Khaqan’s arrest triggers concerns in LNG supply chain

ISLAMABAD: The arrest of former prime minister and petroleum minister Shahid Khaqan Abbasi over LNG supplies and terminal contracts has sent a wave of concern among different participants in LNG local and global supply chain in Pakistan.

A number of international parties are involved including LNG suppliers, LNG terminal companies like ENGRO, its Dutch partner Royal VOPAK and Excelerate Energy USA. The LNG supplies and terminal contracts were concluded with aid of consultants with USAID funding.

World Bank Investment Company IFC and Asian Development Bank are involved in first LNG terminal funding. Some of these companies have started consultations with lawyers to protect their repute and business interests in Pakistan including approaching International Court for Settlement of Investment Disputes (ICSID) if warranted.

This comes on the heels of a fine of USD 5.9 billion by ICSID to Pakistan in Reko Diq case. The business community in general is concerned that such blanket review of long term contracts like LNG by NAB which are concluded after a global process may shake the confidence of existing local and global investors in Pakistan and those considering to invest.

Pakistan foreign investment has been reduced to half in last one year and Pakistan stocks have lost half the value in last two years from USD 100 billion to nearly USD 41 billion. Pakistan’s investment to GDP ratio is a low 15% as compared to India and Bangladesh Investment to GDP ratio at over 30%.

LNG is a clean efficient and cheaper fuel compared to oil and is opted by many countries in last 20 years. Bangladesh became 42nd country in 2018 to install a LNG terminal and added LNG to its Fuel mix. India is importing LNG for around 15 years now and is adding four new LNG terminals in addition to existing four by 2025 to double its capacity to import LNG to 56 Metric tonnes per annum (MTPA).

With an addition of 700,000 consumers last year, Pakistan’s gas shortfall is estimated to jump by 157 percent to 3.7 billion cubic feet per day (bcfd) in fiscal year 2019-20. This is almost equal to total gas supplies at present.

As per Ogra estimates, the gas shortfall will keep increasing every year to 6.6bcfd by FY2028. Pakistan failed in 2006 to start importing LNG and bring its fuel prices down after court decisions. Pakistan finally started importing LNG after first LNG terminal was commissioned in 2015

LNG is one of the latest fuels in global fuel mix. LNG now accounts for nearly 10% of total Global gas supply. Gas makes up of nearly 25% of total Global Energy fuel with only Oil and Coal having greater share than Gas. Pakistan relied largely on Oil Imports to run power plants and industry and made an attempt in 2006 to introduce LNG as a cheaper alternative.

However, finally in 2015, first LNG terminal was commissioned and like other markets Pakistan also signed a long term LNG supply deal with the biggest producer and exporter Qatar which maintains a near 30% global market share. Indian did same in 2004 with a 25 year deal with Qatar.

Bangladesh has done same in 2018 and signed a long term deal with Qatar. Pakistan went same route and signed a 15 year deal with Qatar in 2015 at 13.37 cents of brent. It was considered one of the lowest prices for a long term deal compared to many mature markets.

In fact India renegotiated its LNG prices with Qatar after Pakistan deal despite a penalty clause in the 25 year long term contract which was waived as part of negotiations. Market conditions have changed since Pakistan signed with Qatar in 2016. With new supplies from Australia, USA, Malaysia , there is a supply glut in market and more and more spot based trading is done and lower prices have set in. Out of 316 Metric tonnes of LNG Supplies in 2018, now 31% are non long term contracts.

Because of these market conditions, Pakistan is expected to get at least 20% better prices for new LNG supplies compared to 2016 Qatar deal. Even Qatar is willing to offer better rates to meet additional and new requirements of Pakistan due to prevalent market conditions and the able team under the experienced Nadeem Babar, Prime Minister Special Assistant on Petroleum is working hard to ensure it.

Putting the blame on Shahid Khaqan as to why he signed a long term deal with Qatar in 2016 defies logic as one could not have relied on spot market at that time to ensure a consistent supply of LNG. It was in line with what many new players did before Pakistan and continued to do. Thus the Qatar long term contract made sense and definitely done at better rates than a number of mature markets. In 2017, the petroleum ministry under Shahid Khaqan signed another LNG supply of lower magnitude than Qatar at nearly 20% less price compared to Qatar as market conditions continue to change.

Nevertheless, LNG import has saved Pakistan billions of dollars since 2015 compared to Oil imports and has benefitted its economy with cheaper power and improved operations of textile, fertilizer and other industries.

In NAB probe and in media, reservations have been expressed about the payments to two LNG terminals especially the first LNG terminal. There is a wide spread belief that Engro Elengy, the first terminal operator, has already recouped its investment in project of USD 130 million whereas its guaranteed total payment of USD 1.5 billion over 15 years. Question arises as to why Engro Elengy was given a high tolling based tariff upfront . The critics fail to note that USD 130 million is only the cost of onshore facility. They do not take into account that Engro Elengy arranged a USD 300 million FSRU from Excelerate Energy USA to regasify at LNG terminal and regular payments are made to Excelerate Energy.

In addition to that, Port Qasim gets a royalty of USD 8.5 Million per annum. And there are Maintenance, HR, interest payments of loans from IFC and Asian Development Bank and other financial charges. Engro Elengy tolling tariff after addition of 230 mmcfd handling in addition to initial 400 mmcfd including capacity and utilization charges is only 0.47 cents per mmcfd.

A ready comparison with Bangladesh first LNG terminal in 2018 as reported in a Bangaldeshi newspaper shows that Bangladesh tariff is over 0.48 cents per mmcfd. Engro Elengy handles 630 mmcfd where Bangladesh terminal handles only 500 mmcfd.

Engro tariff is equal or less than Bangladesh tariff whereas Engro Elengy handes over 25% more LNG supplies than Bangladesh terminal. Engro Elengy makes its payment to Excelerate Energy, international lender like IFC and Asian Development Bank and even Port Qasim Authority Royalty in USD and that’s why its tolling tariff is in USD.

Engro Elengy terminal is working at full capacity. There has been hue and cry about the under utilisation of second LNG terminal by Pak GasPort Consortium which is mainly due to non finalisation of demand by power division besides other factors.

Petroleum Division is working hard to allow private sector to use the spare capacity of 2nd terminal as there is heavy demand from local industry and LNG traders like Trafigura who have rights in 2nd terminal are keen to bring in LNG supplies. The demand is such that PTI govt is working at strong pace to commission a 3rd LNG terminal by 2020 to meet LNG demand.

Shahid Khaqan in his tenure as Petroleum Minister made a sincere effort to introduce LNG as a cheaper fuel in Pakistan energy mix. The PTI Energy is also working hard to further improve LNG supplies and improve efficiencies in the system.

There is a large global and privates sector involved in the process, who have invested billions to benefit from the LNG market opportunity in Pakistan. Pakistan in return is saving billions of dollars through cheaper LNG as compared to Oil. It’s a win win for all concerned and any accountability drive without firm merit will only affect and retard this process.