The MPNR has been trying to implement the LNG import project for the last many years. Its high capital cost and even higher LNG prices have posed many problems. Our focus in this space is limited, that is to examine if it is possible to cause some reduction in the proposed contract prices of LNG, which have been pegged at around 80% of the oil price. This would amount to between 3 to 4 times the existing wellhead prices of natural gas in the country.
The answer is yes and no, as we shall see later. However, the subject being of grave importance in the wake of dwindling gas supplies at home and the purchasing power of consumers being very low. The first and foremost answer would be to develop the local energy resources, be it hydropower, Thar coal or local exploration and development of conventional and non-conventional gas resources. How to go about it? We have been discussing these issues in previous articles in this newspaper and this is not the scope here. How to reduce the cost of imported LNG is our focus here.
We will have to review some background information, in order to be able to explore and understand the issue and weigh the options that may be available. There is a significant price difference of LNG in various regional markets, depending on who is buying and who is selling. The FERC (Federal Energy Regulatory Commission) of USA has released the following Landed Price data on LNG for March 2012; Japan and Korea 14.60 USD per MMBtu; UK 9.03; India 13.45; and the US 2.25-2.73. The US figures are unimaginably low but entirely possible under long-term contracts. LNG has been sold under long-term take or pay contracts. That is the customer has to either lift the agreed supplies at the agreed schedule or pay for it irrespective and suffer the loss. It is not easy to store or gasify LNG and such capacities take many years to build. LNG suppliers make investments and capacity allocations in a long-term context, say ten or more years. Even LNG transport ships have fixed and allocated schedules.
However, things are changing. More suppliers and sources are emerging and the required investments being made. And LNG has started to be available under spot buying. It is said that 25% of LNG trade is already under spotting. As has been mentioned earlier, that there is significant variation in LNG prices among various regional markets, it should be possible for the buyers and sellers to reduce this gap and divide the margin. This is called arbitrage, in international trade terms. Hence our question boils down to a technical one; is there a scope for arbitrage in LNG imports of Pakistan, and thus a reduction in the LNG import price?
The existence of a significant price differential is not the sole condition, however, that arbitrage may take place or be feasibly attractive. There are other conditions as well; the foremost being the availability of free and unencumbered LNG cargo, along with a time slot in an LNG transporting vessel to direct LNG supply from one destination to another. Demand and supply variations in other LNG substitutes may create such an opportunity. For example, LNG prices in the US coming from North Africa are one-half cheaper than the proposed Pakistan-bound LNG prices from Qatar. In the US, there is a glut in gas supplies due to the advent of Shale gas there, as opposed to earlier when there was shortage and consequently the gas prices there were twice the currently prevailing prices. Some LNG projects were launched in that period, in which capacity should be available for arbitrage (diverting elsewhere). Similarly, gaps may be emerging in other markets and sources. There may emerge extra free capacities and supplies from time to time. Feasibility or desirability of arbitrage also depends on how critical is one's demand situation and the stability of supplies requirements. For example, Japan and Korea would prefer stability of supplies than the price advantages of a variable supply under arbitrage.
Additionally to benefit from arbitrage or cheaper spot procurement, one has to have free or extra LNG shipping vessels, storage and regasification capacities. Ideally, one should own a ship or have it under long term lease. One should also have gas storage facility. It need not be LNG storage, which is awfully expensive. One could develop storage capacity for ordinary natural gas in the depleted gas fields, which is comparatively much cheaper. Most countries, in the developed world, maintain large gas storages equal to several months of consumption requirements. Apart from adding to energy security, these storages play a key role in meeting high demand in winters. Similar facilities are required, especially, in Punjab where heating demand in winters create a major supply bottleneck. These gas storages would also play a role in building arbitrage options for cheaper LNG supplies.
We should explore the possibilities of building arbitrage options and infrastructure. Reportedly, the Planning Commission of Pakistan is seized of the proposition and is examining the same. This is where the US administration can help us by facilitating its LNG sector towards building arbitrage arrangements with its private sector. They should be able to offer something in return while opposing the gas pipeline project from Iran. Americans can do many things to help solve or at least alleviate our energy problems, which we would like to elaborate in this space some time in the near future.
Arbitrage is a highly complicated and least understood subject. We should hire independent, third-party consultants who have exposure to this uncommon yet evolving LNG trade mechanism. Arbitrage options should be built in the long-term agreements that are to be made in this respect. In fact, keeping in view, the fast changing LNG trade and supply environment, it is advisable to enter into shorter-term agreements. Dr Asim, the new dynamic minister of petroleum is aware of this and has recently travelled to Qatar for shortening the contract duration, among other issues. For good reasons, suppliers in Qatar would like to tie in the buyers for a longer term, under contract conditions which would be agreed at a time of gas shortage and thus are likely to favour the suppliers than the buyer.
It would also be desirable to keep the LNG storage and gasification facility separate from the Gas supplier and the GSPA. Regasification facility owner should only charge its processing fee. Much more money is involved in the LNG energy charge than the capital cost of storage and gasification facility. At least 25% of the LNG capacity should remain unencumbered so that cheaper procurement under spotting and arbitrage can be effected. This free portion could also be made part of the open market system not subject to regulatory intervention. Large customers from the industrial sector may be able to make good use of the facility. Gradually an open market gas sector can be built around it, which may eventually incorporate locally produced gas as well.
And lastly and most importantly, although I am not quite sure about it, it is entirely possible that international suppliers, with or without collusion of the local authorities or private sector, may indulge and benefit from arbitrage without the knowledge of the buyer at this end and thus pocket the difference quietly. Safeguards have to be built for this. In Africa, similar leakages are prevalent in the mineral sector and a lot of international effort is going on to plug this kind of pilferage. Publish what you pay is such an initiative. I am sure the relevant authorities would be cognisant of it and would have taken the required measures already. However, this underscores the need of transparency in energy supply agreements, be it LNG or pipeline gas from Iran. Except for limited newspaper reports, not much has been published on the details of these contracts. These should be published on the website of the MPNR. I am not sure whether there is a parliamentary requirement in this respect as well. If contracts are scrutinised by the respective parliamentary committees, then such a record is made public.
(To be continued)
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