Private party to supply RLNG under TPA rules

ISLAMABAD: Pakistan’s LNG scenario is going to change as the first ever private company UGDC (United Gas Distribution Company) that has already singed LNG supply agreements with international companies ExxonMobil and Trafigura is close to sign a landmark long-term deal with APTMA for supply of 120 mmcd RLNG under third part access (TPA) rules.

However, Sui Northern, PSO, PLL (Pakistan LNG Limited), and Sui Southern started feeling the heat much earlier with the implementation of third party access rules that allow private parties independently bringing the RLNG and sale it to the private sector in Pakistan by using the gas infrastructure.

The said entities are of the firm opinion that RLNG consumers such as export industry, general industry and CNG sector will go out of their jurisdiction and will start getting the RLNG from private parties.

The said entities are upset mainly because OGDC will provide RLNG at much cheaper rate than that of RLNG being provided by them. They argued that they are bound to buy RLNG under contract with Qatar, Gunvor and ENI, which is high in terms of cost of compared with the cost prevailing in the existing open market. All the government entities involved in RLNG supply chain are also looking the government endeavour to privatise two RLNG plants with the fear the new owners of the plants after privatisation may not get RLNG from Sui Northern. The government has basically arranged the RLNG supply for RLNG based power plants at Haveli Bahadur Shah, Balloki, Bhikki and Trimmu and out of them federal government is going to sale out two RLNG based plants at Haveli Bahadur Shah, Balloki to earn about Rs300 billion. So, Sui Northern in an interaction with Privatization Commission stressed to ensure that after privatisation of the RLNG based power plants, the said plant must adhere to the agreements of getting RLNG from Sui Northern at any cost otherwise Sui Northern and other entities and even the government of Pakistan will default on deals with Qatar on LNG supply and also the deals with ENI and Gunvor and PSO and PLL will have no liquidity when their RLNG will not be sold and ultimately they will default on opening of L/Cs and paying back to RLNG suppliers.

These all apprehensions Sui Northern has expressed in official letter written on September 23 to Additional Secretary at Petroleum Division and a letter written on September 24 to DG gas about the meeting of Sui Northern official with Privatization Commission counterparts on privatisation of two RLNG plants. The said official documents are in possession of The News.

However, the textile which is export industry is the current client of public sector Sui Northern which is getting RLNG at $6.5 per MMBUT for which the government is extending Rs25 billion subsidy per year has decided to ink deal with UGDC wishing to confirm the agreement. The APTMA which has now tired of the government’s irritating policy under which textile industrialists receive the RLNG bills with full cost not at the agreed price of $6.5 per MMBTU and the they pay the full cost and after one month period when subsidy is extended by Finance Division, the cost tumbles to $6.5 per MMBTU.

Adviser to APTMA, Shahid Sattar, confirmed the development saying that textile industry has always been asking the government to give the RLNG bills as per the agreed cost of $6.5 per MMBTU, but they have been forced every time to first pay full cost that stands close to $11 per MMBTU and after releasing the subsidy after one month to Sui Northern, the excess amount is paid back to textile industrialists. “The process is very irritating for textile industry as the huge liquidity every month gets stuck with the government only on account of RLNG bills. Now to overcome this agony, we have decided to ink RLNG deal at the price at par with the gas price textile sectors of the regional competitive economies are getting.”

However, the official at Petroleum Division says that If APTMA goes, Sui Northern won’t be able to sell more than 150mmcfd RLNG to its consumers at best other than power. He asked the question as to where the legacy contract supplies will go.

More importantly Sui Northern, according to Mr Sattar, has asked textile industry to deposit Rs2,000 per mmbtu against the three-month consumption of RLNG which will aggravate liquidity crisis of industry manifold. In addition, the attitude of Sui Northern towards APTMA and even power sector is not professional, so, its many clients are switching over to UGDC.

“So much so we are uncertain what will happen in future if the government continues the energy package to export industry in next year or not and that’s the main reason APTMA is unable to carve out its future business strategy to stimulate the growth in textile sector.”

Mr Sattar mentioned a meeting in which Prime Minister Imran Khan had given go-ahead to provide the energy package for 5 years, but the red tape is not allowing it to happen which is why APTMA is unable to carve out its future business plan.

Ghiyas Abdulla Paracha, CEO of UGDC when contacted said, yes, Pakistan textile industry is very keen to ink deal with UGDC for RLNG supply and to this effect he got first formal letter from APTMA. As far as the RLNG price is concerned, he said, it is yet to be decided but it will suit to APTMA. Mr Paracha said that his first deal with APTMA will be a win-win situation for government and private sector as well arguing that the revenue of the government will not suffer, rather the Rs25 billion subsidy it is extending to export industry will be no more there after the deal between APTMA and UGDC. However, he showed his inability to further share the details about the cost of RLNG that UGDC will provide to APTMA and other clients.

