ISLAMABAD: In a desperate move, the government on Tuesday sought two emergency cargoes of Liquefied Natural Gas (LNG) for the current month to plug unexpected supply disruption caused by two defaulting international firms.

According to a tender issued by state-run Pakistan LNG Limited (PLL), bids for two replacement cargoes against earlier long-term committed window of November 19-20 and November 26-27 are required no later than November 5 (Friday). This is the shortest response time (less than three days) given by PLL for bids and perhaps the most urgent delivery schedule.

The emergency tender 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 already struggling to meet demand amid lower than required cargos in peak winter – 9 instead of 12-13.

The tenders required typical cargoes of 140,000 cubic metres (about 100mmcfd) each.

Tender is necessitated as Gunvor and ENI decline to honour contractual obligations

The state-run Pakistan State Oil had already gone for additional furnace oil tenders for 160,000-170,000 tonnes to reinforce current furnace oil stocks of around 350,000 tonnes to meet the power sector demand for 15 to 20 days.

The electricity consumers would have to pay for even higher fuel costs on top of already expensive monthly fuel cost adjustments that stood at Rs1.95 per unit in October and Rs2.51 per unit in November.

An energy ministry official had said on Monday that diplomatic channels had been activated to persuade LNG suppliers to honour their contractual obligations and hoped to salvage one of the two cargoes. 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 rates are mouth watering — between $13 per million British Thermal Unit (mmBtu) and $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). The traders chose to pay the penalty for default and go for higher profit in spot market. 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 spot rates are now exceeding 35pc of Brent.

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 has reduced to nine.

Last month, not a single bidder responded to PLL’s tender for eight cargo deliveries in peak winter – four each in December and January – leaving a shortfall of about 400 million cubic feet each month as global LNG prices skyrocketed.

This has put the government in a tough situation to ensure sufficient energy supplies amid unprecedented higher costs.

The PLL had floated tenders for eight LNG cargoes — four in December and four in January —to meet peak gas demand, mostly in the Sui Northern Gas Pipelines Ltd’s network — Punjab and Khyber Pakhtunkhwa — with October 11 deadline but no bidder turned up.

Published in Dawn, November 3rd, 2021