Last summer, Pakistan (PSO) paid an exorbitant price of ~$20.06 per MMBtu, for a 138,000 MT of LNG cargo that was 29% higher against the Brent’s benchmark of that time. Similarly, later in the year, Pakistan bought 4 LNG cargos from the spot market at $15.4 per MMBtu against a rejected earlier offer of $13.79-$13.99 from Qatar, its primary supplier. This clearly shows how frenzied, unorganized, and unprofessional Pakistan’s procurement agencies (PSO & PLL) are.
Under the price formula terms (if formulated correctly), one does not has to buy at higher prices if the spot prices are lower. Under these circumstances (lower spot prices), suppliers offer discounts against the formula-based price to match the spot prices. This happens routinely in the formula-based commodity pricing executions.
As this author has previously mentioned in his another write-up, Qatar enjoys the lowest production cost compared to any other player of the industry due to its easy accessibility to its gas reserves and it is the most easy-gas-extraction process. According to Wood Mackenzie, an industry consulting group, Qatar’s production cost is about $4 per Million Btu, making it the most aggressive supplier of the LNG industry. With the ongoing capacity increases, soon Qatar will become the leading player in the LNG industry.
With this backdrop, Qatar is already escorting new customers by offering them deeply discounted prices for the future supply against its additional capacity. Later last year, Qatar signed substantial volume deals with its new clients for future LNG supplies by offering them up to 22% lower prices. This shows how the price dynamics play out in a volatile supply and demand environment.
Read the first part here: LNG market and its challenges — I
Pakistan first started importing LNG in 2015 without much planning and strategic thinking. Initially, it was just to supplement its energy needs in addition to domestic coal and oil imports for its power generation, industrial activities, and cooking and heating needs for its population. However, without a storage facility to support its current and future projected volume growth, LNG’s supply and demand has become unmanageable by Pakistan’s procurement agencies.
To address this, a few years back, Pakistan had signed an agreement with ROSTEC to build a storage facility but was never finalized because of the US sanctions on Russia and its companies including ROSTEC.
Since then, Pakistan did not make any concerted efforts to approaching other parties (the US, EU, and China) for building the LNG storage facility, as part of its “energy security.” Pakistan has so many ideal sites for building underground storage facilities at its strategic locations (close to the LNG terminals) and at extremely competitive costs compared to other countries. As a matter of fact, since the project’s debacle with ROSTEC, Pakistan has not even done any feasible study nor has allocated any funds for reviving the project.
Just last July, Pakistan seemed to be reviving its old project with ROSTEC. That geopolitical landscape is changing is a fact but at the same time hostility between the US and Russia is on the rise with potential of additional sanctions against Russia and its affiliated companies and citizens.
Even under these unfolding geopolitical maneuvering, Pakistan has signed a new deal with Russia to build 1,122 kilometers long LNG pipeline. According to the initial information, the pipeline will cost about $2.5 billion and is expected to be completed by 2023.
Also, according to the agreement, Pakistan will fund 74% of the pipeline cost while the balance of 26% will be contributed by Russia. Even though, this project is very promising and will help Pakistan in its “energy security” but to date, no funding has been identified for Pakistan’s share of the cost of about $1.85 billion.
If Pakistan will lose its control on its central bank and if it will start operating under the IMF as planned, it will be impossible for Pakistan to allocate $1.85 billion for this project from its foreign exchange reserves or securing it from the international donors, as the USA may not allow it due to its sanctions on Russia.
The US’ recent objections to additional Russian-Europe (Nord Stream 2) gas pipeline project could be a guide for Pakistan before moving ahead with its pipeline project. The Nord Stream 2 was initially approved by Germany and other EU members but after pressures from the US, Germany has stopped it completely.
According to the industry experts, LNG supply challenges will stay with us through most of 2022 and also to continue in 2023! Under these conditions, LNG supply and demand will remain extremely volatile.
With this kind of scenario and in the absence of the “energy security” policy, Pakistan will be in a very dire position even to meet its current LNG needs, not to mention its increased projected volumes in the coming years. And if Pakistan decides voluntarily to move forward in reducing its coal generated carbon footprint or will be pressured by the international donors to take actions to comply with the NetZero 2050 targets by reducing use of coal for its power generation, it will result into an extremely uncomfortable situation for the country. Since this path will require more LNG volume to support the transition. In the absence of adequate storage facility, this will create a nightmare for everyone in its ecosystem, starting from the government to the consumers.
Since it is not just Pakistan that will be using LNG as the transition fuel for migrating from coal & oil to the renewables, but rest of the world (another 198 countries) will also be doing so.
This will create unprecedented bottlenecks in the entire LNG supply chain and as a result, its future prices will soar to the unknown territories. Thus, with this backdrop, it is about time Pakistan developed its “energy security” policy that must include underground LNG storage (for two months’ supply), regasification plants and a resilient gas distribution infrastructure.
As part of the procurement policy, late last year, Pakistan has signed a medium-term LNG supply agreement with its primary LNG supplier, Qatargas. According to the information, the supply agreement will start this year and it covers a total of nine years (2022-2031).
According to the agreement, Qatargas will supply three million tons per year of the LNG to Pakistan. This is a good initiative by PSO that has signed the agreement and hopefully its negotiators were able to get better than 22% price reduction from the brotherly supplier, Qatargas. However, without the “energy security” encompassing the strategic energy reserves for Pakistan, it will be a temporary fix for a persistent-current problem and to cover LNG’s projected exponential growth.
Recent interests by Qatar in building an LNG terminal at Port Qasim is a great start too and it should be used by Pakistan and its policymakers as the foundation for broadening the cooperation scope between the two countries by including building of other infrastructures for the LNG in the country.
Qatar can use Pakistani storage and its terminals as its strategic extension for supplying its LNG to landlocked Central Asian countries through CPEC’s logistical network. This strategy will not only help Pakistan but will also a springboard for Qatar to have access to new customers who were not accessible before because lack of the infrastructure for the LNG and oil deliveries. It will be a win-win endeavor for both, Qatar as well as Pakistan.
(Concluded)
(The writer is Executive Director, Polykemya International)
Copyright Business Recorder, 2022
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