The latest meeting of the Economic Co-ordination Committee (ECC) ended in a bizarre manner as the official news release was quickly replaced by another. The case in point was the allowance of LNG import through the pre-approved LNG terminal at Karachi port.
The reported disagreement between the Finance Minster Shaukat Tarin and some other notable lawmakers in the committee has all the ingredients of what could possibly turn as controversial as the ill-famed RPPs.
The French firm GDF Suez has been allowed to import 2.75 million tons per annum for a term of six years as per the formula the firm offered. The pricing formula has two variable components of the Henry Hub LNG prices and the Brent crude oil price, in addition to a constant amount of $1.58/mmbtu. This translates into the final LNG tariff of $8.9/mmbtu, as of the latest available Henry Hub LNG price of January 10.
The other bidding party, Shell, offered a considerably higher LNG tariff based on an entirely different formula i.e. 15 percent of Brent Crude oil price, with a fixed component of $0.5/mmbtu. The resultant tariff of $12.5/mmbtu happens to be a staggering 40 percent higher than what was offered by the French firm.
On the simple principle of least price bidder, the entire contract should have been awarded to the GDF Suez firm. Instead, an official statement was released confirming that Shell has also been awarded a contract to import 1 million ton LNG for the medium-term period of six years at the price which they offered.
This is what caused the rift within the ECC members as the decision was taken without the consent of Mr. Tarin, who reversed the decision, according to unconfirmed reports, when it came to his notice.
Why was Shell awarded the contract in the first place, despite higher tariffs, is a question which would be best answered by those who took the decision. But, whatever was the motive behind the decision, it also overlooked ECCs previous approval of 3.5 million tons of LNG import for the Mashal project.
Together, the approved contracts would result in the import of 3.75 million tons or 0.25 million tons more than the requirement earlier assessed by the committee. In contrast, if Tarins decision stands out as the final one, then the allowed imports will fall short of the terminal handling capacity by 0.75 million tons - which would leave the ECC in a no mans land.
But aside from this goof up, there is a bigger oversight. The least offered tariff, which in this case was offered by GDF Suez is way expensive than the region - as LNG import prices in Pakistans neighborhood are at a discount of 30-40 percent.
There is no denying the importance of the imported gas for Pakistan at this point of time when the country faces acute shortage. Pakistans primary energy supply/demand imbalance is expected to increase amid slow growth of indigenous resources.
To meet this demand in the short run, Pakistan will be heavily dependent on gas imports particularly LNG due to its relatively shorter lead time.
Since, imported gas is predicted to have a 7 percent share in Pakistans energy mix by 2022, and the fact that LNG import is a very high-margin business with limited equity investment and an almost immediate payback of original investment transparency in both pricing and the bidding process must be ensured. Else, the issue could well turn out to be farce just like the RPPs.