Pakistan LNG Debate: Truths Lies and Distractions

LNG Debate - Dunya Kamran Khan Ke Saath

It is good to see two Engineers sitting in TV Show “Dunya Kamran Khan Key Saath” discussing history and current situation of LNG and RLNG operations in Pakistan. Mr Nadeem Babar (SAPM) an MS in Civil Engineering with background in developing Power Plants in Pakistan sat with Mr Shahid Khaqan Abbasi (Ex Petroleum Minister and Ex-PM of Pakistan) an Electrical Engineer well known for introducing and operating private airline business in Pakistan. Prior to SAPM serving as SAPM and EX-PM serving as Petroleum Minister of Pakistan, both these gentlemen have no experience and little knowledge of oil and gas sector operations.

 

 

Starting with Ex-PM on LNG Benefits

  

EX-PM started with appreciation of the fact that LNG is the only solution to Pakistan’s energy woes and I take the responsibility and credit for presenting this solution to the nation. Pakistan would have been in worse economic situation lest the LNG FSRU terminals were not commissioned during his tenure as PM and Petroleum Minister.

Author’s Comments: EX-PM conveniently ignored that fact that during 5 years of RLNG terminal operations, 2020 was the first year when both terminals were operated on full capacity. Engro terminal operated at 33% during first year and PGPL terminal operated for almost 3 years at 33% of capacity.

EX-PM indicated his concerns for the contradicting statements made by current SAPM regarding LNG cargo procurements during November & December 2020. Matter was simple as 2 Terminals were installed with the capacity to re-gasify 12 LNG cargoes (Q-Flex ship to be specific with a capacity of 170,000 cubic meter) a month. This capacity is available for government use with the provision of 1.5 cargo a month additional flexibility per terminal. Thus making a total availability of 14-15 LNG cargoes per month for government use for regasification. Out of the based capacity of 12 cargoes per month, my government arranged contracts for 8 cargoes per month – 5 cargoes through 15 years SPA with Qatar Gas, 1 cargo per month through 5 years (SAPM claimed it to be 15 years) agreement with Eni @ 11.99% of Brent and 2 cargoes per month through 5 years agreement with Gunvor @ 11.62% and @13.37% of Brent (1 cargo contract expiring in January 2021 and other 1 cargo contract due to expire in 2022). Thus remaining 4-7 cargoes per month (as of today) are to be arranged through Spot market purchases as per requirement.

EX-PM said that gas demand is so obvious in Pakistan as our economy is gas based with around 50% of our total energy needs are fulfilled through gas supplies. Any gas / RLNG that is made available can be sold.

 

Author’s Comments

Author’s Comments: EX-PM statements were contradictory to the facts as PGPL terminal capacity remained idle till 2020 and we have seen only few recent months its full capacity utilization.

EX-PM told that during winter months (from December to March) we need additional imported gas for industry, CNG, domestic and power sector due to acute shortage in indigenous production of gas. So this is the responsibility of the government (being the sole importer of LNG) to procure additional supplies of LNG for winter peak loads. Similarly, additional LNG supplies are required during summers to provide additional gas to power plants for fulfilling peak electricity demand for cooling. Existing gas-based power plants currently installed in Pakistan need 1.3 BCFD gas to be operational round the clock – equivalent to existing capacity of two RLNG terminals. Adding KESC, industrial and CNG consumers’ load will require additional LNG regasification capacity beyond 1.3 BCFD. Thus it was needed that present government should have added additional RLNG supply terminals during last two and a half years. No terminals were added despite the fact that four international companies (including Exxon Mobil) were anxiously seeking to install Merchant Terminals in Pakistan (with no obligation on government in the form of guarantee or financial support) waiting for provision and identification of location for such terminals. There is, however, one obligation on government to arrange transport pipeline for carrying additional re-gasified LNG to consumers throughout the country. No pipeline capacity is made available by the present government and thus progress on RLNG terminals stopped.

