The thir­teen bil­lion dol­lar blun­der

The Pak Banker - - EDITORIAL - Dr Mubashir Hasan

IT ap­pears that the PML-N govern­ment is ei­ther un­will­ing or in­ca­pable of learn­ing from past er­rors. The de­ci­sion to sign a Long Term Sale agree­ment (LSA) with Qatar is egre­gious and ex­poses Pak­istan to ex­actly the same risks that the Be­nazir govern­ment af­fected when she signed the IPP con­tracts in 1994 un­der the ad­vice of USAID, the World Bank and the Asian De­vel­op­ment Bank. It seems that the avarice of our rulers re­mains un­changed.

At that time, in 1994, the price of oil was $18/bar­rel and the ru­pee was at 28/$. The agreed price of fur­nace oil was fixed at Rs5,000/tonne with any es­ca­la­tion as a pass through item giv­ing an elec­tric­ity unit rate at Rs1.8/unit. By 2007 the price of oil was $120/bar­rel and the ru­pee was 100/$, the price of fur­nace oil in­creased fif­teen fold to Rs75,000/tonne and price of elec­tric­ity shot to Rs20/unit. As this was un­af­ford­able to most Pak­ista­nis it led to the govern­ment sub­si­dis­ing it - re­sult­ing in the in­fa­mous cir­cu­lar debt and per­ni­cious load­shed­ding.

By re­ly­ing on ex­pen­sive im­ported fuel, the new LNG deal falls into ex­actly the same trap. At the agreed price of 13.3 per­cent of the price of the cur­rent price of Brent of $30/bar­rel, the gas rate works out to be $6/MMBTU. How­ever, if you in­clude all the fuel, port and tolling charges the power rate would be ap­prox­i­mately Rs6/unit. But what will hap­pen in a few years or so when, as ex­pected, the price of Brent oil climbs to $100/bar­rel once the sup­ply and de­mand for oil is matched (Saudi King Sal­man is vis­it­ing Rus­sia in mid-March to ne­go­ti­ate just that), and the ru­pee de­pre­ci­ates to 200/$ as may well hap­pen given our rulers predilec­tion for binge bor­row­ing, si­mul­ta­ne­ously with de­clin­ing ex­ports. The LNG rate will then be $15/MMBTU and the price of elec­tric­ity an un­af­ford­able Rs22/unit. But as the LSA is a take or pay we will still be obliged to pur­chase this un­af­ford­able fuel, just as Wapda was ob­li­gated to pur­chase un­af­ford­able power for oil fired IPPs.

By all ac­counts there is a gas price war go­ing on. The price of Rus­sian gas in Europe as per the TTF in­dex has de­clined to an all-time low of $3.3/MMBTU in France and Hol­land, while the in the US which has been re­cently al­lowed ex­port of LNG, the price of gas based on the Henry Hub in­dex is $2/MMBTU (by com­par­i­son Pak­istan is pay­ing $6/MMBTU for its im­ported gas).

Even a so­phis­ti­cated econ­omy like Ja­pan never en­tered into a Long Sale Agree­ment for LNG. In­stead, it had short­term agree­ments while it sorted out a long-term en­ergy so­lu­tion. The PML-N govern­ment should have done the same and en­tered into a three-year agree­ment or even bought the cargo on the spot mar­ket un­til it sorted out a long-term so­lu­tion.

LNG can only be an in­terim so­lu­tion, be­cause in the long run it can never com­pete with piped gas. LNG costs al­most $2.5/MMBTU to liq­uefy, trans­port and re-gas­sify. At cur­rent prices th­ese charges are al­most as much as the price of the gas it­self. That is why Amer­i­can LNG can never com­pete with Rus­sian gas in Europe. Be­sides why is there an ob­ses­sion to in­stall power sta­tions in Pun­jab when the most suit­able lo­ca­tion would be nearer the source of the fuel - in this case, Balochis­tan? Z A Bhutto's govern­ment built the first ther­mal power sta­tion at Guddu, the lo­ca­tion clos­est to Sui with ac­cess to cool­ing wa­ter.

If the govern­ment was hell-bent on re­ly­ing on im­ported fuel, then the most vi­able al­ter­na­tive was the Iran pipe­line. Iran has al­ready of­fered us this gas at $3/MMBTU (al­though, for sure we could have ne­go­ti­ated an even bet­ter deal). As Iran has al­ready built the pipe­line to its bor­der, if a power sta­tion were in­stalled in Gwadar or Ji­wani where there is ac­cess to cool­ing wa­ter, the cost per unit of elec­tric­ity would not have been more than Rs3.8/unit or al­most half of what it costs for im­ported LNG. Iran can only ex­port gas by pipe­line through Turkey or Pak­istan, and its ex­ports via Turkey com- pete with cheap Rus­sian gas. Piped gas is not in­dexed to Brent and there­fore its long-term prices can be bet­ter man­aged. The hurry to sign a $15 bil­lion con­tract for im­ported LNG with Qatar just as the sanc­tions on Iran were lifted is per­plex­ing.

Pak­istan has a par­lia­ment but its mem­bers were ei­ther not aware of the facts or chose to stay silent. The en­tire deal raises se­ri­ous ques­tions. For ex­am­ple, Qatar only agreed to lower its price af­ter an in­de­pen­dent sup­plier Gun­vor quoted a lower price. Fur­ther, why was the min­i­mum off take in­creased from 1.5 mil­lion mtpa to 3.75 mtpa, bur­den­ing our econ­omy even more? This is nor­mally only done when the deal amount and as­so­ci­ated com­mis­sion is fixed, so if the price de­creases the off-take in­creases pro­por­tion­ately.

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