The government has in recent days taken a series of steps that lead more to fault lines in the gas sector than prudent solutions to the challenges. The prime minister and his cabinet are now being shown a garden path that may only see grown weeds when the time comes, with serious repercussions to the people.
More recently, the Ministry of Energy — Petroleum Division (MEPD) has come up with a flamboyant plan of mangling all evils left behind by the ‘corrupt’ governments of the past.
For exactly three and half years in office, Prime Minister Imran Khan’s team has been trying to add an LNG terminal to a portfolio of two such facilities left behind by the previous government. It turns out it has been unable to optimally utilise the two existing terminals and new terminals are not in sight, as of today.
Back in December, the government blamed the slow progress by the two new terminal developers, Tabeer Energy, a subsidiary of Japan’s Mitsubishi Corporation, and Energas, a joint venture of Qatargas and four Pakistani business groups, who are still awaiting a confirmation on pipeline capacity to declare financial close. Their fate is tied with their biggest competitors, the Sui monopolies.
It is very likely that we may have less gas in the coming summer and next winter than this and previous years
The ministry told the prime minister to the surprise of members of the cabinet committee on energy that all was done but the above terminal sponsors were not ready.
“Against the backdrop of slow progress in the development of new LNG terminals by the private sector, a consortium comprising state entities (port authorities, Sui companies and Pakistan State Oil) will work together for speedy development of a new LNG terminal in the public sector, preferably FSRU (floating storage and regasification unit) based, to bring new LNG by next winter (2022-23),” said an order issued by the MEPD.
Strangely though, the MEPD in separate communications has been repeatedly reminding the gas companies to ensure implementation of decisions of the cabinet and its various committees regarding allocation of pipeline capacity, finalisation of access agreements, gas transportation agreements, network code and land allocation for tie-in facilities to two proposed private terminals on a merchant basis, without any government guarantee or responsibility. Between December 21, 2021, and January 5, the MEPD wrote a series of letters to gas companies to complete their tasks and repeatedly noted that “reply from the DG (gas), Sui Northern Gas Pipelines Limited and Sui Southern Gas Company is still awaited”.
Instead, the authorities said the new plan involved the government using the existing LPG facility of Sui Southern Gas Company “partially” for LNG storage. Little did they realise that whilst the entire world had shifted to vessels larger than 40,000 tonnes capacity, Pakistan’s LPG terminal can handle only 12,000 tonnes. Ironically, LNG vessels require more tonnage, usually 70,000 tonnes. So the grand plan of converting the LPG terminal has its own consequences including waste of time and confusing signals to prospective investors.
While talking about securing more LNG, the leadership at the MEPD has been boasting of an excellent hold on the market and securing more LNG than predecessors. In the same breath, there were also claims of Sui’s depleting their supplies annually at 10 per cent. Despite the fact that more LNG should have been secured, this winter Pakistan could arrange between 7-10 cargos per month despite having the capacity for securing 14, according to LNG arrivals reported by regulator Oil and Gas Regulatory Authority (Ogra).
In fact, the situation is a lot worse this year as two traders — Gunvor and ENI — have repeatedly violated their long term contracts since the start of winter and higher international prices and both have again defaulted on the March deliveries. This leaves PSO and the entire nation at the mercy of Qatar for its LNG deliveries.
Lo and behold, Qatar which now provides almost the entire LNG supply and wanted to set up, without a government guarantee unlike existing terminals, its entire supply chain from LNG supply to LNG terminal and sale through its local partners to industrial consumers, is not feeling well received as they too have to run from lamp to post to invest in Pakistan.
Qatar’s state energy minister has now held at least three known meetings with authorities since December last year to address roadblocks. In the most recent meeting with Finance Minister Shaukat Tarin last week, Qatari politely and precisely wanted to know if Pakistan really needed their investment in the terminal and resultant LNG supplies to go up. If so, they expected the government to urgently resolve their issues, and, if not a candid no would not affect friendly bilateral relations.
The situation on the Japanese side also remains similar if not worse. Tabeer also believes that authorities at the MEPD, Sui companies and the regulator continue to make them go round.
Return of the inefficiencies: Another achievement lauded by the government is allowing the unaccounted for gas (UFG) benchmark to return to 12 and 18pc to two Sui companies. Not only does this incentivise the Suis to continue charging roughly 800 million cubic feet per day of gas to theft but leaves no room or requirement for them to reduce such losses. That much gas loss is almost equal to the total LNG being imported at present that can meet the requirement of the power, industry and fertiliser sector.
For the last 20 years, the unaccounted for gas (UFG) of Suis kept increasing and was used as a model for margin equalisation. With the introduction of the proposed weighted average cost of gas (WACOG) to the average price of local and imported gas and an imminent increase in price, an increase in theft is imminent, with no reason or incentive for Suis to reduce the UFG. This will add substantial cost to the economy even if the circular debt is artificially curtailed. Interestingly, despite clearance of an Ogra bill by two houses of parliament in recent days, the application of WACOG would still require approval of the Council of Common Interests to issue fresh policy guidelines for average pricing. Sindh and Khyber Pakhtunkhwa are deadly opposed to WACOG.
And now to the future: The global LNG market continues to maintain its pricing well above crude parity. With the Russia-Ukraine situation and the US building a coalition of LNG suppliers, it is certain that LNG will not be priced any cheaper until anytime soon. In such a scenario the most important element for Pakistan is to secure gas but we may be putting our feet to the fire.
The MEPDs preferred plans about virtual LNG pipelines and expansion of existing LNG terminals with gas being brought by the incumbents at 10pc of Brent or lower by the summer of this year is set to emerge as a bubble that might burst sooner. It is very likely that we may have less gas in the coming summer and next winter than this year and previous years.
Published in Dawn, The Business and Finance Weekly, January 21st, 2022