ISLAMABAD: Pakistan State Oil (PSO) has won about $15 million arbitration award against an international energy trader, Gunvor International BV, for excess port charges on account of liquefied natural gas (LNG) supplies over the past few years.

Pakistan’s state-run fuel supplier and Geneva-based Gunvor signed a five-year contract for the supply of 100 million cubic feet per day (mmcfd) of LNG in 2015-16.

Under the agreement, PSO started payments to Gunvor on account of LNG cargoes along with port charges but kept on asking for reconciliations. It continued making excess payments to the LNG supplier on account of port charges for four and a half years.

Similar charges were also being paid by state-run Pakistan LNG Limited (PLL) to its suppliers. Gunvor had repeatedly defaulted on LNG supply contracts with the PLL, apparently to earn windfall benefits by diverting Pakistan’s contracted cargoes to the spot market at prices, sometimes at triple the price committed to Pakistan, which has been grappling with power outages over the past years.

London court favoured Pakistan State Oil, which withheld payments to Geneva-based firm due to overcharged shipments

The sources said internal auditors and the board of directors of the two companies pointed out excess payments and wanted corrections. After much follow-up by PSO, Gunvor shared the reconciliation of payments which transpired that the LNG supplier had allegedly overcharged PSO to the extent of about $14.6m.

Detailed negotiations and exchange of data substantiated PSO’s position and the amount of cargo was revised by Gunvor. Therefore, PSO withheld the disputed amount overcharged by Gunvor from upcoming cargo payments and got restraining orders from the Sindh High Court for any disruption in supplies or changes to revised charges.

In response, Gunvor filed an anti-suit injunction at London High Court and restrained PSO from proceedings in Karachi. Soon after the supply agreement expired in December 2020, Gunvor took the matter to the London Court of International Arbitration (LCIA) against PSO.

After almost 21 months of proceedings, the LCIA last week handed down an award in favour of PSO along with $14.6m and other legal and arbitration costs. This is perhaps the only arbitration success Pakistan entities secured over the last two decades.

About seven years ago, PSO entered into a long-term LNG supply contract with Gunvor for 100 mmcfd for five years and with Qatar Petroleum for 500 mmcfd for 15 years.

Pakistan has been facing an LNG shortage for the last two years. The previous government struggled to enter into long-term contracts as the global market hit the lowest ebb, with Asia LNG spot prices going below $4 per million British thermal units (mmBtu) in mid-2019 for the first time in several years. The commodity then went out of Pakistan’s reach following the outbreak of the Russian-Ukraine war.

The shortages appear to persist as the PLL has failed to attract any bidder for a long-term contract because of tight international market conditions. Earlier this month, the PLL said its tenders for a total of 72 LNG cargoes for an equal number of months, starting January 2023 to December 2028, did not attract even a single bid.

This meant the LNG was unavailable in the spot market as Europe booked all surplus cargoes to make up for its energy shortages arising out of a Russian gas supply gap. Because of Nord Stream disruptions, Germany is in the advance stages of development of at least five floating LNG terminals on a war footing and has been booking longer contracts in the Middle East at record prices touching $40 per mmBtu.

Published in Dawn, October 13th, 2022

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