOCAR). At 5.74 per cent of Brent or $2.2 per million British thermal units (mmBtu), SOCAR’s bid is the lowest since Pakistan entered the LNG business five years ago. None of the traditional traders — Gunvor, Trafigura and PetroChina at 7.84pc, 8.35pc or 10.38pc of Brent, respectively — could even get close to SOCAR.
Both are positive developments. The first decision by the Economic Coordination Committee (ECC) should create a competitive environment. The Ministry of Energy (MoE) had proposed allowing third-party access to LNG terminals to use excess capacity or government-contracted unutilised capacity. The ECC “approved the proposal for selling the unutilised capacity”.
Enhanced utilisation of LNG terminals will reduce the gas tariff by offering unutilised capacity to private parties
The decision comes after a lot of debate among cabinet members as public-sector companies were reluctant to give up their monopoly and, to some extent, because of faulty supply-chain agreements. The discussion in the cabinet focused on revenue sharing while maintaining the priority rights of the government on the use of contracted capacity. The sale of unutilised government-contracted capacity has a direct bearing on excess capacity.
The second development – the low bid for LNG cargo – apparently is a message that Pakistan needs to reach out to the owners/source of LNG like SOCAR or any other producer/supplier from source countries like Australia, Malaysia, Qatar or the United States to secure a better deal that may be easier in the private sector.
This comes at a time that a long-term agreement with Gunvor at a higher price of 13.37pc of Brent is due to expire in January 2021 followed by another having a price of 11.62pc of Brent in 2022. The public-sector companies now want to have service charges on private-sector imports for processing and transportation etc.
According to the MoE, at present two LNG regasification terminals are operational in the country with the total physical capacity of first and second terminals of 690 million cubic feet per day (mmcfd) and 750mmcfd, respectively. For the first terminal, SSGC has contracted the regasification capacity of 630mmcfd with a peak capacity of 690mmcfd on the best-effort basis as and when required and is utilising it fully through PSO-contracted term cargoes. At the first terminal, the sponsor (Engro) is in the process of replacing the floating storage and regasification unit (FSRU) with a bigger ship and will create private excess capacity later this year.
For the second terminal, Pakistan LNG Terminals Ltd (PLTL) has a contracted capacity of 600mmcfd with the peak capacity of 690mmcfd on a reasonable endeavour basis as and when required. At this terminal, PLL is importing two LNG cargoes per month (nearly 200mmcfd) on a term contract basis whereas additional LNG imports are made through spot tenders to meet gas requirements in the country.
The second terminal is underutilised with the average utilisation of nearly 62pc and 51pc in 2018-19 and 2019-20, respectively, with the drop in the last year being on account of Covid-19. In March 2021, RLNG supply of 150mmcfd to K-Electric will begin on a firm basis and the utilisation will go above 70pc.
Due to the underutilization of the second terminal, the regasification tariff works out at the higher level of $0.6159 per mmBtu and $0.7273 per mmBtu in 2018-19 and 2019-20, respectively, against the levelised contracted tariff of $0.4177 per mmBtu had the terminal operated at 600mmcfd. The resultant higher terminal tariff caused an additional burden of $32.5m and $43.2m in 2018-19 and 2019-20, respectively. That was shifted to the consumers of RLNG in the form of higher gas prices.
This called for enhanced utilisation of LNG terminals to reduce the tariff by offering unutilised capacity to private parties. The MoE advocated offering the unutilised government-owned terminal capacity to private parties on a short-term (three-month) forward visibility basis as the most viable option keeping in mind the increasing utilisation by the government itself. This will mean the government will continue to have priority rights of terminal utilisation and maintain operational flexibility.
The MoE, however, fears that TPA could result in some bulk consumers shifting to private suppliers, thus increasing the take-or-pay risk for the government on account of three mega power projects. Hence, it is reluctant to make a long-term commitment with the private sector for unutilised terminal capacity.
Various private parties have expressed their interest in availing unutilised government-contracted capacity at the second terminal. All interested parties having the necessary regulatory authorisation and contractual arrangements will be given access to the available unutilised terminal capacity. Under this TPA framework, private parties will import LNG. The relevant state entity will only provide regasification services and deliver RLNG at the combined terminal station to the importing private parties on the Ogra-determined tariff.
TPA arrangements for excess and unutilised capacity will be exercised through an agreement between the stakeholders on the storage and handling of comingled cargoes and will be administered by Ogra until the promulgation of TPA Rules for LNG terminals. This capacity will be offered to private parties through auction and, in case the total requirement of all eligible interested parties exceeds the total offered capacity, the capacity will be allocated proportionally.
Moreover, the Power Division and the Ministry of Industries will be required to firm up their RLNG requirements at least six months in advance on a recurring basis, enabling state entities to assess unutilised capacity and seek the private sector’s interest in it. That has been a major challenge.
The inability of the Power Division to accurately forecast its LNG demand has been resulting in oversupplies of gas amid low power demand and gas shortages amid peak power demand, exposing gas companies to heavy liabilities and safety challenges. That is where the government will have to put its house in order.
Published in Dawn, The Business and Finance Weekly, August 4th, 2020