LNG procurement: global challenges

During the COP26 conference last November in Glasgow, LNG was identified as the transition fuel for migrating to the renewable energy. Since then, LNG market has become very volatile, and its sourcing has become incredibly challenging for every country.

Diving deep into the LNG market reveals that during the Covid-19 pandemic, the energy producers (OPEC+) were extremely discouraged as the energy demand plummeted and the energy prices nosedived, reaching the negative territory very first time in its history.

This phenomenon happened due to complete shutdown of all kinds of manufacturing and economic activities across the world due to the unprecedented Covid-19 spread. With the economic recovery re-start, global attention shifted to the weather-related severe events (droughts, food shortages, heavy rains, floods, uncontrollable forest fires, earthquakes, air pollution, etc.), pushing for replacing the fossil fuels of all kinds at expedited rates to reach to the NetZero by 2050. As a result of this push by the UN, environmentalists and the activists, the energy producing OPEC+ countries stopped making investments for increasing their capacities and upgrading their capabilities.

As the world was getting handle on the Covid-19 pandemic and the global economic recovery was picking up its momentum, the energy demand started escalating and, in some cases, stretched beyond its current capacity.

Additionally, the power plants that were using coal as their fuel for producing electricity, they started switching to LNG as the cleaner source of fuel. Lastly, with the US led continued sanctions on Iran and Venezuela, their capacities were still out of reach. On top of it, political turmoil in Libya, Algeria, and Iraq, further curtailed energy supply in the global market. All these events caused further strain on the already fragile LNG supply leading to shortages and skyrocket prices, creating “perfect storm” for the energy (oil and gas) market.

While the LNG market was still highly volatile, the Russia-Ukraine war in late February added another dimension to the global LNG supply. Historically, Europe has been heavily dependent on the energy (~45% gas and 29% oil) supply from Russia due to its proximity and favorable logistics costs through the network of pipelines.

Germany, the 4th largest global economy and the European economic powerhouse, was importing above 40% of its gas, 35% of oil and >54% of coal from Russia for its energy needs. Gas was coming through the Nord Stream1 pipeline built in 2011 under a JV between Russia and Germany to supply Russian gas for the next 50 years. In 2021 another pipeline, called the Nord Stream2, was completed but due to the US objections, Germany never used it. Now it has been abandoned, and Germany has to write-off its part of over 6-billion-dollar investment.

After the invasion of Ukraine, the US imposed economic sanctions against Russia, including freezing of its US dollar accounts and removing it from the SWIFT network. The US also asked the EU and its allies to stop importing their energy from Russia.

In its retaliation, Russia started slowing down its energy supply to the EU and demanding payments in its own currency, Ruble. With the continued war intensification, prices of LNG and oil, both have shot up in the unprecedented territory in the history of OPEC+.

The geopolitical manoeuvring and supply and price volatility in the LNG market have created an incredibly challenging situation not only for the developed economies but also much colossal challenges for the developing countries.

Pakistan being in the developing countries’ group has suffered the most in its LNG procurement. By diving deep into Pakistan’s procurement procedure, it is very evident that the process for procurement that Pakistan is using is from its colonial past, thus not only very outdated, and cumbersome but it requires a lot of resources for completing the paperwork associated with the tenders.

Additionally, the people in charge of the LNG procurement in the Ministry of Energy are said to be not only inexperienced but are also not trained in the digital era of RFQ & RFP dynamics.

Under the new regimen of tenders for July LNG shipments, except for one cargo offer, no other offers have been made to-date by any other trading company for most of July period (July 3-4, 8-9, and 25-26), leaving Pakistan to choke for its survival without pushing the country to its ‘life-support ventilators’. According to sources, the only offer made was by Qatar for July 30-31 delivery at a price of $39.80/MBTU.

This should be a red flag for PSO, PLL and other energy procurement agencies of the Ministry as it confirms that even though the colonial masters developed the current procurement, but it is not working.

And if it is not changed to a simpler mechanism, like the RFQ/RFP process, Pakistan will continue to face its energy supply nightmares making it more vulnerable with time as LNG will continue to be in short supply until additional capacity by Qatar and others is not brought on stream. Additionally, with the continued global recovery and more switching to LNG from coal & oil, its supply will get worse before getting any better!

By keeping the status quo, procurement of LNG will be getting increasingly challenging, at least in the foreseeable future. As a result, not only will Pakistan’s power generation suffer (even by switching to coal or high sulfur oil), but most importantly its fertilizer production (for its agriculture) will be calamitous.

Extended power supply outages will hamper the manufacturing output that will reduce its exports significantly. In turn, it will create higher trade imbalances and put additional burden on the balance of payments and that could push Pakistan toward the insolvency crisis.

Thus, in order Pakistan to secure its LNG supplies, it is in its best interest to reform its procurement process in line with the digital age procurement protocols. Additionally, under the current highly volatile LNG supply conditions, Pakistan should approach to China for help in procuring its LNG supplies through China’s experienced and well-connected industry network.

Pakistan should develop a pricing formula in consultation with China, (like: LNG market price + Transportation cost + discharging costs + a service fee), to make it a fair and acceptable proposition for the procurement companies (SINOPEC, Petrochina, Sinochem, etc.).

This way, it will add further leverage to Chinese procurement channels for negotiating better pricing from the LNG suppliers against certain committed offtake every month. It will be a win-win situation for all the parties involved and Pakistan will be able to have a steady supply of LNG volume for its national needs. In the meantime, Pakistan should develop its energy security policy also by borrowing Chinese playbook.

Copyright Business Recorder, 2022