In the spot market, the excess and uncommitted LNG volumes are sold in other than contracted markets on the basis of single transaction sales. This trend gained significant momentum in the 2010s with a sudden rise in demand from East Asia following the shutdown of nuclear power plants in Japan and lower demand in the European region.17 As a result, the share of spot and short-term trade in global LNG trade has increased rapidly between 2000 and 2020 (Figures S1.7)

S1.4 The current state of LNG market in Pakistan

Physical infrastructure

As in most other countries transitioning towards LNG, the associated trading and distribution infrastructure is still at a developing stage in Pakistan. The country started imports only in 2015 to bridge the rising demand-supply gap. Encouragingly, in a short span of five years, the sector has established strong footings and a basic supply chain structure.

The current LNG value chain comprises two Floating Storage and Regasification Units (FSRUs) with different import-handling facilities at Port Qasim Karachi. The first terminal – Engro Elengy Terminal (Private) Limited (EETL) – commenced operations in 2015, and currently provides handling and regasification facilities to Pakistan State Oil, which has the mandate to import the contracted supplies under the long-term agreements. The second terminal, – Pakistan LNG Terminals Limited (PLTL) – was built in 2017 by Pakistan GasPort Consortium (PGPC), and currently provides handling and regasification facilities to another state- owned importer, Pakistan LNG Limited (PLL). The existing pipeline network of the two public Sui gas companies is utilized to transport and distribute imported LNG from the terminals to other parts of the country (Figure S1.8).

At present, the two FSRUs have a government-contracted capacity – on a take- or-pay basis – of around 600 mmcfd each.

The installed regasification capacity of the two units stands at 690 mmcfd and 750 mmcfd, respectively. As shown in Figure S1.9, on average, 6 LNG cargoes are coming every month at Engro Elengy, with quantities amounting to 19 million mmbtu, roughly at par with the contracted capacity of the terminal. In the case of PLL, however, the average capacity utilization since its operationalization has averaged 65 percent, with 3-4 cargoes berthing every month.

Presently, Pakistan has been importing LNG under a government-to-government LNG agreement (15-year contract with Qatar on take-or-pay basis) as well as four agreements with private suppliers in Italy and Qatar (also term contracts on take-or-pay basis).

During the last 3 years, more than 87 percent of the imported LNG in Pakistan came under these term agreements. The remaining 13 percent comprised spot purchases, to cater to demand in excess of the term contracts.

Under the existing arrangement, the EETL terminal receives all the contracted volumes imported by PSO, whereas the PLL receives both long-term and spot cargoes.

Regulatory and operational framework

The upstream and downstream natural gas sector, including the import of LNG, is being regulated by a comprehensive legal framework, which comprises policies, rules and regulations that are enforced by different ministries and regulatory bodies. The government has authorized OGRA to manage LNG allocation, pricing, and other associated matters.19 OGRA issues licenses to design, construct and operate the LNG terminals and the pipeline infrastructure, and also computes and notifies the weighted average cost of imported LNG for domestic users.

The operators of LNG terminals are also required to secure NOCs from relevant authorities, including the Ministry of Energy (Petroleum Ministry), Port Qasim Authority, Ministry of Maritime Affairs, Defense Ministry, Ministry of Industries and Production, Civil Aviation Authority, Sindh Environmental Protection Agency, Naval Headquarters/Maritime Security, Sindh Govt. District Administration and the City District Government, Karachi.

The Ministry of Energy (Petroleum Division) is solely responsible for issuing sector- specific policies, such as the LNG Policy (2011), Third Party Access Rules (TPA), and the Natural Gas Allocation and Management Policy. In addition, the ministry reviews and executes the gas price agreements between the producers and the government- nominated buyers; and it also ensures the safety of natural gas pipelines, in coordination with the law enforcement agencies.

Currently, the government is the sole player in the LNG-importing business. This is in line with the global practice of heavy state presence during the initial stages of the LNG market development, to build the basic infrastructure, implement policies governing the fuel-mix, and generate local demand from industries, power and transport sectors. The LNG procurement process typically starts with the estimation of LNG demand, which originates from end- consumers like the power sector (including captive power plants), general industries, transport, and households. In particular, the Sui companies are mainly responsible for forecasting future demand of gas by different consumer segments. The Sui companies present their projections to the Petroleum Division, which weighs the projected demand against the contracted supplies from long-term arrangements, and then submits a formal request to PLL to procure additional volumes from the spot market, if needed.

PLL then floats the tender in the international market, and procures the required quantities.

