LNG tender default turns into boon for Pakistan

Published January 23, 2021
Two urgent replacement tenders for February fetched about 16-18 per cent cheaper rates as international market plunged. — Dawn/File
Two urgent replacement tenders for February fetched about 16-18 per cent cheaper rates as international market plunged. — Dawn/File

ISLAMABAD: The liquefied natural gas (LNG) supply defaults last week by two foreign state-owned companies — Enoc and SOCAR — came as a blessing in disguise to Pakistan as two urgent replacement tenders for February fetched about 16-18 per cent cheaper rates as international market plunged.

The urgent tender floated by state-run Pakistan LNG Limited (PLL) for second half of next month attracted the lowest bid of $9.58 per million British thermal unit (MMBTU) or 19.5pc of Brent for Feb 21-22 window from Vitol Trading and $8 per MMBTU or 16.3pc of Brent from Qatar LNG for Feb 25-26 window.

In comparison, the lowest bids from defaulting parties for almost same period were $11.48 per MMBTU or 23.41pc of Brent for Feb 15-16 by SOCAR of Azerbaijan and $10.22 per MMBTU or 20.09pc of Brent by Enoc of UAE for Feb 23-24.

Informed sources in the PLL said that SOCAR not only defaulted on its February bid but also tried to blackmail the PLL into committing about 11 cargos between February and September at higher than market rates under government-to-government (G2G) arrangement without bidding. Documents seen by Dawn show the PLL and SOCAR remained engaged in talks until the last moment but the requirement for cabinet approval for G2G deal ended the process.

Replacement orders fetch cheaper rates

Fortunately, the prices had already gone down in the market by the time the PLL floated urgent tenders.

Two major factors contributed to the LNG market crash. This included an intervention by Japan’s energy regulator to exit the spot market in an attempt to ensure that power prices do not go up further amid warmer weather conditions. Likewise, South Koreans also decided against securing additional gas for February.

As a consequence, LNG traders hoarding the product had nowhere to offload their cargoes, thus a fall in spot market. At present, European and Far Eastern importers are paying about $7.5 and $8.2 per MMBTU, respectively. Market analysts now expect the LNG prices going further down to about $5-6 per MMBTU or 10-12pc of Brent in April onwards period until October next year.

The petroleum division that seldom announces PLL bid results immediately claimed credit for the lower prices. In a statement, it said the PLL “has arranged one more LNG cargo at a lower price for the month of February 2021 through an urgent tender. The price is approximately 22pc lower than the price of the bidder that withdrew its bid earlier for same cargo”.

The petroleum division said this also put to rest the argument that “ordering very early necessarily guarantees a better price”. It said the time period between the bid submission date and delivery date of cargo for the urgent tender was 35 days as compared with 49 days for the earlier tender in the same delivery window.

The episode also established the fact that traders do not own cargoes, do not care about reputational damage and hence chose to default on Pakistani tender as they were making profit of $15-20 million per cargo against a paltry loss of $300,000 security bond. In the process, however, Pakistan is estimated to have got a saving of $7m-$10m per cargo when compared to two lost cargoes.

This means the government should move away from traders and encourage producers to participate in tenders. It is also important to plan and procure in advance in a bullish market while buyers have a better choice in bearish market. This is also supported by Indian advance bidding that resulted in $5-6 per MMBTU now being delivered.

Interestingly, the PLL has received bids for March 2-23 delivery window at the rate between $17 and $23.75 per cargo. All the spot cargos contain about 140,000 cubic meters of LNG or 3.2 million MMBTU.

PLL CEO Masood Nabi could not be contacted for comment despite efforts, but his close aides said the procurement rules were hampering competitive rates to Pakistan because 10-day period between bid opening and contract award provided bidders to move to greener pastures.

PLL sources said the SOCAR initially offered six cargoes for current year under G2G arrangements between Pakistan and Azerbaijan and when it emerged as lowest evaluated bidder for February tender, the company increased its offer to 11 cargoes at a rate almost a dollar higher than Japan-Korea market. This was subject to the condition that the PLL should not award the February cargo of 23.43pc of Brent SOCAR had won in bidding. The talks fell apart after consultant Wood Mackenzie voted against the offer for being uncompetitive in South Asia.

Published in Dawn, January 23rd, 2021

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