The Oil and Gas Regulatory Authority (Ogra) on the request of Pakistan State Oil (PSO) has fixed provisional price of imported Liquefied Natural Gas (LNG) at $8.64 per Million British Thermal Unit (MMBTU). According to a notification issued here on Wednesday the authority considering PSO's application to determine provisional LNG prices has fixed Delivered Ex-Shipment (DES) price of the commodity at $7.73 per MMBTU.
The authority has approved $0.0088 per MMBTU as PSO's other import related cost, $0.66 per MMBTU as terminal tolling charges, transmission and distribution losses are fixed at 0.5 percent of the DES price or $0.034 per MMBTU and PSO's Margin at $0.14 per MMBTU or 1.82 percent of DES price.
Gas utilities Sui-Southern Gas Pipelines Limited (SNGPL) and Sui-Southern Gas Company Limited had requested for transmission and distribution charges of $0.52 per MMBTU but the authority has not approved anything on this account. The policy guideline regarding tolling tariff of $0.66 per MMBTU secured through a competitive bidding process shall be issued to OGRA in terms of OGRA Ordinance 2002:
All other commercial aspects of the import of LNG agreement shall be settled between the respective parties to the contract. (i) The cost components comprising (i) PSO margin up to 4% (ii) administrative margin of gas companies up to 0.05$ per MMBTU and (iii) cost of service of gas companies, in accordance with the decision of the Federal Government (FG) has to be determined by OGRA. Accordingly, a consultative process shall soon be initiated with reference to holding public hearings to determine the same in the light of various shades of opinions/suggestions of the stakeholders and public at large.
The Authority further observes RLNG pricing is carried out under Petroleum Levy (PL) Ordinance 1961 which does not obligate for public hearing; however the Authority is of the view that the same shall provide the opportunity for natural justice and shall attract the valuable input from all stakeholders.
The information submitted by PSO has been and prima fade observed that LNG framework suffers from fundamental shortcomings as under; Long term LNG sale purchase agreement with Qatar on G to G basis, which is a hall mark of LNG arrangement, has not been finalised yet. Tripartite agreement which regulates the supply chain between PSO, SNGPL and SSGCL has not been signed yet.
Agreement with the end consumer has not been provided. Also, PSO has not ensured that the cost components per the FG decision as mentioned above have been mutually agreed and settled. In the wake such non-finalised supply chain, the Authority that on the figures and mandate by the parties are deficient to include the same in RLNG price built up. Further, PSG was required to provide the detail to the effect that LNG activities are governed under tripartite agreement, in compliance to relevant law and in accordance with the approval of competent forum which were not yet provided.
The Authority further observes that PSO has initially procured four cargoes for SNGPL on spot purchase basis whereas FG in its various decision advised that Relevant rules should be followed & spirit. In this context, the Authority had pointed out that PSO has entered into short term agreements and has also procured LNG cargoes at various rates; the same have not been presented before the FG for approval. MP&NR in this regard endorsed ECC decision dated June 6, 2015 which was reiterated by the same forum on and provides as under:
Regarding the first four cargoes on spot purchase basis, MP&N'R advised that same may be included in RLNG price on provisional basis till it is included in SPA to be submitted for approval of the Federal Government. The Authority observes that PSO has now opted procurement on DES/FOB basis through tendering process and has been accorded the autonomy to explore the options and decide itself. This essentially requires that transparency in the process must be ensured through fool proof internal control system, proper disclosure, approval mechanism and necessary checks and balances in the entire supply chain, in order to make the project a success.
The Authority further observes that FG had already constituted high level committees on RLNG pricing component and LNG price negotiations on G to G basis. No such committee has been involved to monitor/ oversee this short term arrangement to ensure commercial prudence in view of price of RLNG vs. price of alternate fuels.
Moreover, the LNG activities including cost flow till RLNG end consumer, operates on the mutual agreements and principle of synergy. Such agreements, viz; G to G LNG agreement, rate finalization with PQA, tripartite agreement, SNGPL agreement with end consumers, all have not been finalised yet. Accordingly, no cost/payment have been settled/ agreed, which are basis for such determination.
As per decision of the FG, PSO margin upto 4%, administrative margin upto $0.52 per MMBTU and cost of service of gas companies has to be determined by OGRA. Accordingly, OGRA is soon in process of holding public hearings in this regard in order to obtain the concerns of bulk buyers, who are party to the arrangement and of the public whose interest may directly/ indirectly get associated with this arrangement since the LNG arrangement has to be executed for existing consumers and through existing network. In view of above, it transpires that final RLNG price cannot be determined unless the LNG procurement made so far bears FG approval, mutual agreements in channel are finalised, activities are streamlined and accordingly information complete in all respect are submitted in letter & spirit.
The Authority considered MP&NR advice on provisional pricing dated September 7, 2015 and the meeting with MP&NR, gas companies and PSO wherein it was highlighted that PSO is procuring LNG cargoes since March, 2015 for onward delivery of RLNG to IPPs/Fertilisers/CNG etc; on continuous basis. No RLNG price however has been recovered yet. Resultantly, PSO is facing serious financial crunch and is incapacitated to LNG procurement. It was also stressed that LNG import suspension shall indulge into further energy shortfall and shall result into unutilised terminal capacity payment at the cost of public exchequer.
The Authority, in view of the above of MP&NR dated September 7, 2015 and ground realities, consents for RLNG pricing on provisional basis in national interest. The Authority observes if provisional price notification is not issued, it may halt LNG procurement resulting to increase in energy shortfall and loss to public exchequer in terms of material amount of fixed terminal capacity payments. Further, it shall adversely impact G to G agreement negotiations.
Accordingly, the Authority, in the larger public interest, decides the relevant price components as under, on provisional basis till the same is decided after public hearings and mutual agreements between the parties: The authority observes that advance income tax and financial risk may be unavoidable cost connected with this margin, the magnitude of the same, however, could not be 4%. Further, as per statement provided by PSO, advance tax has been computed at 1.32% of DES price. Considering the cost of financial risk and incremental operating cost tentatively @ 0.5% the margin computes to 1.82%.
The Authority, provisionally disallows gas companies' claim on administrative margin of gas companies upto 0.05$ per MMBTU. The Authority disallows the cost of service in respect of gas companies, which the gas companies claimed on account of RLNG shipment through their network. SNGPL and SSCCL has claimed 0.52 and 0.13 $ per MMBTU.
Regarding the terminal charges, the authority observes that payments between the parties in this regard have to be made in accordance with the mutual agreements. Averagely, it shall cost @ 0.66$ per MMBTU. Accordingly, ECC decision approved the same to be charged from the end consumer. The authority, therefore, includes terminal charges to the levellized tariff of 0.66$ per MMBTU in accordance with the PSO should expeditiously take up the matter with FG for finalization of long term LNG contract as well as mutual agreements. The matters with PQA must be resolved on urgent basis. Accordingly, the charges should be included on actual basis.
LNG procurement should he planned in a way that terminal capacity should be optimally utilised to avoid unnecessary burden. FG in consultation with parties to the agreement should develop a mechanism to ensure commercial prudence and transparency in the entire process particularly the LNG procurement under the short term arrangement.
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