LNG import from Qatar at $15 per MMBTU to hurt economy

Plans are under way in Islamabad to buy liquefied natural gas (LNG) from Qatar on a 15-year long contract through the Sui Southern Gas Company (SSGC) at an astronomical rate of $15 per million British thermal units (MMBTU) as compared to domestic gas’ price of $3.5 and international price of nearly $8 per MMBTU.

The move if succeeded will result in doubling of price of natural gas for domestic and commercial consumers in the country. Sources say the rules of Public Procurement Regulatory Authority (PPRA) and Oil and Gas Regulatory law will be relaxed to strike this contract. Obviously, big bosses will receive kickbacks worth billions of rupees in the shady business.

It has been the standard practice of the present government to let the shortages build up into severe crisis and then hastily make policy decisions in which rules and regulations are bypassed to buy things in emergency at much expensive rate and make huge kickbacks in the process. The inflated prices in these cases are justified by saying the emergency deal would end the very shortage which in the first place was allowed to develop by the government itself. The past examples are expensive electricity deals through independent power producers and rental power plants. Now the same trick is being applied on the import of natural gas in the reinforced liquefied form, LNG.

Adviser to the Prime Minister on Petroleum and Natural Resources Dr Asim Hussain said the other day that the federal government was working on the LNG import project. He was presiding the first meeting of the committee on LNG infrastructure projects constituted by the prime minister, which was also attended by other committee members though the chairman of the regulatory body of oil and natural gas, OGRA, was conspicuously absent from the meeting. It needs to be mentioned here that the petroleum minister snubbed OGRA chairman in one of the Economic Coordination Committee of the Cabinet (ECC) meetings held in June 2012 when the officer tried to express his dissenting views on the approval of the import of LNG without clear mention of price mechanism.

It was reported that detailed discussions were held in the latest meeting on the framework for import of LNG including fast-track imports and the long-term import components. The committee members were reported to be in an agreement that LNG import projects were necessary keeping in view the current energy crisis in the country. The committee was of the view that Sui Northern Gas Pipelines Ltd (SNGPL) and SSGC’s joint venture company should be set up with major shareholding of the federal government that should undertake the infrastructure development for LNG import.

Moreover, it was also recommended in the meeting that the import initiatives already undertaken by SSGC would run parallel to infrastructure development so that LNG could be imported as early as possible. Here lies the catch because the political high-ups seem to be in a hurry to strike a deal between the SSGC and Qatargas for import of LNG at much higher than normal rates.

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Sources in the Petroleum Ministry say the federal government is planning to buy LNG from Qatar under a 15-year contract with a price review after 10 years bypassing the competitive bid as required by PPRA rules at inflated rates. This is despite the fact that initially Finance Division, Planning Division and OGRA opposed the deal in the making. According to estimates made by the Finance Division, if this deal materialises, the domestic price of natural gas for domestic and commercial users will be doubled. This astronomical hike will make the lives of the poor people miserable and rendering the industry uncompetitive. More than 20 percent of the cost of the industrial inputs relate to fuel prices including natural gas.

The federal government has been silently working to realise its designs and the LNG policy of 2011 was the first step in this direction. Para 3.1 (c) of LNG Policy, 2011 provides that LNG imports can also be made on spot purchases based on market and commercial considerations. Gas companies will be allowed to purchase LNG from spot market without competitive bidding for which waiver of PPRA rules will be solicited separately.

The government has already signed a memorandum of understanding with Qatargas and they have provided a term sheet subject to negotiation. According to the terms sheet, presented by the Qatargas, the Pakistani company will buy 3.50 million metric tonnes of LNG per annum during the first contract year. These terms also bind the Pakistani company to make payment for 100 percent of the quantity of LNG whether it takes or not the full capacity of the gas it had agreed to buy initially.

In a summary of the Ministry of Petroleum and Natural Resources for the ECC dated May 11, 2012, the import price of LNG has been quoted at $15 per MMBTU, while currently the domestic price of natural gas is $3.5 per MMBTU. This means that the government intends to buy imported gas at more than 400 percent price of the current domestic price.

Independent experts say the entire concept of LNG import is based on the presumption that LNG would be imported at the 70 percent price of the imported fuel oil (BTU parity). They say in case the LNG is now imported at a price which is close or equal to price of imported fuel oil, there appears no reason for going ahead with the project keeping in view the huge costs involved in establishing the entire LNG setup including storage terminals and pipelines.

It would not be in the interest of the country to sign a long-term contract linked to oil price with a 10 years price review because it will result in the landed price of LNG close to fuel oil. This is because various market reports (March 3, 2012) suggest that the LNG market dynamics are volatile and are fast changing. There is an expected surge in global supplies from Australia and the United States that will encourage buyers to move away from oil-based contracts. The world will face a global LNG glut by 2018-19 owing to huge production increase from unconventional gas resources. This period falls around five years from now. Therefore, they should be able to negotiate with upstream suppliers for a 5-year price review and not expose Pakistan to high LNG prices locked in for 10 years.

As compared to $15 per MMBTU price being negotiated by the Pakistan government, an Indian company, Gail, is reported to have signed a long-term contract for importing LNG from the United States at landed price of $7 to $8 per MMBTU by 2016. This deal is linked to Henry Hub, a trading hub, which provides a benchmark price for bulk gas in the US.

Intriguingly, for a project of such magnitude, which involves dealings worth billions of rupees per annum, the Ministry of Petroleum has proposed a financial close of 100 days. This will close the doors on many intending suppliers who would not be able to complete the homework in such a short period of time for such a huge project. Experts say that for such a project the time period of at least one year is required.

Another part of the ongoing process of the import deal is that the government of Pakistan would be a guarantor for payment to the supplying company though the government is not in a position to give guarantee because of its limitations under the Fiscal Responsibility and Debt Limitation Act, 2005.

source: Daily Times