 Learn About Real Issues Related to RLNG / LNG Operations in Pakistan

Initial Convincing Response of SAPM

SAPM said that my conflict with EX-PM is that he has presented a beautiful and simplified history of LNG / RLNG operations while missing the problems faced by country since the start of RLNG supplies. First one is that EX-PM government declared RLNG as petroleum product whereas it is actually gas. This resulted in non-inclusion of RLNG in weighted average cost of gas in Pakistan and thus can only be sold to consumers who are ready to pay its price. A domestic consumer is buying gas at around PKR 250 per MMBTU while RLNG price is PKR 1400 per MMBTU. He said that I acknowledged on a BBC interview a month ago that previous regime one good decision (initiated LNG import) and one bad decision for Pakistan. The bad decision was that they did not award a single new block for E&P activity during their tenure to augment indigenous gas production which impliedly was done to promote RLNG demand in Pakistan. Even the initiative to import LNG was marred by severe anomalies. For example, I can show you a dozen international energy agency reports of 2016 on energy sector outlook and pointing of LNG supply glut in coming years. In such an oversupplied market if you go for a 15 years contract (locking price for 10 years) is not prudent rather un-wise decision on the basis of market economics, and the nation will pay the price of this decision during LNG procurements for at least 11 years. Our procurement price for LNG cargoes for last twenty-seven months is 20% less than the price of LNG procurement contracts signed by EX-PM government. This 20% price differential is equivalent to USD 238 million dollars for one-third quantity of LNG procured during last 27 months (two-third being procured under agreements signed by previous government). Additionally, during 9 months out of last 27 months the total demand for RLNG of all consumers was 800 MMSCFD or less, with no curtailment effective. So against a total re-gasification capacity of 1.3 BCFD the demand for one-third period of time (during last 27 months) was 800 MMSCFD and this fact does not warrant installation of new terminals. Thus to sum up, the entire contractual framework was ill-founded (including legal hitch of declaring RLNG as petroleum product) for procurement, transportation and supply of RLNG to consumers without considering price sensitivity of RLNG demand. The two existing FSRU based terminals currently operating in Pakistan are based on Take-or-Pay contracts. Irrespective of demand or consumption of RLNG in the country, government is bound to pay USD 527,000 per day to these terminals under Take-or-Pay contracts. Has RLNG not been declared as petroleum product, I could have blend its price with indigenous gas and sold it to consumers at average cost of supply, which I cannot do due to legal anomaly created by previous government through act of parliament. The legal framework based on Ring-Fencing concept, created under legal provisions of law by previous government, is the main hurdle in utilizing optimum capacity of two existing RLNG terminals. So it is not possible to allow additional RLNG terminals under the so-called ring-fenced legal framework, because consumers are not ready to pay the price of RLNG. By adding more terminals in such state of affairs, we will only be adding to the Take-or-pay obligations of the country without creating corresponding RLNG demand

 

Author’s Comments

Author’s Comments: SAPM was correct to point out anomalies which were the blunders of EX-PM government.

Now, with the effort of last 27 months, we have been successful in creating a new legal framework that will allow operations of two new Merchant Terminals – construction of one will start in Jan 2021 and of other will start by July 2021. For these new RLNG terminals no capacity payment obligation will be borne by government of Pakistan.

Author’s Comments: SAPM played a bluff with regards to formulation of new legal framework for Merchant Terminals and linking start of construction of two new RLNG terminals in 2021. Only one land-based terminal is expected to start construction in 2021 which is Engro Terminal and that has nothing to do with his referred new legal framework. SAPM should be asked to share that new legal framework publicly if he has finalized it.

With regards to construction of pipeline for transport of additional RLNG volumes that will be available through operations of additional re-gasification terminals, I would like to ask EX-PM (and previous Finance Minister Ishaq Dar) to inform about the whereabouts of PKR 226 billion collected under GIDC during 2013 to 2018 for construction of gas import pipelines. When in previous regime Sui companies were asked to start construction of pipeline, they required the government to fund PKR 100 billion out of GIDC collection. Then Finance Minister Ishaq Dar responded in writing that money collected under GIDC has been expended and Sui Companies should borrow PKR 100 billion from banks. PKR 100 billion borrowed from commercial banks now require repayment of PKR 225 billion (including interest) which has severely impacted Sui Companies financial health. Now Sui Companies require this repayment to be built in gas tariff so that they may recover it from consumers. My question as a citizen of Pakistan is: “When the consumers have already paid PKR 226 billion under GIDC for construction of gas import pipeline why should they be charged again for financing of such pipeline”

 

Author’s Comments

Author’s Comments: SAPM was right in his arguments related to GIDC and this was a blunder done by successive government in past decade.

EX-PM informed that Take-or-Pay payment is not made by government of Pakistan rather paid by RLNG consumer and is equal to roughly USD 175 million per year. Four power plants with total capacity of 840 MW (210 MW each) were installed in the tenure of General Pervaiz Musharaf near Lahore which took 7 years to complete in 2010. These plants ran on diesel for 7 years till 2017 when they were converted to RLNG. This conversion resulted in USD 100 million per year saving per power plant. Thus these plants while consuming around 150 MMSCFD RLNG save USD 400 million every year for country. EX-PM claimed that total Take-or-Pay charges of USD 175 million per year compare favorably with USD 400 million per year fuel cost saving (which resulted only due to utilization of one-fourth capacity of one RLNG terminal) from conversion diesel fuel to RLNG. Thus Pakistan saved USD 225 million per year due to RLNG use.

