LNG im­ports in hot spot again

The Pak Banker - - 4EDITORIAL - Khaleeq Kiani

THE ba­sic ob­jec­tive be­hind im­port­ing LNG was to re­place the us­age of ex­pen­sive fur­nace oil by the power sec­tor. The PPP, care­taker and the PML-N gov­ern­ments had also pledged that im­ported LNG would not be in­cluded in the weighted av­er­age cost of gas for do­mes­tic con­sumers and oth­ers pro­tected un­der ex­ist­ing long-term poli­cies.

Un­der agree­ments with the gov­ern­ment, En­gro Cor­po­ra­tion is in the fi­nal stages of com­plet­ing its ter­mi­nal at Port Qasim for re­gasi­fi­ca­tion and sup­ply of gas to the na­tional trans­mis­sion sys­tem, op­er­ated from the port by SSGCL. The same agree­ment re­quired the gov­ern­ment to en­sure LNG im­ports lat­est by March 31 to en­able util­i­sa­tion of En­gro's LNG ter­mi­nal. In case of de­lay, the gov­ern­ment and its en­ti­ties are li­able for $250,000 in penal­ties per day.

As of now, the gov­ern­ment has not been able to fi­nalise im­port ar­range­ments or its pric­ing. The gov­ern­ment needs to fi­nalise ar­range­ments with IPPs first, to be able to trans­late the im­pli­ca­tions of im­port agree­ments into lo­cal sup­ply deals, which are not go­ing to be ac­cept­able to IPPs. "Putting the cart be­fore the horse" is not go­ing to work, ac­cord­ing to a se­nior of­fi­cial.

Tak­ing ad­van­tages of th­ese weak­nesses, some in the om­nipresent oil business have al­ready raised the ante by cir­cu­lat­ing sto­ries of bad LNG pric­ing even be­fore the prices were dis­cussed - a re­peat of the 2010 LNG ar­range­ments that were fi­nally an­nulled with the in­ter­ven­tion of the Supreme Court.

As of now, the gov­ern­ment has not been able to fi­nalise im­port ar­range­ments or its pric­ing

The gov­ern­ment had held a se­ries of meet­ings with IPPs like Saif, Saph­hire, Ori­ent, Hal­more, Rousch, Fauji Kabir­wala and Kapco etc, but none were will­ing to take ad­di­tional risks for up­com­ing com­pli­ca­tions beyond their ex­ist­ing obli­ga­tions un­der power pur­chase and fuel sup­ply agree­ments. In of­fi­cial jar­gon, th­ese back-to-back agree­ments are not ma­te­ri­al­is­ing.

The loom­ing com­pli­ca­tion is that the gov­ern­ment is in talks with Qatar for an LNG Sales Pur­chase Agree­ment (LNGSPA) that would need to be in­tro­duced back home through re­verse en­gi­neer­ing.

Con­se­quently, ad­verse con­di­tions in sales pur­chase or gas sales agree­ments would re­quire re-open­ing of past PPAs in­volv­ing a host of pub­lic sec­tor com­pa­nies - Wapda, WPPO, PPIB, NTDC etc - and lo­cal and in­ter­na­tional lenders, pro­vided the IPPs agree on gas pur­chases. The en­tire process re­quires 6-12 months, while LNG im­ports are just round the cor­ner.

So far, all the above men­tioned IPPs have de­clined to ac­cept the con­di­tions for LNG. They are cur­rently en­ti­tled to ca­pac­ity pay­ments even if NTDC fails to pro­cure their elec­tric­ity or if the fuel sup­plier (PSO or a gas company) de­faults on the fuel sup­ply.

On the other hand, the LNG agree­ment seeks the IPPs to be re­spon­si­ble for 100pc take-or-pay be­cause a ship at port has to be off­loaded even if the power pur­chaser is not ready to buy the elec­tric­ity for any rea­son. The IPPs are not ready to scrap a guar­an­teed straight jacket agree­ment and take ad­di­tional li­a­bil­i­ties for no gains - the fuel price is di­rectly passed through in the con­sumer tar­iff.

The end-out­come of this sce­nario is that the en­tire im­ported LNG has ei­ther to be ded­i­cated to the CNG sec­tor or the na­tional grid, and thus be made part of do­mes­tic and fer­tiliser tar­iffs. In both cases, do­mes­tic con­sumers would suf­fer be­cause of the im­pact on the weighted av­er­age cost of gas. This is be­cause almost all CNG sta­tions are on dis­tri­bu­tion gas lines in­volv­ing up to 15pc sys­tem losses and not on main trans­mis­sion lines.

The gov­ern­ment's re­luc­tance to pass on mi­nor gas tar­iff in­creases ap­proved by the gas reg­u­la­tor to do­mes­tic con­sumers sug­gest it would be dif­fi­cult for it to ab­sorb the dif­fer­ence be­tween the im­ported LNG's cost of $10-14 per MMBTU and the do­mes­tic ex­ist­ing price of $3-4 per MMBTU. The Sindh gov­ern­ment and SSGCL have al­ready de­clined to have a part in LNG be­cause of its higher cost when com­pared with their suf­fi­cient lo­cal sup­plies. Sindh pro­duces about 70pc of the coun­try's ex­ist­ing gas sup­ply and utilises less than 40pc of na­tional con­sump­tion.

The ex­po­nen­tial growth in the gas price over the next cou­ple of years could be as­cer­tained from the fact that LNG flows of 250MMCFD has to be­gin on April 1 un­der the agree­ment, be­fore grad­u­ally go­ing up to 400MMCFD by Oc­to­ber. On top of that, another 1,200MMCFD in LNG im­ports are to be de­liv­ered by 2017, fol­lowed by a fur­ther 1,200MMCFD by 2019.

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