Govt ties LNG imports with consumers’ buying ability

ISLAMABAD: The government will sign additional liquefied natural gas (LNG) import contracts only when there is a sufficient demand from buyers in the country in a bid to avoid any other circular debt crisis, petroleum division said on Friday.

“The government has to ensure that we can sell the full 800 mmcfd [million metric cubic feet per day] every month before we can commit to more long-term contracts,” the petroleum division said in a statement. “When the projections will show that the country has firm demand exceeding 800mmcfd on a consistent basis, only then, the government will consider signing more long-term agreements. Otherwise, it will be releasing LNG in the air.”

The petroleum division, part of ministry of energy, said the government can only buy more LNG when confirmed buyers are available who will pay the full price “since LNG is not gas as per law”.

“Otherwise, it will create a LNG circular debt,” it said.

All LNG under contracts is take or pay, and when a spot cargo is procured, it becomes take or pay. Each cargo is approximately $25 million in value.

“Using financial prudence, the government is buying additional volumes, above 800mmcfd of prior contracts, based on demand from consumers who are prepared to pay the full price,” said the petroleum division. “Buying more without ability to recover the full cost would be reckless.”

In the last four years, the government has paid billions of rupees in charges for unutilised capacity of LNG terminals.

“If the present government is to build more terminals on the same financial model, much larger amounts will be paid out of public money that will go waste,” said the petroleum division.

Private investors are permitted LNG imports with no financial commitment on the part of government. Two private companies are moving forward and one is likely to break ground within two months.

The spot cargoes are prepared for delivery (within one to two months), whereas in forward buying (order today for delivery much later), the pricing for such purchases is undertaken on a forward curve for Brent and swap spreads for slope.

“So, if spot cargoes were available in July for 10 percent of Brent, resulting in $4/MMBtu [million metric British thermal unit] delivered price, an order placed in July for delivery in December does not get priced at $4/MMBtu,” said the division. “The sellers will use forward projections of Brent in December and a swap spreads for slope in December, resulting in a much higher price for delivery in December.”

The petroleum division further said global demand of LNG goes up dramatically in winter compared to summer. Summer spot prices are lower and winter prices are higher. Even ignoring the current winter season, the range of spot prices in tenders in the last one year spanning a winter and a summer has been at a slope of as low as 5.8 percent and as high as 15.78 percent.

From September 2018 to November, a total of 35 spot cargoes were bought by Pakistan, with an average spread of 10.4 percent of Brent compared to 13.37 percent of Brent old contracts.

“Even if the high of December 2020 is added, the spot average still comes to only 11.3 percent and this average will go down after January 2021,” said the division. “Spot cargoes are ordered once firm demand is available showing the need for going above 800mmcfd.”

The petroleum division said Public Procurement Regulatory Authority’s (PPRA) rules followed in routine require approximately 75 days procurement process. “If an emergency cargo is needed, the process is shortened, again staying within PPRA rules.”

The division said industries were shut down during lockdown and electricity demand was low in the middle of summer.

“When lockdown restrictions were eased, the economy had a V-shaped recovery and the demand picked up rapidly,” it said. “When additional demand was placed, emergency tenders were arranged to procure the LNG.”

The petroleum division further said when load shedding hit the city of Karachi this past summer, and K-Electric (KE) did not have enough furnace oil in stock which it is required to do, some LNG ordered for the National Transmission and Despatch Company (NTDC) was diverted to KE.

“This resulted in replacement of that capacity in the NTDC system with RFO [residual fuel oil] for about two months until the emergency cargoes of LNG were delivered,” it said. “As of end of November, the total generation on RFO in the NTDC system in 11 months is less than 3.5 percent of total generation.”