It appears that finally LNG will come to Pakistan's gas networked sometimes next year. In the kind of emergency situation that we are in, the only short-term solution appears to be LNG; all other options being several years away. PSO has advertised for procuring LNG supplies recently, although such advertisements have appeared before as well. We will explain in this article as to why we are so optimist in this respect and what options and potentialities lie ahead in Pakistan's LNG market such as much cheaper LNG from the US possibly in mid-term future (two to three years).
LNG background Firstly, LNG issue has been delayed enough and the crisis of both gas and electricity has worsened in the meantime. No further delay is possibly affordable. Secondly, in the meantime the decision makers or stakeholders have learnt quite a bit and have structured the project to an optimum as we will examine. No more, there is an unnecessary enlarging of the deal size like twenty years and coupling it with LNG terminal. LNG terminal is now at an advanced stage of implementation under a separate service centre, whereby it would be paid on the basis of gas volume handled and there would be no role of the terminal business in gas procurement, and thus the PSO advertisement. Also the procurement is structured keeping in view the market realities. A 5-year gas procurement tender has been floated.
Traditionally, LNG business has been dominated by long-term take or pay contracts, which offered security of supplies to buyers and security of investment payback to the seller and investor. A complete chain of LNG infrastructure usually involved an investment of several billion dollars. In this period, however, oil and gas prices were low, typically around 40 USD per barrel. Gas prices were linked to oil. However, things started changing after the year 2003 from when oil prices continued an upward escalation to the current prices of 120 USD per barrel.
LNG used to be cheap and sold at 3.00 USD per mmBtu, ala India-Qatar contract which ended some year earlier at the instance of Qatar. Today's LNG price is 18 USD per mmBtu, almost 80-85 % of Oil price. One naturally wondered as to why LNG at such high prices, especially, in our part of the world and most of Asia where locally-produced natural gas sold at 4.00 USD per mmBtu. LNG supporters argued, with some merit, that gas? LNG offered additional benefit; it is a clean and convenient fuel for households; a massive infrastructure of gas distribution is there; and finally, in power sector LNG/gas generated 15-20% more electricity on per mmBtu basis. And continued decline in gas production, no more new discoveries, and stampede towards CNG usage in the wake of a highly objectionable price advantage of 100%.And thus LNG created its justification, which became unavoidable as of today and thus the seriousness and objectivity that seems to be in the air accompanied by an understanding of market realities. And that is our basis of optimism that this time it is serious while LNG terminal is already on its way.
Although LNG is awfully expensive, almost 3-4 times our current gas prices, its share in the total gas supplies, at least initially, would be small (10%). It would be able to generate more electricity or/and boost supplies to other sectors. In Punjab, during winters, people can hardly cook their meal due to gas shortages.
Cheaper LNG from the US I may be appearing to be throwing a spanner into the LNG process by introducing the subject of the availability of much cheaper LNG from the US in view of supply glut due to Shale gas production. However, it cannot be as early as next year when we need the gas supplies. However, one would like to outline the need and urgency of developing this option. Let us see what is involved and how soon we ,if at all, can benefit with much cheaper LNG at 10-12 USD per mmBtu, which is almost 30-40 % cheaper. At this kind of price, a lot of LNG can be imported and can fill the demand-supply gap appreciably.
India has already had LNG agreements with US companies and supplies are scheduled to be on stream by 2016, two years from now. US energy Secretary has visited India and has assured her that the necessary authorisation of US government would be obtained for LNG exports to India. US law requires special time consuming clearing process for LNG exports to non-FTA (Free Trade Agreement) countries. In fact such authorisation can be denied, if a special waiver is given. In the US, a long debate ensued in Congress as to the merits and demerits of cheap LNG exports. The debate appears to have to come to fruition for several reasons and urgency appears to be there to export LNG in the wake of Russian acquisition of Crimea and continuing conflict in Ukraine. Russia's important share in European gas supplies is one of the reasons that militate against more severe actions and steps against Russia. Consequently, US DOE has recommended that FTA requirement be done away with and LNG exports be made available to all WTO countries. This would open the alternative to Russian gas supplies to Ukraine and help the latter to stand up to Russia in its struggle for remaining free and independent. India, Japan and Korea would automatically and immediately benefit from these developments.
One asks as to why Pakistan is not in the line for the cheap LNG exports of the US. Simple answer - inefficiency, ignorance and other interests, not that GoP did not try. A low-level delegation did visit the US headed by the additional secretary MPNR and having gas and OGRA officials in the delegation. They were shown around but were told flatly that Pakistan was ineligible for US LNG exports as it was not a member of FTA.
But how India did got the nod and approval (in finalising stage); possibly as a quid pro quo for withdrawing from IPI pipeline agreement with Iran. For all practical purposes IPI now IP-only (Iran and Pakistan) project is practically dead under US pressure. Similar Quid pro quo as that of India should apply. But did Pakistan seriously attempt to get cheaper US LNG authorisation from US government. There is no available evidence to that effect. We had elections in the meantime after the inactive governance of President Zardari. An Additional-Secretary-level contact obviously could not have even initiated the process, not to talk of any major development in this respect.
