Putting all one’s eggs in the Qatar LNG basket is not astute
THE Latin phrase 'caveat emptor', or 'let the buyer beware', is
commonly used to place the burden of a good before purchase on the
buyer. In this context, it serves as a cautionary reminder that a buyer
must examine the conditions, the contract and, of course, the good
itself before signing on to a long-term deal, such as a long-term LNG
contract that normally spans two decades.
Liquefied Natural Gas, or LNG, has been on the radar for all in the
natural gas sector for a while now. Asia accounts for more than 68pc of
the total LNG market at present, and as demand for natural gas continues
to soar in this part of the world, LNG may play an even larger role in
the future. LNG contracts are often long term because they need a
significant investment of capital, not limited to extraction,
transportation, storage, re-gasification, and other components of the
supply chain. While spot and short-term LNG trade provide greater
flexibility in terms of different market prices and options, they do not
grant the security that a long-term contract provides.
This country seeks to import two billion cubic feet of gas per day
from Qatar on a long-term contract, and it is said that both countries
will be in talks on pricing and volume of gas later in February in Doha.
Earlier this month, the Sui Southern Gas Company approved plans for the
construction of a new LNG terminal at Port Qasim. On the surface, it
seems like things are moving forward. However, one must look closer and
address some underlying problems, on pricing, and its impact, something
that seems to be missing in our power corridors.
The price for imported LNG from Qatar is indexed to Brent Crude Oil,
and oil-indexed natural gas prices will increase with rising oil prices.
The price was negotiated to $17.437 per million British thermal unit
(mmBTu), but that too will be too high considering trends in the global
gas market. Amidst a ‘shale gas revolution’ in North America, global gas
spot prices in the Henry Hub, a major gas distribution centre, are
going down as natural gas supply increases.
The trend in the global gas market is towards a divorce of oil and
gas prices, as shown in recent cases filed in the International Court of
Arbitration. In an uncertain future, as oil prices soar, it will be
unwise to agree to a long-term contract indexed to Brent Crude Oil
prices at a high parity. In fact, India faced the same dilemma with an
LNG deal with Qatar in 2012, and favored LNG produced from shale gas in
the US, which was linked to the Henry Hub with a premium.
Under a long-term ‘take or pay’ agreement with Doha , Pakistan, must
pay for the agreed quantity of LNG, regardless. The caveat is that the
base price and price index, once inked in the contract are subject to
little or no change. What is more problematic is the projected
additional costs of shipping, receiving, storage, re-gasification, which
would make the cost of LNG around $19.50/mmbtu, an exorbitant price for
Pakistani consumers. Moreover, pipeline tariffs for SNGPL, SSGC and
other local levies could make the cost about five times the price of
domestic gas, and therefore the economic impact of LNG cost must be
analysed.
Pakistan cannot bury its head in the Arabian sand and deny the
changes in the global gas market. Putting all its eggs in the Qatar LNG
basket is neither astute nor rational. When it comes to international
price negotiations, we have a terrible record and a lack of
transparency, a trend that must be changed.
Firstly, if Pakistan is unswerving on LNG, it 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, under democratic
principles.
Secondly, it is imperative for Pakistan to include a price review
clause, especially when international gas prices are nose-diving at the
biggest natural gas hub. 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.
Thirdly, instead of just focusing on its LNG and pipeline contracts,
Pakistan must foster a self-sustainable natural gas sector by unlocking
shale gas, to generate employment, and heal an ailing domestic natural
gas sector.
In conclusion, natural gas policy must focus on the principles of
energy security — creating reliable energy supply at an affordable cost.
Will Pakistan have the wisdom to move towards a regional gas pricing
hub for Asia?
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