Having gone up 25 percent in October alone – LNG prices stabilized for much of November – as earlier supply-side concerns wane and temperatures in Europe are far from the extreme seen in the last couple of years. Does that mean the LNG market will not be in a frenzy like yesteryear come winters? That appears highly likely – but it does not always mean it’s the same for everybody – as Pakistan found out one more time.
Pakistan LNG Limited asked for bids for January delivery and got the lowest bid at around $18.5/mmbtu – later negotiated down to $17.95/mmbtu. How the authorities have reportedly invited trouble by bargaining the price for the cargo is left for another day, but even the negotiated rate for January delivery window is higher than any reported contracts for the winter thus far.
Mind you, the Japan-Korea Marker LNG Platts Future prices in November have averaged $17.3/mmbtu – and were at $17.095/mmbtu at the time of final evaluation of bids. This is surely not the first time Pakistan is paying a premium on LNG spot purchases – as events of the not-so-distant past are still fresh in memory, and the perceived credit risk remains high.
While there are no signs of shipments being cancelled or being increasingly diverted towards European shores last minute this winter season, Pakistan’s affordability quotient remains weak – both in terms of making timely hassle-free import payments and the subsequent retail pricing at the distribution level.
The continuous failure of implementing the Weighted Average Cost of Gas Bill in the pricing mechanism means more misery is around the corner. This is despite a historic rise in consumer-end gas prices across the board that also includes an inexplicable (and likely illegal) imposition of monthly fixed charge. Domestic consumers (especially in the North) are provided a blend during peak winters – as domestic gas is not enough. Imported LNG at distribution level excluding GST costs around $14.5/mmbtu – and is likely to go higher as winters deepen. Most of the imported gas will be routed to domestic consumption, more than 90 percent of which is priced way below expected LNG distribution cost.
Industrial activity is struggling to rebound – as evident from snail-paced LSM recovery. Latest electricity generation numbers also point at much-reduced demand from industrial sector – and it is highly unlikely to change the course completely in the next two to three months. Fertilizer consumption also stays heavily cross-subsidized, although usually fertilizer plants’ maintenance is planned around peak winter to manage the load.
It is the negligence of the highest order that the Ministry has not worked out a mechanism around the WACOG for the regulatory authority to consider – more than a year after the passage of the bill. As the priority order remains unchanged with domestic consumers at the top – and no budgeted subsidy for LNG diversion to domestic consumption – the arrears will keep on mounting.
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