However, with this first expected private-to-private party on RLNG supply will inflict the huge loss to Sui Northern, Sui Southern and PSO as under TPA (third party access) rules their clients that also include the general industry will leave them and get the RLNG from UGDC at much lower price.

Spokesman for Petroleum Division Additional Secretary Sher Afgan, while talking to The News, agreed that under third party access rules, private company can import RLNG and utilise the gas infrastructure to transport its gas to its clients and it will break the monopoly of gas companies — Sui Northern and Sui Southern. He also agreed that Sui Southern and Sui Northern, PLL and PSO will feel the heat as the government and its said entities are in various agreements starting from LNG supply from Qatar, Gunvor and ENI at fixed rates.

The official correspondence with DG Gas unfolds that SN wants the existing Gas Sales Agreement, Implementation Agreement, an agreement under which RLNG plants are bound to lift minimum 66 percent guaranteed off take of RLNG and Reimbursement Agreement with RLNG power plants even after privatisation must continue otherwise new owners will not buy the RLNG from Sui Northern. This will pave the way for default of all government owned entities involved in RLNG supply chain.

According to the documents, the state-owned companies, which are part of RLNG supply chain, fear that one day they will go default, if they are not provided the level playing field as the private sector companies will grab their consumers as the private sector companies have better and cheaper prices of RLNG where as PSO, PLL, Sui Southern and Sui Southern are bound to buy RLNG from Qatar, Gunvor and ENI under contracts at high prices if compared with RLNG price that private company has managed keeping in view the current glut of RLNG in the market. They fear that their RLNG will not be sold out owing to which recovery will not take place resulting in the default of the said state-owned companies.

SNGPL has suggested, according to the documents, to the government that all the shippers should be equated while the gas companies of Sui Southern and Sui Northern should not be put in a disadvantageous position for no fault of their own. SNGPL is obligated to sell RLNG at prices negotiated by the government entities, which is beyond our control.

Sui Northern has also expressed its apprehension over the implementation of Third Party Access rules saying it does not provide the level playing field to the public sector gas companies, therefore, their clients will switch over to the private gas company.

The letter of SNGPL written to Additional Secretary at Petroleum Division of which copy is also exclusively available with The News unfolds the SNGPL apprehensions saying that there is no additional demand for RLNG at this time, and all parties will be eying existing consumers of the gas companies and none of them is planning to explore new consumers. According to the letter, Sui Northern has expressed its ire that the existing consumers will switch over while net consumption or demand would remain the same.

The Sui Northern also mentioned the decision of ECC under which it was decided that LNG terminal operator (s) may allocate their additional re-gasification capacity of terminal to third parties on commercial basis. Sui Northern is of the firm opinion that there is no additional capacity in the said two terminals for third party usage.

SNGPL is also of the view that all the shippers should be equated while the gas companies should not be put in a disadvantageous position for no fault of their own. SNGPL is obligated to sell RLNG at prices negotiated by the government entities, which is beyond their control.

Sui Northern to counter the situation may provide same import price to all shippers through weighted average mechanism. As no protection has been provided to the gas companies in respect of direct import of RLNG by private importers while SNGPL promotes and adherers to TPA regime, it is important that there should be a level playing field for all the parties. The Sui Northern wants a mechanism that should be devised to avoid cherry picking by third parties.

The level playing field may only be possible if RLNG price for all the parties shall proportionately include cost of diversion of our RLNG to less tariff sector, being a cost arising from GoP policies along with other similar cost while discriminatory treatment shall not be practiced against any entity including SNGPL.

The top official says now under new scenario, the LNG in open market has come down because of glut in market and surprisingly the demand is very much there. So private sector such as export industry, general industry, CNG sector will definitely go out from the jurisdiction of Sui Northern, but still they have very good clients as housing societies and special economic zone which are being built under CPEC projects. The PSO is under contract with Qatar for 15 years for RLNG supply. However, after 10 years Pakistan can come out of agreement. Similarly, PLL is also under contract with Gunvor and ENI for three and 5 years respectively for RLNG supply. In the presence of these agreements, Sui Northern, PSO and Sui Southern will be having not level playing field, rather they will expose to default as there will be no more to buy their RLNG, which is costly because of the long-term contracts.

The official said that large increase in LNG liquefaction plant capacity additions in recent years, led by Australia and the US, helped establish a buyer’s market in recent years as supply outstripped demand.

An oversupplied market combined with a fall in crude oil prices has allowed buyers (and new entrants) to gain favourable LNG supply terms for new contracts (i.e. lower pricing levels, competitive slopes , and more flexible terms), while also giving some an opportunity to re-visit older contracts through exercising re-opening clauses to reset pricing terms by removing price caps and floors or reducing the oil index slope, leading to significant savings in some instances.