LNG import in the doldrums

ISLAMABAD: With the winter season looming, the entry of the private sector into importing and selling one LNG cargo a month under third party access (TPA) rules has landed in the red zone as an agreement about the utilisation of the excess capacity of 100 mmcfd available at LNG Terminal-2 signed on August 3, 2022, between the Pakistan LNG Limited (PLL) and the Pakistan Gas Port Company Limited (PGPCL) has hit a snag.

The Petroleum Division (PD) has placed five new terms and conditions that have virtually scratched down the signed deal about the utilisation of the excess capacity of the LNG terminal owned by the PGPCL.

All this has been stated in the PGPCL’s latest communication to the Petroleum Division, which says that any deviation from the contract signed between the PGPCL and the PLL is not workable and acceptable.

The relevant official in the ministry confirmed that the Petroleum Division had placed new terms and conditions for the PGPCL and the PLL, which put the import of one cargo of LNG by the private sector by using the excess capacity of the FSRU at LNG Terminal-2 in the doldrums. He said that on the new terms and conditions (proposals) placed by the Petroleum Division on September 3, 2022, through a letter from the DG LG Directorate, sought the comments of the PGPCL and the PLL before making a summary for the ECC on September 20, seeking the approval of the PGPCL-PLL deal on use of the excess capacity of the LNG terminal owned by the PGPCL. He also preempted the legal action from the PGPCL if the Petroleum Division annulled the contract signed on August 3 and insisted on re-inking its agreement on the use of the excess capacity of LNG Terminal-2 based on five new terms and conditions. The official said that undoubtedly, the new terms and conditions were meant to foil any attempt by any private company under TPA rules to import LNG and sell LNG on a BtB basis.

Pakistan needs 12 LNG cargos in a month to cater to the increasing demand in the coming winter season. The country is now importing 7-8 LNG cargos per month under term agreements signed with Qatar and ENI, which are not enough to meet the country’s energy needs and the PLL is unable to bring spot cargos from the open market, mainly because of two reasons: one is that LNG producing countries and trading companies are over committed with Europe for provision of LNG. The demand for LNG in Europe has escalated manifold after it imposed sanctions along with the US and Japan on Russia because of its invasion of Ukraine and the second is that the PLL has failed to create a clout in the LNG market and ensure the cargo from the open market through bids in the coming winter season. For two-three months, it already failed to allure bids at reasonable rates for procurement of LNG from the open market. The PLL has been operational with an acting MD for long and its performance is in question.

Masood Nabi was acting as MD when LNG was available at $4 per MMBTU in the market for medium to longer-term agreements when the first wave of Covid-19 hit the whole world. Prime Minister Shehbaz Sharif mentioned time and again the failure of the PTI government for not taking advantage and inking an agreement for the import of LNG at $4 per MMBTU. Nabi also failed to initiate any process to enter into a new term agreement some six months before knowing the fact that a 5-year terms agreement with the Gunvor will expire in July 2022. Now the term contract with the Gunvor has expired. However, the ENI is providing an LNG cargo a month under a 15-year term contract. The ENI is currently providing LNG to Pakistan every alternative month, not every month, but the PLL is unmoved and has not taken any required action.

Masood Nabi recently visited Italy to attend the Gastec conference, but the time will tell if the visit was result-oriented for Pakistan in terms of provision of any LNG cargo from the open market or not for the winter season.

However, with the signing of the contract about using the excess capacity of LNG Terminal-2 by the PLL and the PGPCL, hopes were pinned on the private sector to import one LNG cargo a month on the BtB (business to business) model from the end of the ongoing month of September, but the new terms and conditions placed by the Petroleum Division have erased the hopes to import LNG cargos on a BtB basis.

A copy of the PGPCL’s communication on September 19, 2022, addressed to the DG LG, available with The News simply pleaded that the new terms and conditions were not in line with the signed contract and any deviation from the deed was not acceptable and workable. So the PGPCL shows its inability to accept the terms proposed by the Petroleum Division.

The PGPCL said in its communication that after four frustrating years, the PLL and the PGPCL signed an agreement on August 3 for utilizing the excess capacity of LNG-Terminal 2, which would have seen at least one cargo at the PGPCL terminal by now. The new terms and conditions placed by the Petroleum Division are also available with The News, saying that TPA arrangements may be for up to one year only and extendable under a mutual agreement.

The official said that the new condition that TPA arrangements might be up to for only one year would serve nothing but to hurt the import of LNG by the private sector. LNG experts said the private company would have to ink agreements with LNG suppliers in the international market for more than five years at least, but the PD is suggesting that the TPA arrangement would be for only one year. This means that the government does not want any private company to enter the LNG business.

The LNG experts and officials say that factually, LNG Terminal-2 has 750 mmcfd capacity out of which, 600 mmcfd had been procured by the PLL under the original OSA (operation and services agreement). “This means that the PGPCL has an additional capacity of 150 mmcfd on the terminal, but when the contract about the utility of excess capacity signed on August 3, 2022, the PGPCL gave a huge advantage to the PLL by doling out a capacity of 50 mmcfd more without any price and this is how the procured capacity of the PLL has increased to 650 from 600 mmcfd. But the Petroleum Division’s top functionaries in return asked for 50 per cent share in the revenue the PGPCL will earn by importing and selling one cargo under TPA rules.”

The experts say that the government has virtually backed out from the agreement signed on August 3, 2022 and does not want any private party to enter LNG business under TPA rules.

The Petroleum Division also wants, as per its letter written on September 19 to the PLL and the PGPCL, that the PLL will have unconditional access to peak daily delivery of 650 mmcfd for 300 days (to be increased to 350 days subject to offshore container terminal schedule and 690 mmcfd for 45 days on the firm basis, not on the operative’s reasonable endeavours basis. The official says this condition totally negates the agreement signed on August 3, 2022. He says that as per the signed contract on utility of the additional capacity of the LNG terminal, out of the total physical capacity of the FSRU of 750 mmcfd owned by the PGPCL, the PLL will have unconditional access to peak daily delivery of 650 mmcfd for 300 days (to be increased to 350 days subject to offshore container terminal schedule and 690 mmcfd for 45 days on the operative’s reasonable endeavours basis in accordance with Clause 9.3.5 of the agreement, subject to unloading of a maximum of 4.5 million tons per annum of LNG by the PLL at the PGPCL terminal.

The Petroleum Division has also placed a new condition under which the operational capacity test of the floating storage of regasification unit will be conducted at the operators’ expense by the operator (PGPCL) and confirm that the daily delivery capacity of 650 mmcfd for 530 days can be made available to PLL on the firm basis. The official said the condition was also irritating as the deal signed on August 3 clearly said that if the PLL suffered any demurrages or loss as a consequence of the failure of the third party or the operator, the PGPCL would bear the loss to be suffered by the PLL and would indemnify the PLL in any such instance. On the other hand, the PLL would neither take any additional liabilities nor incur any extra costs for facilitating the import of the private sector LNG cargoes, as per the agreement.