RLNG: Supply glut or policy failure?—I

What is being commonly marketed as an RLNG supply glut in Pakistan is in fact the result of 1) mismanagement of generation planning by CPPA-G and Karachi Electric, and 2) deliberate demand destruction of industrial captive users by the government. It is all being done only to extend a short-term lifeline to a fundamentally unsustainable national grid, while imposing huge costs on the economy and doing long-term damage to the gas sector and overall energy landscape of Pakistan.

A supply glut is specifically a supply-side phenomenon. It occurs when the quantity of goods supplied in a market surpasses demand at the prevailing price level, and excess supply leads to a downwards pressure on prices. The anticipated global LNG supply glut, for instance, is a supply-side phenomenon driven by the American shale gas revolution and strong international demand, which spurred aggressive expansion of US LNG production capacity and export infrastructure.

Pakistan’s case is markedly different as the supply of LNG remains fixed.

In 2015, Pakistan started entering long-term LNG agreements to supplement gas supply from rapidly depleting domestic reserves. Pakistan State Oil (PSO) signed a 15-year-agreement with Qatar Energy in 2015 for 3.75 million tonnes per annum at 13.37 percent of Brent crude prices. In 2021, PSO secured an additional 10-year contract for 3 MPTA at 10.2 percent of Brent. Pakistan LNG Limited (PLL) also entered into a 15-year agreement with ENI in 2017, supplying 0.75 MTPA at 12.14 percent of Brent, which has been overtaken by Karachi Electric. In total, Pakistan signed long-term LNG supply agreements amounting to roughly 1,000 million cubic feet per day (MMCFD).

LNG was envisaged to replace HSD and FO in the power sector to lower the overall generation cost and improve energy efficiency and address Pakistan’s chronic electricity shortages and high tariffs. Key infrastructure developments under this plan were the commissioning of the Bhikki and Balloki combined-cycle power plants in 2018, each with an installed capacity of around 1,200 megawatts (MW). These plants were designed to primarily run on RLNG, leveraging long-term LNG supply contracts to ensure fuel availability and price stability.

However, over the past few years, actual RLNG off-take by the power sector has declined significantly. The main reason is the comparatively higher fuel cost of RLNG-fired plants, which drives an increase in the average power purchase price, making power from LNG plants less competitive within the energy mix. In June 2025, for example, power sector RLNG consumption was approximately 28 percent below the committed off-take levels stipulated in LNG contracts. If the committed RLNG off-take stood at about 550 MMCFD, the actual consumption hovered around 395 MMCFD, indicating a shortfall of ~155 MMCFD from contractually expected levels.

This under-utilisation of RLNG in the power sector is not limited to government-run system. Karachi Electric (KE), Pakistan’s only private and vertically integrated power utility, has significantly concentrated its generation portfolio around RLNG-fired plants, a strategic choice with significant consequences.

Following its privatization, KE shifted its generation mix heavily toward gas-fired combined-cycle power plants fuelled by RLNG. This move was intended to leverage LNG imports and provide Karachi’s vast demand centre with reliable, cleaner electricity.

However, KE’s concentrated reliance on RLNG has exposed the utility to severe operational and financial inefficiencies. Unlike a diversified fuel mix that balances cost and supply risk, KE’s portfolio became structurally dependent on relatively high-cost LNG, making its generation expensive compared to the national grid relying on cheaper alternatives.

Despite signing long-term LNG contracts for approximately 100 MMCFD, KE has consistently failed to off-take the contracted volumes fully. For example, the much-touted BPQS III combined-cycle power plant has operated well below expected capacity, reflecting poor generation planning and operational inefficiencies.

Further complicating matters, KE’s LNG procurement strategy has lacked transparency and sound risk management, remaining short to the market. The utility’s RLNG supplier, Eni, has diverted contracted cargoes to higher-priced international markets, notably in Europe, capitalizing on favourable arbitrage opportunities. This practice exposes KE consumers to asymmetric risk allocation as KE absorbs the downside risks while suppliers retain price upside. KE’s delay in disclosing key contract terms related to cargo diversion to OGRA has also hampered regulatory oversight and public accountability.

KE’s failure to secure consistent, cost-effective RLNG supply and its inability to optimize plant dispatch have contributed materially to the RLNG surplus and the broader energy sector crisis. Its structural inefficiencies have raised power generation costs, pressured tariffs, and complicated efforts to stabilize the gas market. In the larger context, KE exemplifies how poor fuel choices and flawed procurement strategies can exacerbate systemic imbalances, undermine utility financial health, and deepen the disconnect between LNG supply contracts and actual demand.

Another major contributor to the LNG surplus is the deliberate demand destruction of industrial captive power users. Anticipated industrial growth, especially under CPEC, was one of the major reasons for aggressive expansion of power generation capacity on the grid. However, as this growth was never realised — due to a host of reasons—the stranded capacity became a major driver of inflated power tariffs, which comprise ~70 percent of fixed costs and ~30 percent fuel costs in Pakistan whereas the global standard is the opposite.

Failing to stimulate demand, the government resorted to a forced transition of industrial captive power load to the grid. To achieve this, in March 2025 it imposed an arbitrarily calculated grid transition levy of Rs 791/MMBtu on gas consumption for captive power generation. This took the price of gas for captive users from Rs 3,500/MMBtu (RLNG-equivalent) to Rs 4,291/MMBtu, causing gas/RLNG demand for captive power generation to plummet by 90 percent YoY, contributing another ~300-400 MMCF/d to the RLNG surplus.

As a result of the lower than committed off-take by the power sector and deliberate demand destruction of industrial captive users, in 2025, 52 out of 120 contracted LNG cargoes are expected to be surplus. At a DES price of USD 8.5/MMBtu, the market value of these surplus cargoes is ~ USD 1.4 billion plus ~ USD 0.5 billion for regassification. Although government has temporarily addressed the surplus by diverting RLNG to domestic sectors or by reselling it on the global market, these approaches are not viable in the long term.

Copyright Business Recorder, 2025