LNG in Pakistan has gotten a lot of flak for higher pricing, and for the kind of contracts inked with the exporters. While rightly considered to be higher, the long term contract price has the advantage of guaranteed and stable supply. Plus, LNG prices linked to oil are a predominant and a preferred pricing methodology for LNG suppliers in Asia.
However, the Competition Commission of Pakistan feels differently. The competition watchdog in its study on the LNG sector has advised the LNG importers in the country to renegotiate their long-term contracts and revising their LNG supply negotiation strategies. In an interview with BR Research, published in August 2018, Anser Ahmed Khan CEO for ENERGAS LNG Terminal pointed out that what is more important for Pakistan is have the right supply partners, the right terms and price to provide balanced terms for both buyers and sellers for a sustainable long term relationship.
Warning against oil-based LNG pricing, the draft recommendations come at a time when weak demand for LNG in the coming winter season has brought a significant disparity between the spot LNG prices and the long-term oil inked contracts.
The key issues the CCP highlights in its study involve the oil-indexed contracts, the take-or-pay clause and the pricing review methodology. While the European markets have moved away from the oil-linked pricing, buyers in the Asian markets have traditionally been buying LNG on a JCC index (Japanese Crude Cocktail), which is linked to oil. The CCP argues that linking LNG prices to oil makes LNG prices vulnerable to oil markets, which is a source of inefficiency as ‘the uncertainty does not arise from organic sources like demand and supply of LNG, but rather from a “different” market like oil.’ Plus, it also says that these long-term oil indexed contracts are no longer necessary as the liquidity of the market has improved significantly due to larger number of LNG buyers and sellers.
Where the long-term LNG agreements ensure supply, these contracts have led to higher LNG prices in the country as the LNG SPAs are indexed to Brent crude oil prices; whereas, the global LNG markets are seeing a supply glut resulting in falling gas prices. In such a situation, the CCP recommends the sector to consider alternative pricing through the introduction of LNG spot market and natural gas hubs in long-term contract pricing like JKM, NBP, and Henry Hub. Other measures suggested to make the price more competitive in the LNG sector include reduction of the price review period from the existing 10 year and fixing the renegotiating clause.
Other recommendations that the competition watchdog believes could make the LNG market competitive include making the port charges more compatible with the regional players buying LNG. It also highlights the benefits of doing away with the infrastructural development cess that the Sindh government has imposed on LNG but other petroleum products are exempted.
The Competition Commission of Pakistan has put forth the report for comments until December 15, 2018. Rightly or otherwise, this has started the debate on LNG pricing once again amid the government’s plans to renegotiate LNG terminal contracts and increase terminal utilisation.
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