The recent slump in the global LNG market during the Covid-19 outbreak also validated the need to reassess the price and volume conditions agreed under the long-term contracts. For Pakistan, the government can engage in short term contracts with more flexible conditions until the country is ready to pursue more spot purchases under the private sector’s participation.

However, it is also important to note that the volatility in the spot market means that there would be times when spot procurements may end up being costlier than the term procurements. As shown in Figure S1.16, although Pakistan’s spot procurements were cheaper than term procurements most of the time, there have been instances when spot procurements were costlier. This may be the case during winters, when excess demand almost always results in a substantial rise in global prices. However, better demand forecasting and adequate storage capacity can help alleviate these concerns and allow for better spot decisions.

Here, it is also important to note that so far, spot rates for LNG imported by Pakistan had been higher than LNG futures in 2018; lower in comparison to most of 2019 and early 2020, and, after a long pandemic- induced break, much higher than the futures prices in the second half of 2020, as the actual price rose due to a demand glut in the East Asian markets (Figure 1.17). All in all, this makes a strong case of advertising and finalizing orders earlier than usual during winters in order to lock in rates, which tend to increase as the season progresses.

4) Improvements in demand forecasting and decision-making in both public and private sectors

Given the fact that nearly a third of cargoes at PLL arrived on spot basis during FY20, timely and accurate demand forecasting by public procurement agencies is important because the incoming private players would secure the rights to utilize the auctioned excess capacity of the terminals.

Currently, the demand forecasting capability and practices are not at a satisfactory level, which – in the presence of a lengthy public procurement process – results in tender delays and pricier bids. Also, smooth importing on a regular basis would eventually require more than one-at-a-time auction process, which would further necessitate timely communication and dissemination of demand forecasts along the whole supply chain.

For smoother operations and to ensure that imports are finalized at competitive rates, importers need to notify the terminals around three to four months in advance to secure the needed cargoes. In this regard, the PPRA procurement rules may also be revised to minimize the time between the invitation and opening of bids, and between result announcement and contract finalization. With private importers eventually coming into the market, further improvements would be witnessed on this front, provided that these players would not have to follow PPRA regulations. Although the government has recently exempted PLL from the PPRA rules when securing spot purchases, these exemptions are time-bound, and would also not be sufficient to shorten the import process duration. A more effective solution would be to introduce sector-specific clauses within the PPRA rules for LNG imports. This would provide a legal cover to the importers, help reduce costs, and speed up supplies to the end-consumers on a sustainable basis.

(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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