EX-PM informed that 40 Blocks were already issued on the basis of Petroleum Policy 2012 where work started in few blocks and it was not appropriate to award more blocks – Pakistan being a country where finds remain mostly gas dominated and oil reserves are not expected so we have lean international interest. Policy was got approved from CCI due to difficulties arising out of 18th amendment in the Constitution of Pakistan

EX-PM informed that GIDC fund is available but Sui companies are always interested to invest their own money in assets to get more returns for their investors.

EX-PM informed that 15 years agreement for LNG supply from Qatar Gas can be terminated after 10 years. We will keep LNG supply contract for 15 years and will not terminate it after 10 years. The price determination was done on the basis of two 1 year LNG supply tenders floated during 2015. Price of Qatar Gas LNG SPA was very competitive.

SAPM challenged that EX-PM has not responded to the fact that GIDC was charged to the consumers and how can it be double-charged from them in tariff for the sake of profit for Sui companies’ investors. This is also a violation of Supreme Court decision regarding GIDC. The marked account for collection of GIDC was penny less when PTI government took over and there is correspondence on record related to refusal of then Finance Minister to release funds from GIDC account for infra-structure development of Sui companies. The correspondence states that GIDC fund has been expended on other matters and no money is available.

 

SAPM over doing

SAPM challenged that EX-PM claim for not awarding blocks for E&P companies has nothing to do with 18th amendment of constitution. In case EX-PM has formulated a policy document with the approval of CCI, he may kindly present it and I will apologize.

Author’s Comments

Author’s Comments: SAPM was wrong in claiming that no policy was finalized by EX-PM as 2012 Policy amendment was carried out in 2013 and subsequently 107 PCA amendments were signed for implementation of that amended 2012 Policy

SAPM back on Track

SAPM challenged that Qatar Gas agreement was signed on 10 Feb 2016 @13.37% of Brent Price and just 10 months later in another contract was signed in December 2016 @11.99% of Brent with Eni (which he claimed to be 15 years contract). This was a proof of my earlier claim that they signed Qatar Gas high price agreement at a time when market was reported to be soon flooded with LNG putting a downward pressure on price. They should have locked the price for maximum 5 years and not for 10 years.

SAPM required EX-PM to respond that first RLNG terminal was commissioned on 28 March 2015. Take-or-Pay charges of USD 282,000 per day kicked off from 1st April 2015 which continued till February 2016 which Pakistani consumers paid. But industrial demand, CNG demand and other consumers’ demand was curtailed during this period despite the fact that only 33% of RLNG Terminal Capacity was utilized. Would EX-PM provide the reason for that.

EX-PM skipped the response related to under-utilization of terminal capacity in 2015 and instead informed that during COVID times 1-2 years contracts for supply of LNG @ 10% of Brent were available in the world but we refused them and locked LNG supply with 6 cargoes for December 2020 delivery at @ 16.5% of Brent and 3 cargoes for January 2021 from Qatar Gas @ 17% of Brent. The loss due to procurement of 12 cargoes for Nov-Dec 2020 and Jan 2021 is PKR 17 billion. Due to unavailability of gas in coming winter electricity generation would be on diesel / FO during this period and additional loss of PKR 100 billion will be incurred.

 

SAPM getting un-professional

SAPM responded that EX-PM has done speculation. Total Spot purchases for this year was PKR 57 billion and I cannot understand PKR 55 billion loss is calculated. Total FO consumption of Electricity Generation is 3.9% this year as compared to 20% in last year of previous government

Last government purchased 18 cargoes @ USD 8 per MMBTU during winter while this winter 23.5 cargoes are procured this winter @ USD 6.5 pre MMBTU. He cleverly ignored the slope relationship with Brent which is around 30% of Brent for last tender.

EX-PM responded that 3.9% generation of electricity during the year caused PKR 55 Billion loss

 

Author’s Comments

Author’s Comments: SAPM acted very shrewdly while responding to revelation of his failure to procure timely LNG cargo. While he was discussing LNG price in terms of slope throughout his discussion, at that moment he switched LNG price discussion from “SLOPE” to “USD per MMBTU”. This was highly un-professional of him but the trick did work for ignorant public as he proved that in USD per MMBTU terms he bought cheaper in December 2020 as compared to December 2017. This was an absolute lie because Brent price in December 2017 was over USD 70 per barrel as compared to USD 45-50 per barrel in December 2020 and LNG price cannot be taken in isolation without comparison with Brent. This was highly dishonest of him to cheat the public in this manner on national media just to cover his fault.