Moving past the never-ending long-term and spot debate on LNG, there are some thorny issues that need immediate attention. The most important among these is the fear of accountability that is resulting in inefficient and untimely decisions. The other critical issue is the government’s excessive reliance on spot buying.
For example, the recent long-term deal with Qatar had to go through cabinet route as both petroleum and finance secretory at that time were not ready to sign the agreement. Even though they had the establishment’s backing, the fear of NAB prevent them from officiating the deal. The premise was that there would be no need of gas in future.
The fear of officers in decision making is evident in spot dealing as well. When the bids were coming at higher prices (July 21 onwards) the government started delaying the buying. Even though traders were bullish, but the government officers were not ready to accept bid which was relatively higher than previous months. Seeing the fear of officials, the ministry has now involved boards of PLL and PSO in the process. Another layer of red tape. And yet the passing the pillow on accountability continues undeterred. Then the government is dealing with traders – not suppliers. Since there is red tape and uncertainty, traders come in foray to sell on spot, as suppliers usually shy away from such situations. And traders keep their margin for according to the risk appetite that they extend and inevitably government settles for suboptimal pricing.
Under these circumstances the government and media should accept that, in soaring market government has no option but to pay more. However, at over 15 percent of Brent, producing power on FO is cheaper to LNG, and using petrol is cheaper than CNG (as petrol prices are low due to forgoing taxes). Hence, the government should curtail its imports on spot at peaking price.
Right now, around 3,000 MW plants are running on FO. Given the domestic refinery supply capacity, another 1,000 MW can be added. The additional potential is 2,500 MW (given LNG contract buying and LNG plants specific constraints), but the government did not plan to buy FO from international market. That coordination is missing. The ministry did not anticipate the need of FO in moving LNG market.
Going forward, the demand of LNG will build up as natural gas is falling. But the right pricing is imperative for not letting gas circular debt to build. For that, weighted average pricing is important. And over the period, government should get out of this procurement process on spot. But due to low ullage, government continues to buy on spot for its contracted terminal take or pay charge, to avoid demurrages, as the storage is low.
In a recent issue related to FSRU changing of Engro some commented that the new FSRU of higher capacity should be kept. But that would have reduced the replacing time of cargo – right now 6 cargos are to be dealt in a month at one FSRU – that is 5 days of storage. If number of cargo increases, the time to evacuate a cargo to reduces further. Similar is the story of second FSRU.
Experts claim that demand for Pakistan is 15 cargos a month – by enhancing throughput on existing two, this can be met. But government’s risk of low ullage will enhance. That is why, it is imperative to have two new terminals on board – by having those – the volume that needs to be managed – on average will reduce to 4 on each terminal – and will increase the storage from 5 days to 7-8 days on each terminal. That will resolve some part of the issues associated with demand assessment at the last moment and pipeline packing capacity risk.
Pakistan is amongst the lowest in the world in terms of ullage and needs to double its LNG storage terminal capacity – not throughput. With this approach, each terminal can have 10 days of storage (on existing volumes) as compared to 5 today. Therefore, having new terminals is important. The other factor is to leave spot buying to private sector for private customers at take and pay.
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