S1.5 Challenges arising out of Present Operational and Administrative Structure

The domestic natural gas market has consistently been prone to various challenges, such as supply shortages during winter seasons, difficulties in timely delivery of adequate quantities to the power, industrial and residential sectors, and the financial constraints faced by the distribution companies while ensuring implementation of OGRA-notified sector-wise gas tariffs. With substantial government involvement across the LNG supply chain and a distorted subsidy structure, price discovery in the natural gas sector becomes harder. Besides, a common perception that seems to prevail is that the prevailing price of LNG in Pakistan is on the higher side, and that this has more to do with the take-or-pay nature of the contracts (regards to both the capacity charges of the terminals and the fuel’s import cost), than with the trends and levels of global prices. Furthermore, governance issues, procurement timings, global bargaining position, and financial considerations of the distribution companies, are also believed to contribute to the escalation in the LNG import cost.

While there might be merit in some of these arguments, our analysis suggests that these kinds of problems (especially contractual issues and procurement timings) are not unique to Pakistan. As mentioned before, the global LNG market does not have a long history; it is still evolving and is in the process of embracing changes on policy and procedural grounds. Pakistan’s LNG market would experience a similar transition (e.g., changes in term-spot balance, nature of additional import/ terminal contracts, and modifications in public procurement rules) in due course. Furthermore, as will be discussed later in this section, the current operational and procedural challenges have more to do with heavy (rather, exclusive) involvement of the public sector in the business. These issues are expected to be addressed to a large extent with the private sector’s participation in the LNG import and marketing business going forward.

The following points present the major challenges that arise out of the existing operational and administrative structure of LNG imports in Pakistan.

The uncertain demand from the power sector

Demand projection is a critical element in the LNG procurement business, as the spot purchase decisions are based on the import requirements communicated by the end- users to the importers. In case of Pakistan, this issue gets complicated due to a narrow user base and uncertainties associated with the power sector’s consumption - as the sector takes up more than half of the imported LNG. Specifically, LNG-based power plants in the country are known to be highly efficient and are ranked above the oil- based plants in the merit order. However, recurring transmission bottlenecks compromise the merit order, and these power plants are sometimes forced to operate below capacity. This uncertainty related to the level of their capacity utilization makes it challenging for these plants to accurately assess and subsequently communicate their actual monthly fuel requirements to the Sui companies.

Procedural delays

Once the import request is placed by the Petroleum Division, PLL initiates the process of placing the tender. As a public owned entity, PLL has to fulfill all the requirements under the Public Procurement Regulatory Authority (PPRA) regulations. Though the guidelines ensure transparency in the public procurement process, the length and duration of the required procedures delay shipment arrivals. In light of the PPRA rules, the overall import procedure takes up, on average, more than 60 days, with a 30-day mandatory period between advertisement and bid submission and a 10-day period between bid announcement and award of tender (Box S1.3).

Apart from creating a timing mismatch from when the commodity is needed and when it is actually supplied, this lead time may also be unfavorable from the pricing perspective, as the PLL effectively locks in the import price 40 days in advance. Since the spot LNG market exhibits more volatility as compared to other fuels, prices can move substantially in either direction by the time the LNG vessel arrives. This uncertainty may then be implicitly factored in the form of higher rates quoted by the exporting companies that submit the spot bids to PLL.

Box S1.3: LNG Procurement Process in Pakistan - A Brief Description with Timelines

Stage 1: After taking into account LNG demand and constraints (terminal, pipeline, port-related etc.), delivery dates of the LNG cargoes are locked.

Stage 2: Based on the locked delivery dates/windows, a tender is advertised. The tendering/procurement process is in accordance with the Public Procurement Regulatory Authority (PPRA) Rules. Once the delivery dates are locked and a tender is advertised, any change in demand will necessitate restarting the procurement process. If the procurement process is not restarted, the required amendments may lead to either a shortage of gas and/or penalties on account of delay in cargo discharging. According to PPRA Rules, there must be at least 30 days between the advertisement and the bid submission dates (Figure S1.3.1).

Stage 3: Bids received are opened the same day (first technical and then financial, based on the single- stage two envelope procedure), and the offers are announced (and the lowest bidder identified) after the technical evaluation of the bids.

Stage 4: As per PPRA Rules, at least 10 days must be provided between the announcement of offers and the award of the tender.

Stage 5: Contractual formalities are completed and successful bidder furnishes a performance guarantee. According to PPRA rules, the amount shall not exceed 10 percent of the contract amount.

Stage 6: The LNG cargo is delivered on the locked delivery date/window. Weather, operational and technical reasons may lead to amending the schedule, based on mutual consent as per the provisions of the contract.

From the policy and operational perspective, it will be prudent to provide sufficient time between Stages 5 and 6. This time will allow the LNG vessel to reach Pakistan. For perspective, an LNG cargo takes around 3 days from Qatar and around 35 days from the US to reach Pakistan. Considering the mandatory PPRA timelines requirement and the time required for the LNG vessel’s voyage, the LNG procurement typically takes at least 60 days (from demand confirmation to cargo delivery).

Reference:

PPRA Rules, Public Procurement Regulatory Authority; input from procurement agencies.

(To be continued)

(Excerpts from “The State of Pakistan’s Economy: Second Quarterly Report of the Board of Directors of State Bank of Pakistan”)

Copyright Business Recorder, 2021

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