The fragility of the liquefied natural gas(LNG) value chain was exposed last week that sent shock waves in the power corridors. The fault lines whilst hidden acted like sleeper cells and the first strike made the decision-makers lose their sleep. The end consumers suffered the most in killing hot summer amid the return of the countrywide power cuts of various scales and durations.
Any lesson: how weak and frail is the value chain. The fault lines were well known but small jolts in the form of a dry dock created a crisis which should now initiate a serious re-think in the decision-making circle — what leverage do they have when the value chain is in the hands of a few? Better late than never but they need to identify the perils ahead and measures necessary for a flourishing, stable gas market.
At present, the Pakistan LNG chain comprises two LNG terminals with 320,000 metric cubic meters of physical storage and a base-load regasification throughput of 600 million cubic feet per day (mmcfd) each and a peaking capability of 690mmcfd. Both operators have pledged their capacities exclusively for the government’s sole use (for which they receive approximately $190 million per annum) unless Third Party Access (TPA) is allowed.
Lack of options left little leverage to policymakers on the terminal operator who threatened to sail away leaving behind an energy crisis with no solution
Down the line, an LNG pipeline network of 1800mmcfd in the Sui Southern Gas Company franchise and about 1200mmcfd for the Sui Northern Gas Pipelines Limited franchise — system augmentation through swapping allows an additional 400mmcfd for the franchise up north heavily relying on regasified liquefied natural gas.
From the supply side, long term LNG contracts will ramp up in 2024 to about one billion cubic feet (9 cargos from Qatar and one from ENI). The weighted average price of LNG after the expiry of the first Qatari contract will be a very competitive 10.35 per cent of Brent.
As reported by the public sector companies, the existing terminals are operating at 84pc and more compared to roughly half the utilisation rates of terminals in the global markets. To put things in context a terminal operating at 600mmcfd requires six cargos per month per terminal. This means that a single LNG cargo must be re-gasified within five days to make room for the next. If the terminal throughput is increased to a throughput of 900mmcfd this would mean the terminal and the system will have to re-gasify a cargo in three days instead to make room for another cargo. A feat not achieved anywhere in the world, as a baseload.
By international standards, the minimum send out on LNG terminals is a minimum of 10 days. This leaves no flexibility for operational constraints. Thus demurrages are a common occurrence — a cost of an inefficient value chain added and borne by the customers in Pakistan.
Another important element of the LNG value chain is storage and the most important is underground storage, followed by pipeline line pack, contractual flexibility and lastly LNG storage as LNG is already compressed 600 times. In the case of Pakistan, the odds stack up against us with no underground storage, limited line pack, zero contractual flexibility by virtue of Take or Pay contracts and a meagre 320,000cubic meter of LNG storage — over utilised by two times the global average.
An often forgotten panacea is that of diversification, may it be sources of supply, and sources of energy or the dependence on monopolies, in the case of LNG terminals in Pakistan a duopoly. This came as a rude awakening for Pakistan last week where a terminal operator gave the notice to proceed for dry docking during the peak demand season.
Without going into the merits or the faults of poor planning, one thing became abundantly clear that lack of options left little leverage to policymakers on the terminal operator who threatened to sail away leaving behind an energy crisis with no solution, a reason as explained by the energy minister why they had no choice but to agree.
For the last many years, on the other hand, there has been talk of the development of two additional terminals which are yet to break ground. The government’s intent on bringing in terminals with zero ‘take or pay’ risk has so far not materialised. Despite very recent regulatory approvals to new terminals, the sticking point remains the necessary gas transportation agreement with the Sui companies who resist opening the market to private importers who challenge the state’s monopoly.
This could take away their valued customers and lead to the demise of state-owned enterprises as seen in the case of airlines, telecoms and so forth. To make matters worse, the existing terminal operators are pressing for TPA to the limited pipeline capacity so they could maintain their duopoly. Without pipeline access, the new terminals will not break ground. In the midst of this, the petroleum division has not been able to solve either problem. It has been unable to develop a policy framework for a fair market and private investments.
These issues are not unique to Pakistan and similar situations have been witnessed in multiple nations, the difference has been a robust policy framework that provides clear lines for promoting healthy competition. So what are the potential solutions?
On terminal capacity, enough data is available globally to ascertain the maximum allowable base-load throughput from LNG terminals. By way of comparison, a terminal with 150,000 cubic meters of storage tanks may not be allowed more than 3-3.5 million tonnes per annum of long term LNG throughput. Additional throughput (peaking) is allowed on a three months rolling basis as is customary on all regulated terminals across Europe. These terminals are mandated by law to maintain a 25pc allowance to cater for operational constraints. In the case of a floating storage regasification unit, this is more important. Sadly in the case of Pakistan, this requirement was initially included but subsequently removed for reasons unknown.
On pipeline capacity, a proportionate throughput quota on the LNG pipeline could be awarded on a per terminal basis (about 400/500mmcfd) on a firm basis and the remaining on an “available basis”. Again a policy framework similar to one of oil marketing companies’ storage and LNG terminals across the world provides data points to ascertain the right level of pipeline capacity to be dedicated per terminal.
More importantly, market liberalisation is the way forward — the essence of TPA provides customers with the choice to choose their own supplier. Customers may be won over by the quality of service from the supplier rather than the supplier’s control over the franchise. Multiple examples of market liberalisation in the telecom, airline and banking sector are just a few examples of benefits to the consumer and the economy.
TPA rules have been made by Oil & Gas Regulatory Authority but their implementation is missing.
Firefighting can seldom lead to a sustainable policy framework. It requires clarity of thought and the ability to develop an enabling environment to follow through on its success.
Published in Dawn, The Business and Finance Weekly, July 5th, 2021