Cheaper LNG only solution to energy woes

Source:  Tribune Published in Business & Economy on Monday, February 8, 2016

ISLAMABAD: The import of liquefied natural gas (LNG) appears to be a game-changer for Pakistan as government officials believe that they have finalized an LNG deal with Qatar at the lowest price.

They air the hope that this new fuel source will give a push to the national economy that has been afflicted by energy shortages.

The deal with Qatar looks better when compared with a contract signed by India with the energy-rich Gulf state.

Pakistan will buy LNG from Qatar at 13.37% of Brent crude price, which amounts to $4.680 per million British thermal units (mmbtu) when oil is sold for $35 per barrel. This also includes port charges of $320,000 per vessel.

On the other hand, India is buying LNG at 12.66% of Brent crude price plus $0.6 constant and $0.33 shipping cost. This is equal to $5.361 per mmbtu based on $35-per-barrel crude price.

Average regasification charges in Pakistan stand at $0.66 per mmbtu whereas in India these are $0.90 per unit.

Pakistan has planned to import 3.5 million tons per annum compared to Indian purchases at 8.5 million tons per year.

Pakistan and Qatar are all set to sign the $15 billion LNG deal in the next few days, which will be the first long-term agreement for the former that will place it on the world’s energy map.

Price revision

The government has succeeded in persuading Qatar to revise the price downwards, compared to the initial pricing formula agreed between the two countries, leading to annual savings of $40 million.

During the previous government of Pakistan Peoples Party, Qatar was willing to offer LNG at 14.5% of Brent oil price. However, later Doha agreed to revise the price downwards to 13.9%.

In the meantime, Pakistan State Oil floated a short-term tender for LNG supply over five years, in which Gunvor won the contract at 13.37% of crude price, which was lower than the price the government had agreed with Qatar.

This provided an opportunity to the government to seek renegotiations with Doha, which agreed to match the price offered by Gunvor.

According to officials, the government is going to sign a commercial agreement with Qatar during Prime Minister Nawaz Sharif’s visit to Doha on February 9-10. Under the agreement, PSO will bring 1.5 million tons of LNG in the first year and receive 3.5 million tons from the second year.

Energy giant Royal Dutch Shell had also got the short-term contract at 13.8% of crude price. However, the government later scrapped the contract and decided to import the same volume at the lowest price of 13.37%.

Bridging shortfall

Pakistan produces 4 billion cubic feet of natural gas per day (bcfd) against the demand for over 6 bcfd. The government considers LNG as a fast-track solution to the energy shortages.

Under the proposed arrangement with Qatar, the long-term contract will be for 15 years, but it will be renegotiated after 10 years. The two sides can end the contract if they fail to develop consensus over the price.

Past governments had made five attempts and floated tenders to set up an LNG terminal and import the gas but failed. According to the officials, the country has suffered a loss of $3 billion due to delay in LNG imports as it has to rely on expensive furnace oil and diesel to run power plants.

Now, the country will be able to save $2.5 billion a year when LNG is consumed in power plants.

Owing to the poor energy mix, the major fuel source for power generation is oil, which results in piling up of circular debt. Since long, governments have pumped trillions of rupees into the energy sector to clear the debt and the present PML-N administration also cleared Rs480 billion worth of debt after coming to power in June 2013.

Still, the circular debt is haunting the energy sector and the national economy is losing three percentage points every year due to the power crisis.

However, the use of LNG in power plants will help to tackle the debt. The country will have a sustainable energy solution following a long-term deal with Qatar. It will help to eliminate or substantially reduce power outages, which are damaging the industrial sector and crippling the lives of ordinary citizens.

In the current winter season, gas is supplied to only 60% of domestic consumers in Punjab. In this area too, LNG will be the only solution and the government is planning to build two more terminals at Gwadar and in Karachi.