Double jeopardy: Either buy LNG for Rs5b more or let country freeze in Feb

KARACHI: The federal government is seemingly caught up in a crisis of its own making by either purchasing LNG at a prohibitive cost of over Rs5 billion or let the country shiver and freeze without heating fuel throughout February.

If this was not enough with no alternative fuel, the country may also be forced to generate expensive power through furnace oil. This was said by Shahzeb Khanzada while hosting Monday’s episode of 'Aaj Shahzeb Khanzada Kay Saath'.

Khanzada said LNG tenders for February were opened on Monday in which the companies offered two bids for supplying the gas in the second fortnight of February at 20.8 percent and 32.4 percent cost of Brent.

If the country goes down this road it will have to accept the highly expensive bids being offered at 23.4 percent for second week of February (Feb 15-16) and at 20.8 percent for the third week of Feb (Feb 23-24), inflicting a loss of cool $30 million i.e. Rs5 billion due to making spot purchases instead of acquiring the commodity in futures earlier.

The problem further complicates if it does not, the country will confront a massive gas shortages in February and it will be forced to further lose billions from the exchequer by generating power through furnace oil. This alone will cost Rs10 billion in losses over two months period due to contracting gas for acute winters much later in the day. Similarly, Rs20 billion is feared to be lost because in absence of LNG, the power would be generated through expensive furnace oil and diesel.

Khanzada reminded that earlier in 2020 due to prevailing coronavirus pandemic Pakistan had the historic opportunity of acquiring gas in futures purchase at rock bottom prices, but while rest of the world benefited from the slump, we chose not to. This was the time when LNG was available at $2-$2.5 and in futures purchase it was further available at a $4-5 premium. Several countries contracted record long term deals in the first six months of 2020, but we did not.

If the previous government had not contracted long term gas supplies from Qatar, Genver and ENI, the country would have been virtually without fuel now. Expensive power is being generated by furnace oil. LNG terminal would remain underused in Jan and February despite increasing demand and that would cost a damage of over Rs one billion alone. Now the country is posed by difficult choices of purchasing expensive gas at 23.5 per cent or no gas at all.

SAPM on Energy Nadeem Babar kept on insisting that delay in opening bids had nothing to do with rise in the prices of gas. The Trafigura had submitted bids at 32.4 per cent for Feb 15-16 and at 25.9 per cent for Feb 23-24 meaning a single cargo alone will cost over $14.

In April, the Trafigura had offered long term gas supplies at low tariff and at the fixed rate of $3.7-$4.25 which could have saved the country Rs 200 billion in over two years. Pakistan could have exploited the opportunity in global markets. Same was repeated later in Oct 2020 when LNG was available at less than $6 for February 2021.

But we refused despite knowing the high demand for winter months. In August, it was available at less than $5, and only 20 days ago the LNG was available at $8, but a loss of billions was incurred by inviting late bids from Nov-Feb. On September 11, Bloomberg reported LNG at its 8-month-highest cost as Australia and Norway were aggressively purchasing gas due to outages to prevent future losses. Even India was also purchasing gas in futures market. The Bloomberg explained the price rise was due to shrinking supply and it had warned back in Sept that there might be a global run for gas in the winters. In anticipation of second wave of coronavirus, the countries aggressively purchased LNG from the futures market to offset the spectre of purchasing expensive gas later.

On Oct 6, if the price of LNG witnessed a sharp peak due to forecast of acute winters and the consequent problems in gas supply and several countries raced to purchase the shrinking commodity. If in Oct our energy Tsars had invited bids for Jan and Feb, and they were opened in Nov, gas for the later months would have been available easily and at much cheaper rates.

Once again global market witnessed a sharp peak in LNG price in October due in apprehensions of supply interruptions in the fast approaching winters and the supply was already being affected in Nigeria, US and Norway. Even if at that time the tenders had been opened the LNG would have been available at cheaper rates. On Nov 13, it was reported that India, Russia and other countries were hectically purchasing LNG for Jan and February 2021. We ignored the opportunity once again and invited bids through advertisements on Nov 28 and the bids were opened at expensive rates on Monday ( Dec 29). This is the route to another crisis.