As oil hovers around $70/bbl, the oft crucified LNG supply state deal with Qatar has started making more sense. Much was said and written over the LNG deal with QatarGas, and few technicalities aside, the heaviest criticism was aimed at the long term contract price. There is no denying, while the deal was being inked, 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.
Some things need to be put in perspective here. Pakistan is fast on the track to become a heavy LNG importing country. Rightly or otherwise, LNG will have a more than significant share in Pakistan’s energy mix a few years from today. Even if for argument’s sake, the LNG deal with QatarGas is assumed to be pricey, it will increasingly become a lesser portion of the imported LNG pie – which can grow to no bounds in the years to come.
The last two tenders floated by the Pakistan LNG Limited for supply of LNG clearly stamp the notion that the long-term deal is aimed at hedging against the volatility in the international oil market. Case in point is the rate of 16.89 percent of crude oil, being the lowest bid received for a week’s slot in January. The figures for March’s lowest bid are not much different, with the first week price quoted at 15.9 percent of crude. Compare this with the heavily criticized rate of 13.37 percent of crude oil with Qatar, and see for yourself who is saving how much.
Some of these bids have reportedly been rejected and fresh ones have been invited. But given the oil price trend, it is less likely to be vastly different from the ones rejected. This should also be reason enough for Pakistan to start rationalizing natural gas prices at home, so that the imported LNG is blended well with the existing tariff structure.
Mind you the LNG market around the globe revolved around preferences of producers and traders. The latter would always prefer spot deals, while major producers would not hesitate entering a long-term deal. Granted, there will be times when the long-term price may look on the higher side, when and if the oil prices cool down. But the whole point is to even it out over the longer run.
Bear in mind the LNG business has other costs associated as well, where timely and uninterrupted fuel supply is of utmost importance. The sport market players could chose from a variety of buyers, without any contractual obligation to deliver in time. This could result added costs of handling, and capacity payments – which will eventually either be borne by the paying customer, or will create a fresh pile of receivables. Both are unwelcomed outcomes.
Pakistan would not do bad to actually enter more long-term deals, with stable suppliers. Indonesia is being reported to be in talks with Pakistan over one such deal. Here is hoping, any new deal is kept more transparent to get the ball rolling. Also, Pakistan must not over commit too early and not put all the eggs in either basket of spot or long-term supply markets.
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