LNG long term price

Rarely has a state-to-state deal received as much criticism as the one on the long term LNG deal did. While there may be some controversial points in the nitty gritty of the long term deal, the one that attracted most flack was the price at which the deal with QatarGas struck. And that criticism seems to have lacked some wisdom.

First things first, the global LNG market is all about preferences of traders and producers. It is no secret that producers would generally prefer long term supply deals over traders who would opt for spot price. Bear in mind that the handling LNG terminals also have costs associated, which makes timely and uninterrupted supply of fuel, the single most important variable.

Moving on to the price component, the deal at 13.37 percent of crude oil for long-term LNG supply for 15 years, initially seems to be on the higher side. There were times when lower bids were placed, and the Qatar deal looked expensive. Evaluating a long-term deal with cargoes bough on short-term basis is not exactly an apple-to-apple comparison.

A look at the recently floated tenders by Pakistan LNG Limited, seeking LNG supply shows just why entering a long-term contract is not as bad as it is being made to look. It is worth repeating that the long-term contracts would generally even out in the longer run, while ensuring timely and uninterrupted supply – a cushion that is of high significance.

Two recent tenders for December 2017 and January 2018, fetched prices ranging from 13.98 percent to 16.89 percent of Brent crude. Even the lowest bid is higher than the price contract with Qatar Gas. Back of the envelope crude estimate suggests, Pakistan would end up saving around $48 million in December and January, for an average six cargoes per month, by virtue of the long term contract.

Now this may not be a huge number in terms of dollar saving and the context of Pakistan’s trade mix. But, to be able to save tens of millions of dollars in peak demand season, when spot prices are generally on the higher side, can only be good for Pakistan. There is no rocket science to that. Moreover, a bigger advantage is certainty of supply and saving on account of potential loss in terminal payments.

This is not to certify the long-term agreement is free of errors or that it could not have been negotiated better. But, too blatantly mark it is a dark deal, is factually incorrect.