Last week, Pakistan signed a long-term contract of LNG supply from Qatar at 10.2 percent of Brent, which is at prevailing market rate. Earlier, in 2015, when the then government made its long-term contracts with Qatar and Gunvor (both at 13.37%), the rate was about 15 percent higher than the long-term market rate at that time. Then later in 2017, Pakistan entered two contracts with Gunvor (11.62%) and ENI (11.99%) at around 10 percent premium to the prevailing market rates.
The comparison of the old deal with Qatar at 13.37 percent in 2015, with the latest deal at 10.2 percent in 2021 is not right as the overall market rates of LNG are moving downwards. Apple to apple comparison would be based on whether long-term contracts entered by other parties at that time were made at higher or lower rate. Based on these, Pakistan paid a premium of around 15 percent in 2015, 10 percent in 2017 and none in 2021. This makes 2021 deal the best so far.
In 2015, Pakistan was a new market, and thus carried risks associated with a new market. Prior to 2015, there were two attempts to buy LNG from Qatar; but did not materialize. The Supreme Court came in the way once; and the government herself moved away the other time. With this backdrop, a premium to the market in 2015 is partly justified.
However, having a long-term contract of supplying 5 cargos a month for 15 years without the option of price re-opener in 10 years was questionable. The LNG market norms are that whenever a new player comes in, it establishes itself by buying in spot and short/medium contracts for initial 2-3 years, before entering a long-term contract. But Pakistan at that time made a long-term contract in haste.
Now Pakistan has a history of buying long-term and spot for good six years. The market size is established and forecasted to grow as domestic gas supply is falling every year. Having a better deal is natural. The PTI government had been trying for 1.5 - 2 years to get this deal. The PM wanted it at 9-9.5 percent, but Qatar was offering nothing less than 10.5 percent.
The negotiation had been taking place for quite some time. Early last month, Chief of Army Staff (COAS) went to Qatar and asked for a deal at 9.99 percent. But Qataris didn’t want to give anything below 10.2 percent, as the recent contracts of Qatar with China and Singapore were at the same rate – the market rate. 10.2 it is.
To make the effective rate low, sweeteners have been added in the deal by the petroleum ministry. As compared to the past deals, there will be additional port charges ($80,000 per cargo) to be paid by Qatar. This brings the effective rate to 10.13 percent. Then, the deal is of supplying 24 cargos a year (till 2024, and 48 cargos thereafter till the expiry of contract in 2031) and Pakistan has the flexibility to change the monthly run rate - higher than 2 cargos/month can be shipped in winters (when the spot prices are high due to higher demand) and less than 2 cargos/month in summers (when the spot prices are lower due to low demand). This summer-winter arbitrage makes the effective rate even sweeter.
Thus, the effective price Pakistan shall receive from Qatar is probably the best offered to anyone publicly. Even though the rack rate of deal is market based, there are several layers of sugar coating, meaning Pakistan has made this sweet deal as part of a package. The country level decisions include sending manpower to Qatar (to boost home remittances) and defence ties. Clearly, it is more than a mere commercial deal.
The one criticism could be that it places most of the eggs in the Qatari basket. Buyers usually diversify the portfolio to reduce the supply risk. There are other suppliers such as Russia, Malaysia, Indonesia, US, Australia etc. The question is why Pakistan didn’t go to another big player.
There are several explanations, the obvious being that the benefits of a package deal –man-power supply and defence contracts- more than outweighs the risk associated with lack of diversification. Just like a couple of years back, India entered a deal with the US for other strategic reasons. The point is that in G2G contracts worth $3 billion, getting something more than the commercial terms in return is worth its while.
The irony of the matter is that in 2015, despite paying premium ($15 billion for 10 years) Pakistan got nothing in return. When PTI assumed power, PM went to Qatar and got a credit line of $2-3 billion at a discount to market interest rates. That can be termed as Pakistan’s discount on 2015 deal – but the deal was done by PML-N while the PTI got the discount.
Some are criticizing why Pakistan did not go for open bidding in 2021. The experience of 2015 suggests that it is better to enter a G2G negotiated deal. In 2015, Pakistan entered open bidding. The best rate it received was 13.37 percent from the usual set of traders. While Qatar did not participate in open bidding, it matched the rate. One can argue that had Pakistan gone for open bidding in 2021, market could have offered 10.5 percent and it would have been difficult to get 10.2 percent from Qatar.
Moreover, there were talks of open bidding in the background chatter. Secretary Petroleum called on PSO, PLL and other stakeholders for open bidding. They were against any long-term contract and wanted to continue with spot buying. The argument was that spot buying is better for demand management, and the country should avoid take or pay contract.
The long-term contracts were for 8 cargos till last year. After expiry of one Gunvor contract, only 7 are left now. In 2022, another contract will expire. This will leave 6 cargos a month in take or pay. The new deal takes the sum back to 8 cargos till 2024 and 10 cargos after that. With falling domestic gas supply, this is not a case of oversupply. The only question is whether this will leave even less room for the private sector to come in to play.
The criticism of preferring long-term contract over spot buying is uncalled for. Even the private players would like to lock in long term contracts. The spot rates are generally high and controversial. The usual suspects – Vitol, Gunvor, Trafigura etc, participate in Pakistan. Officials at PSO, PLL, SSGC etc probably have ‘good terms’ with these players and don’t want them to be out of the game.
Thus, the latest deal will generate significant savings as compared to the last deal. Assuming Brent at $60/barrel, Pakistan is paying $26 million per cargo, and in new deal, the rate would be $20 million per cargo. The savings of $6 million per cargo will result in $144 million a year till 2024 (24 cargos a year), and $288 million per year 2024 onwards (24 cargos a year). In case of 2015 deal, the price opener is after 10 years. By any stretch of imagination, the new deal is a better one.