EDITORIAL: Earlier this week, the Public Procurement Regulatory Authority (PPRA) reportedly exempted procurement of 27 spot cargoes of Liquefied Natural Gas (LNG) from its rules till June 2022.
LNG spot buying is a judgment call based on market dynamics, price movement and demand/supply positions in respect of any commodity and traders that trade these commodities usually decide within the limited/short validity of the ‘offer and bid’ rates. However, under the PPRA rules, it is a lengthy process extending over at least several weeks if not a month.
The international traders charge premium in pricing to counter the duration commitment risk. In other words, the longer the price validity the higher is the price. The government’s procurement of LNG under PPRA rules has come under the spotlight due to the volatility in the market which has been in vogue since the Covid outbreak.
Thus, exempting LNG buying from PPRA rules is a correct decision. A similar exemption was made earlier as well. To make the process of procurement market-oriented LNG spot buying should not be done through PPRA, particularly in a sellers’ market as is the case today. And to make it more efficient and competitive, the government should reduce its footprint in buying and selling of molecules.
A meeting of price negotiation committee was convened to discuss LNG buying from Qatar on G2G (government to government) basis. There could be an element of price review and talks on volumes. The energy minister has recently spoken to his counterpart in Qatar.
The third LNG terminal (Energas) is in its final stages of approval and QatarEnergy is a shareholder in it along with Pakistani partners. Energas needs some commitments from the government side. Perhaps, the government is vying to get something in return.
There appears to be no room for negotiations on pricing in view of volatile market conditions. The government can however leverage by enhancing supply under the recent LNG contract with Qatar at 10.2 percent of Brent.
The supply is of two cargoes a month for 2022, three cargoes from 2023 and four from 2024. The government may seek some increase in contracted quantity in 2022 and if it succeeds it would indeed be to the country’s advantage.
The government doesn’t need any more long-term contracts to cover base load in months of leaner demand. The issue is in peaking months and commitment by the seller of an additional cargo or two under the term contract could be a sweet deal.
It is however important and essential that the government desist from compelling the gas distribution companies to provide new connections particularly when domestic gas reserves are depleting without any small or big new discovery.
Adding customers to the system in the present environment of acute shortage will only lead to further discontent and difficulties in load management. As it is the demand is expected to grow and with domestic gas getting depleted some domestic gas consumers could move towards alternate energy sources.
The government should let the private sector come in the market by closing the new terminal project and exploring other options. An idea being floated by one LNG player to the government is about provision of virtual LNG supply.
In this case, the LNG in specialized tanks is transported to consumers. There is no gas line involved in upcountry transportation. However, the supply will remain relatively small through this mode. One truck to carry 15 tons and around 4,000 trips are required for one LNG cargo’s molecules.
The government needs reliable supply which has remained erratic these winters. The government having the peaking capacity of 12 to 14 cargoes a month could only manage supply of 8-10 cargoes. Spot was too expensive; and some long-term contractors defaulted.
There were some stupid mistakes in management. Moreover, an integrated plan of execution is missing. That coordination is weak is a fact. For example, gas fields went into maintenance in peaking months. That should have been done in shoulder months.
In addition, suppliers of two cargoes defaulted. The difference of the spot and contracted price was much higher than the commercial damages that suppliers paid. These suppliers can only default if they don’t have supply.
However, if the vessels go to other areas, they are liable to pay full damages. For that the government needs to have their annual delivery plan. But the government lacks capacity to properly conceive, plan and execute.
Traders are well aware of this weakness. They had all the commercial reasons to default. The market is expected to soften up in April. However, the Russia-Ukraine spat is a wild card. The market can dishevel within days.
That is why PPRA exemption is a must. Be that as it may, the government needs to have a firm demand plan from the domestic gas companies. They should not rely on power sector where merit order power production changes at the last moment and so does the demand for fuel type. The government should focus on getting the basics right and do it right. There is clearly no room for complacency.
Copyright Business Recorder, 2022