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The future era in LNG

Published on 19th May, Edition 20, 2014

 

Natural gas accounts for 50 percent of Pakistan’s total energy mix. The present shortage of 2,000mmscfd has led to the closing down of small and large scale industries and businesses across the country. The LNG Policy was issued in 2006 but so far no project relating to LNG has been materialized. This is the final attempt by the government to bring LNG to Pakistan. At present, Asia accounts for more than 68 percent of the total LNG market, and as demand for natural gas continues to reach in it zenith in this part of the world, LNG may play an even strategic role in the future.

The present government is fully aware of the problems; the domestic consumers are facing in gas supply and are taking steps on an urgent basis to resolve the issue. It is regretted that Bio-gas technology had not been implemented in the country and it seems that LNG would be made a cheap source of fuel.

LNG projects require sufficient time for planning, execution and involve billions of dollars of investment. The largest LNG importing nations in the Far East like Japan and Korea comparatively buy it at or close to crude oil parity. They have already diversified their energy sector to include LNG for environmental reasons.

Pakistan does not want to use LNG for this purpose as it’s too much reliance on gas that has culminated in its widespread supply shortages. Its involvement would be limited to building the local LNG receiving terminal, required infrastructure and the ability to connect it into the domestic grid.

The gas first has to be liquefied at source, which need sophisticated plant. Its merit is that its volume lower down, enabling large quantities to be moved to faraway places. It needs to be hauled over long distances by special LNG ships. At the final stage when it arrives at its place, special facilities are required to change it back to gaseous form. All these steps in changeover and transportation raise the commodity’s price.

The scene is nevertheless different for locally available natural gas, which has a long history of being lower-priced due to moderate and large supply since the discovery of the huge Sui gas field. With quick decline and now lessening reserves after more than forty years of usefulness producer gas prices paid by the government to secure new supplies have more or less with the international prices of roughly $3.5-$4/mmbtu.

Domestic prices, especially for the large market, are significantly lower than these prices, signifying huge subsidy to consumers. The LNG solution looks quite surprising in the backdrop of artificially low domestic gas prices at $3-$4/mmbtu and imported gas at $16-$18/mmbtu.

With domestic demand heavily subsidized, the arrival of imported LNG will accelerate the cost vs. price gap by another 400 percent jump, resulting in more than a fourfold increase in subsidies required to maintain existing consumer prices. The $16-$18/mmbtu imported LNG will at best be priced at par with current gasoline/diesel prices.

Pakistan is trying to have on a discount of some sort when negotiating LNG supplies with Qatar. It must be remembered that Qatar is already one of the largest LNG exporting countries, with most of its output contracted out to buyers in the Far East, Europe, etc.

It is sure whether on discount or no discount, the price of imported LNG is only going to further worsened Pakistan’s balance of payments position. New LNG will also discourage or displace domestic gas, especially if a long-term contract is signed. This is quite likely a prerequisite in these arrangements.

There are some very large world class gas reserves in our neighboring countries. The gas import option from Iran or Central Asia is one of the alternatives which should be given utmost priority. Otherwise the future can see Pakistan becoming a regional gas hub, with international pipelines connecting it with Iran and Central Asia.

The current position is that the LNG Services Agreement and the schedules are expected to be finalized very soon and will be ready for signing. The schedules cover the unlimited corporate guarantee undertaking from ECorp with a $10m performance bond. Similarly, the PQA has approved the LNG terminal site, and the implementation agreement (IA) has been initialed. Upon approval of the PQA’s board of directors, the IA will be signed.

The government is ready to award the pipeline supply contract to lay a 42-inch pipeline for SSGC, and a 24-inch one for itself, from the jetty to the delivery point, and from the delivery point to the SSGC Pakland metering station.

The PQA has approved the right-of-way (ROW) for the pipeline, and awaits approval of Pakistan Railways. The SSGC is expeditiously working and mental and social impact assessment has been conducted and the NOC from the Sindh Environment Protection Agency and a conditional license from the Oil and Gas Regulatory Authority have been received for construction of the terminal.

 

Once completed, the project will process imported LNG and inject 400mmcfd gas into the national network, which will reduce the existing shortage of 1.6 billion cubic feet by one-fourth.

ETPL will invest approximately $150 million in the LNG import infrastructure project. Engro has decided to initiate the project with equity funds, and the amount received will support the execution of the project in 335 days from the signing of the long-term sales agreement (LSA), until the loan documents are finalized in two months.

CNG sector has been advised to convert their system to Liquefied Natural Gas (LNG) as the country is facing severe shortage of natural gas. The future era is of LNG and the government is working on promoting it to meet the growing future requirements. The government has not yet finalized the sale price of LNG but it was striving to keep it 30 percent less then petrol. The government at the same time is endeavoring to explore more oil and gas reserves in the country.

Regarding Iran-Pakistan gas pipeline project, the sanctions imposed on Iran were an impediment in completion of the project. About Pakistan, Turkmenistan, Afghanistan India gas pipeline project, it would take three to four years to complete.

India has set a benchmark of LNG price from Qatar in the region at $10-12 per MMBTU posing an enormous challenge to Pakistani authorities. According to Dr Miftah Ismail, Chairman Board of Investment who is also chairman of board of directors of Sui Southern, as per existing international price, the LNG price from Qatar will hover at $17 per MMBTU for Pakistan. After adding other charges it will hover at $18. Dr Miftah said if the LNG is provided to power houses the sales tax will be re-adjusted. So the cost of LNG price because of GST will not increase.

When his attention was drawn towards the fact that India is importing LNG from Qatar at $10-12 per MMBTU as mentioned in the letter of energy expert Arshad H. Abbasi associated with SDPI written to Prime Minister Nawaz Sharif, Dr, Miftah said: “I assure that this government will get a better deal with Qatar and we will also look into the Qatar-India deal prior to advancing on LNG deal.”

Qatar has sought a LNG supply contract for a period of 15 years extendable for to five years with no price reopener. Qatar wants a penalty of $200 million for termination of the agreement at any stage. It also wants the price to be fixed as a percentage of Brent, it shows. Agreeing to a fixed Brent rate for 15 years will be like mortgaging Pakistan’s future generations.

Similarly, looking at India’s LNG price from Qatar between the time periods of October 2012 to July 2013, it has ranged between $10-12/MMBTU, and the price that did not rise to more than $11/MMBTU in 2013.

The gas position in Pakistan is set to improve in near future as the contract for LNG (Liquefied Natural Gas) tender for the import of 400 MMCFT LNG is going to get forward on the basis of the recommendations of the Board of Directors of the Sui Southern Gas Pipelines Company, (SSGC) and the Economic Coordination Committee of the Cabinet.

According to details, three bidders have been technically declared qualified by the SSGC and their Consultants. They include Elengy of Engro Pakistan, GIP of Turk Consortium and Pakistan Gasport of Iqbal Z Ahmed.

Pakistan at this point of stage must seriously renegotiate the price. India has already set the benchmark in LNG pricing in the region when it struck a deal with the US at $10.50 in July 2013. This should be a transparent process. Moreover, the Ministry of Petroleum and Natural Resources will need to assess the economic impact, when the domestic gas price is only $3-5 per mmbtu.

It must be remembered that instead of just concentrating on its LNG and pipeline contracts, Pakistan must develop a self-sustainable natural gas sector by unlocking shale gas, to generate employment, and rehabilitate a suffered domestic natural gas sector. In short, any natural gas policy in the near future must focus on the principles of energy security and creating reliable energy supply at a modest cost.

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