AS indigenous reserves of gas continue to deplete, the reliance on imported LNG will grow. Due to the commodity supercycle triggered by the ongoing strategic conflict, Pakistan has been unable to import the expected quantities, with the situation exacerbated due to the dearth of the availability of the foreign exchange.
However, it is evident that as soon as the LNG prices return to their long-term historic average values in the international markets and some sort of economic stability is achieved within the country, the imports are expected to rebound. This is simply because of latent energy demand and, to an extent, the availability of the required infrastructure.
It is also likely that the government may allow the auction of unutilised capacity in existing terminals to industrial consumers. Further, with the government recently announcing the implementation of the Weighted Average Cost of Gas (WACOG), the incentive is expected to shift towards imported fuel.
With this context in mind, the issue often debated is the absence or limitation of LNG storage in Pakistan. The country currently has two Floating Storage and Regasification Units (FSRU) based offshore LNG import terminals, with a limited combined storage capacity of about 0.3 million cubic meters.
By directing private capital towards land-based integrated storage and regasification facilities, the government can channel its resources towards other critical infrastructure
These in-built storages in FSRUs hardly provide any kind of energy security to avert an event of supply disruptions, as they are solely built to ensure gas supply chain continuity for limited periods. The government in the past has hinted towards developing strategic LNG storages, as severe challenges were faced during the scheduled maintenance outage event of one of the FSRUs, which resulted in severe disruption of the LNG supply of the entire country, causing widespread load shedding.
To develop strategic LNG storage, one must understand the difference between commercial and strategic storage. Business entities develop commercial storage to ensure their product’s supply continuity and optimise their levels to attain maximum commercial benefit. The presence of a clear market incentive is a prerequisite for these commercial entities to construct and maintain these storages.
On the other hand, strategic storages are developed by sovereign entities, with the primary intent of using them to protect their country and its economy from any kind of fuel supply shocks during an emergency. Taking any commercial benefit from this venture is not the primary driver.
If one closely analyses the LNG-importing countries with similar GDP per capita to Pakistan, one would hardly find any example of a country building strategic LNG storage. The reason lies in the fact that these dedicated strategic storages are big ticket items, and it is hard to create an economic justification for their development in emerging economies.
Nonetheless, these countries maintain some commercial storages to ward off the short-term supply disruption threats, but large-scale seasonal storages are usually afforded by the developed gas markets.
It has also been heard that the government has commissioned a detailed feasibility study to develop strategic underground gas storage (SUGS) with external assistance.
The decision-makers should ponder upon a few of these aspects while embarking upon this extravagant proposition: first, as mentioned earlier, Pakistan’s dependence on LNG has significantly risen due to the depletion of its indigenous gas reserves. In the current situation, the development of on-ground LNG storage may create higher benefits as compared to SUGS, as it is a proven fact that storage of gas in liquified form is much cheaper because, in a compressed state, it occupies almost 500 times less space than for the same quantity of gas stored in gaseous form.
Secondly, for underground gas storage to operate successfully, it is critical for it to have abundant availability of “cushion gas”. This is the non-retrievable gas which cannot be used to serve the needs of gas utility but accounts for about 25-50pc of the underground gas reserve.
With the fast-depleting indigenous gas reserves, it is widely expected that a steep rise in its price will also occur. Therefore, it is highly likely that the economic cost of developing large-scale underground storage will substantially outweigh its benefits. Additional challenges, like laying down pipelines to connect the SUGS with the existing gas network, exist, along with the absence of any policy framework.
With several terminals in various development stages, such options that benefit the country in the long run must be pursued. Onshore storage and regasification terminals have higher upfront capex and longer construction periods. However, they are more economical for a project life of more than 10 years.
Onshore terminals have the additional inherent benefit of having the option of enhancing the initially installed storage capacity at a relatively lesser incremental cost, as and when required, to meet the future storage needs of the country.
This option could benefit the government by reducing the LNG terminal’s tolling charges and increasing the gas storage capabilities. Furthermore, by directing private capital towards the development of land-based integrated storage and regasification facilities, the government can channel its own precious resources towards the development of other critical infrastructure.
The writer is an energy expert.
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Published in Dawn, The Business and Finance Weekly, October 2nd, 2023