Scramble to meet energy shortages after suppliers default

Published November 2, 2021
Two LNG suppliers — Gunvor and ENI — declined to meet their contractual obligations to supply one cargo each in November, leaving authorities in a state of shock as they were already facing gas shortages. — Reuters/File
Two LNG suppliers — Gunvor and ENI — declined to meet their contractual obligations to supply one cargo each in November, leaving authorities in a state of shock as they were already facing gas shortages. — Reuters/File

• Minister meets companies’ officials to cope with shortfall
• Gunvor, ENI decline to fulfil contractual obligations
• Ogra notifies LPG price of Rs2,560 per cylinder of 11.8kg for November

ISLAMABAD: With prices of Liquefied Petroleum Gas (LPG) touching Rs217 per kg, up 67pc over last year, the government on Monday was scrambling to address energy shortages as winter sets in amid default by suppliers of Liquefied Natural Gas (LNG) to deliver committed cargoes.

Energy Minister Hammad Azhar held back-to-back meetings with relevant companies in the energy supply chain, power and petroleum divisions and the finance ministry to cope with supply shortages through diversion of gas from southern to northern region, prioritisation of sectors to be fed with limited gas availability and financing arrangements to ensure alternative imported fuels.

This was necessitated by two LNG suppliers — Gunvor and ENI — declining to meet their contractual obligations to supply one cargo each in November, leaving authorities in a state of shock as they were already facing gas shortages.

“We are working at multiple levels to minimise disruption,” said a senior government official.

He said the Ministry of Energy had also activated diplomatic channels and engaged with the LNG suppliers in an effort to make them honour the commitment.

He said it was hoped that one of the two cargoes would be salvaged while the other might not be possible due to technical reasons.

There were indication that ENI of Italy would address its default and deliver committed quantities even if with certain adjustments in schedule for technical reasons, but Gunvor was purely a commodity trader and unlikely to avoid wilful default.

The price differentials between term contracts with Gunvor and ENI and prevailing global market prices are mouth watering — between $10-12 per million British Thermal Unit (MMBTU) and $30-35 per MMBTU — apparently a reason for the suppliers to default. On the other hand, the penalty for default in contract is about $3 per unit (30pc of the contract price).

ENI has a 15-year contract with PLL at 11.95pc of Brent while Gunvor had five-year contract at 11.63pc of Brent.

The relevant ministries – power, petroleum and finance – and supply chain entities like PSO, Pakistan LNG Ltd, SSGCL and SNGPL besides the exploration and production companies and power entities were called to examine if gas supply sources could be switched and how the difference could be met through alternative fuels.

It was prioritised that export sector industries, power sector and fertiliser units would be supplied with maximum available local gas and imported LNG.

The only saving grace was late arrival of mild winter that has reduced the need for cooling (air-conditioners) with little requirement for heating (geysers and heaters) and enough stockpiles of furnace oil for power sector. Non-export industry and CNG would suffer the most followed by residential consumers.

An official said the current furnace oil stocks at around 350,000 tonnes were enough to meet power sector demand for 15 to 20 days while PSO had already placed tenders for reinforcement of another 160,000–170,000 tonnes of additional furnace oil.

But the key problem here was the liquidity crunch of the PSO, PLL and gas companies.

These companies required over Rs160bn to overcome the situation but it was agreed among the relevant ministries to move a summary for supplementary budget grant of Rs60-70bn to ensure opening of letters of credit which are recovered from the power sector with a substantial time lag.

Detailed work sheets examined during hectic consultations showed that additional gas shortage at a given time would be 100-200mmcfd in November and options were examined how to manage power sector, export industry and fertiliser.

The 200mmcfd gas shortage could be overcome through 150,000 to 200,000 tonnes of furnace oil.

There would be some adjustments in gas supplies between Sui Southern and Sui Northern gas companies with the support of exploration and production companies.

Qatar was being requested at the highest level to help provide an additional cargo during November.

It was noted during these meetings that Pakistan was supposed to get 11 LNG cargoes in November, which include seven from Long-Term Agreement with Qatar, one each from the long-term contracts with ENI and Gunvor and two cargoes from Spot purchases. However, after the default of ENI and Gunvor, the number of cargoes will reduce to nine.

On the other hand, the Oil and Gas Regulatory Authority (Ogra) on Monday notified LPG price of Rs2,560 per cylinder of 11.8kg (Rs217 per kg) for November, 6.5pc higher than Rs2,404 per 11.8kg cylinder during the current month.

When compared with November of last year, the LPG prices have gone up 67pc from Rs1,530 per cylinder and 97pc higher than Rs1,298 per cylinder in June 2020.

Published in Dawn, November 2nd, 2021

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