ISLAMABAD: The Petroleum Division has responded to some points raised by the DG Audit (Petroleum and Natural Resources) in its report dated 04 January 2021.
The Pakistan LNG Ltd (PLL) submitted a detailed response during the Departmental Accounts Committee meeting held on 19 January 2021, and explained that no loss was suffered on account of import of LNG as the price variations in bids received were a result of changes in the market dynamics and a variety of other factors.
It is factually incorrect to say that spot cargoes were bought at higher prices during the year 2020-21 as a result of poor planning, instead, the factors involved in procurement of spot cargoes are absence of additional and firm demand over and above LNG imports under long-term contracts; in the absence of any firm demand, the PLL would have simply exposed itself and the national exchequer to financial risks of millions of dollars by locking cargoes in summer 2020 for delivery in December 2020.
The Sui Northern Gas Pipelines Ltd (SNGPL) through its letter dated October 26, 2020, conveyed its RLNG requirement for January 2021 as 550 mmcfd.
However, the SNGPL communicated that this is a constrained demand, in view of the limited pipeline capacity of maximum 1,200 mmcfd and regasification rate of 650 mmcfd planned at Terminal-1.
The actual RLNG requirement is significantly higher and the SNGPL will require additional volumes, if the pipeline capacity is increased beyond 1,200 mmcfd by the SSGC.
Based on this preliminary demand, five spot cargoes were required to be delivered in January 2021 to meet this demand in addition to one cargo under the term contract.
However, considering the uncertainty of the demand and addition of pipeline capacity, the PLL was constrained to initiate the tender process as issuance of corrigendum for any change in cargo deliveries would have required the timelines of procurement to start afresh in accordance with the PPRA Rules and the clarification of the PPRA (letter dated 07 October 2020).
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The firm demand was not provided by the SNGPL.
In an effort to arrange the maximum availability of the LNG, the PLL floated tender for delivery of six spot cargoes during January 2021, with added flexibility in delivery window to align cargoes according to future demand in January 2021.
The PLL proceeded with the floating of tender on November 10, 2020, with 3-4 days delivery windows, while highlighting the associated issues to the SNGPL about likelihood of attracting higher bid price due to expanded delivery window of 3-4 days.
Increasing the number of days in a delivery window with buyer’s right to choose the exact day of delivery increases the uncertainty with likelihood of higher cost of deliveries for the suppliers and ultimately LNG price.
The PLL informed the same to the SNGPL and highlighted that such delivery windows may have a price impact in the bids.
Mainly due to longer bid validity and aforementioned LNG market dynamics, bidders did not participate for the three delivery windows scheduled between 8 January 2021 to 18 January 2021.
In order to align the terms of spot tenders with global industry norms, the PLL has already approached the PPRA for a reduction in response time as well as time between announcement of results and award of contract.
Lowest evaluated bids received from Qatar Petroleum on the remaining three delivery windows (20-21, 24-25, 29-30 January 2021) were in accordance with the prevailing spot market.
The second term cargo of January 2021 (Gunvor’s 5-year term contract) was advanced to January 2019 due to sudden requirement of the SNGPL (communicated to the PLL on 02January 2019) as there was no time to conduct spot tender for an additional cargo. The SNGPL was duly informed that the cargo being advanced to January 2019 is a term cargo from the month of January 2021.
The SNGPL also stated in its letter dated 02 January 2019that it will request the PLL for additional supplies in January 2021 through 90-120 days’ advance order.
However, the SNGPL communicated its tentative RLNG requirement, 67days in advance of January 2021, that too with numerous caveats and possibility of additional requirement considering the status of capacity enhancement by the SSGC.
As a matter of fact, the LNG is mainly consumed in the power generation.
However, the LNG consumption in the power sector depends on other factors such as generation share from hydel and coal-based generation, etc.
This also makes it difficult for the SNGPL to precisely forecast the need and consumption of gas in the country and confirm such demand to the PLL for timely procurement.
Historically, there has been variations between the demand placed and actual off-take/consumption by the SNGPL.
Demand in the months of November and December 2020 increased unprecedently compared to demand in the past during the same months in 2018 and 2019, posing difficulty in procurement of additional cargoes.
Further, projection of future LNG requirements is the responsibility of the downstream consumer (SNGPL) and not PLL.
Accordingly, the PLL conducted spot tenders for November 2020 and December 2020 based on visibility of demand confirmed by the SNGPL.
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Floating a spot tender in advance in June 2020 for deliveries in November and December 2020 was not appropriate due to non-visibility of demand and saved national exchequer from potential demurrages and/or take-or-pay penalties in case of lower consumption/off-take of imported volumes during winter 2020, especially in view of demand during winters of 2018 and 2019.
For 2018 and 2019, the futures prices for December got lower closer to the delivery period, whereas for 2020, the trend was entirely opposite primarily because of the unexpected Covid-19 recovery and supply disruptions.
The PLL is importing LNG that is aligned with the demand communicated by the SNGPL from time to time.
Base load demand is met through LNG cargoes under long-term contract, whereas short term (peak) demands are met through buying of LNG from the spot market.
Due to the take-or-pay nature of LNG supplies, the PLL only floats spot tenders in accordance with the demand communicated by the SNGPL.
As stressed by the PLL above, it cannot award cargoes without firm demand and commitment from the SNGPL to offtake the imported volumes, due to massive demurrages and/or take-or-pay implications.
The additional demand of August 2020 was communicated to the PLL on 31 July 2020, while additional demand for September 2020 was communicated to the PLL on 18 August 2020, due to rapid recovery from pandemic-related demand suppressions and decision of the Ministry of Industries to operate fertiliser plants.
Such urgent requirement was not foreseeable by the PLL and circumstances of urgency are not attributable to the PLL.
However, PLL struggled its best and managed the requisite supplies through the PPRA compliant but urgent spot tenders to meet additional demand of August and September 2020.
In order to manage scheduling of an additional cargo in a particular month, almost all already fixed delivery windows are required to be changed.
During the months from August to November 2020, the PLL managed to make room for two-day delivery windows for additional cargoes, while ensuring that schedule of other cargoes is not impacted.
The historical consumption trend and price trend for winters of 2020-21 was completely opposite to the previous two years due to the impact of the Covid-19 at global, regional, and domestic levels.
Copyright Business Recorder, 2021
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