Golden chance for Nawaz Sharif government Nawaz Sharif has the golden chance of launching an initiative in this respect on the same lines as he has broken the deadlock on coal and has revived Chinese interest, even if, on imported coal projects. PML (N) governments has a rare opportunity for quick success and earn the laurels of the people and more importantly augmenting gas supplies at much lower cost saving billions of US dollars. I wish somebody close to the PM reads it and initiates the cycle. Why do I see the chances for quick success? The major impediment of the FTA clause barring Pakistan is on the way out on its own without any request or initiative from Pakistan. This does not mean that Pakistan becomes automatically eligible to get the US LNG. Efforts have to be made. There are several issues and lobbies that may militate against such development. But the biggest factor lies within us and our system. We have bargaining points as well such as co-operation in US withdrawal from Afghanistan. However, we are more interested in their used inventory of weapons than anything else. That may continue to be there. Addition of LNG issue would not cost the US anything, while the doors are being opened to all.
By bringing in the issue of cheaper LNG from the US, I do not at all mean that the current initiatives and projects for procuring expensive LNG from sources like Qatar and others should be stopped. US LNG, if at all, cannot come as soon as we require, which is next year. LNG liquefaction plants are being built there, albeit at a fast rate. It would take about three years to get hold of LNG supplies from US. It would, however, put downward pressure on LNG prices dictated by Shell/Qatar, as alternatives to their monopoly emerge for India, South Korea and Japan who are major LNG importers. And, of course, to us as well, provided we play our cards well enough. After all, the present LNG pricing system, unabashedly, is based on regional scarcity and not based on some sturdy economic rationale. If you are suffering, you suffer more. This is what the capitalism as taught by Shell to our Qatari brothers.
New opportunities under cheaper LNG regime With a gas price regime fostered by access to cheaper LNG from the US, a whole lot of opportunities open up. Currently CNG pumps are getting gas at 7 USD per mmBtu and sell it 15.37 USD against a petrol price of 35 USD per mmBtu. If CNG -Petrol price differential is brought down to 75%, CNG price should go up to 26.25 USD per mmBtu. If they continue to earn the same margin of 8.00 USD, they should be able to afford, a LNG price of 14.25 USD/per mmBtu. Still Qatar LNG at 18 USD per mmBtu would not be affordable but cheaper US LNG at 12 USD per MMBtu would be very attractive. CNG sector can itself install a LNG terminal itself for its gas requirements of 400 mmcfd, almost of the same capacity as that of Engro-Vopak. They can form a co-operative; with 3000 CNG pumps, an investment of 150 million USD with a 25% equity component, it would require a contribution of 12500 USD per member, which would be peanuts for the CNG pump owners. Alternatively, an independent company can do the same.
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CNG regime under LNG
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Units Current Qatar LNG US LNG
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Gas purchase price USD/mmBtu 7 18 12
CNG Retail Price USD/mmBtu 15.37 26.25 26.25
CNG Margin % 119.57 45.83 118.75
Petrol price USD/mmBtu 35 40 35
CNG-Petrol Price advantage % 127.72 75 75
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Notes; In Qatar LNG scenario, petrol prices may have to be increased by 15% to maintain CNG price advantage of 75%;
even then, it is debatable, if a Gross Margin of 45.83 % would be acceptable to CNG pumps. In case of US LNG
GoP may earn some cess/tax to shave off the Gross Margin from 119% to a more reasonable level.
Source: compiled by the Author
Similarly, the fuel cost of LNG Qatar-based electricity would be 10.8 cents per kWh as opposed to 7.2 cents for US LNG. For comparison case, current coal-based electricity would cost 5 cents per kWh as fuel cost only. Coal would be still cheaper. Most European fertilizer companies are running on gas costing 10-12 USD per mmBtu and competing in the market. Thus Fertilizer could also shift to US LNG and try to compete with the imported fertilizer. It would be an easy task for the fertilizer sector to install a LNG terminal for itself, both technically and financially. The subsidy on fertilizer can be given at wholesale trade level. Currently, there are two subsidies on fertilisers; one on imported fertilizer and the other on low-priced gas.
New gas pricing regime
Apart from LNG issue, gas pricing is in itself an important issue meriting some consideration. India and China are both shifting to higher gas price regime; both used to be low gas price countries like Pakistan. In India natural gas is not that widely used in residential sector. In China, however, natural gas is widely used in residential sector. China is not planning to enhance the residential gas tariff. We can also do the same, so that difficult pricing decisions do not put a direct burden on the people. I am not arguing for a give-away to the existing gas producers. The proposed gas prices should go to the new discoveries so as to provide the required incentives to investment and exploration in the oil and gas sector. When such price reform occurs, without causing political unrest, there would be a case of opening up gas market for competition. Buyers and sellers negotiate price directly without government regulation. This should be the music to IMF and World Bank. In that case, one would have strong support from the two powerful institutions and lobbies for getting access to cheaper LNG from the US. One can get the same without them as well. However, their music brings cash as well that we often need so badly and may need more of it during the transitional period.
(The views expressed in this article are not necessarily those of the newspaper)
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