The current government has been able to secure one additional cargo from Qatar for December 2022 and January 2023 and another expected delivery of commitments made by Eni, which means that LNG will be provided at 900 mmscfd in December 2022 and 800 mmscfd in January 2023; this leaves a shortage ranging between 579-679 mmscfd. Due to the non-availability of LNG within the spot market at affordable prices, the silver lining is that our imported gas rates have reduced for the month of October to $14.78-15.83 from $22-24 in May 2022.
The world’s top LNG exporters have already warned that the energy crisis could extend to the middle of the decade. While Europe will be fine this winter, but it will have shortages through 2025 if the Russian gas “does not start flowing back once again”. The LNG market is at risk, reduced by warmer weather, of remaining in a crunch until at least 2026 when massive new export projects come online in Qatar and the US.
When the fuel-supply crisis began in the EU because of the Russo-Ukraine war, spot prices for the liquefied gas shot up to $60 per mmbtu and in November 2021, Pakistan purchased its highest-ever RLNG cargo at $30.6 per mmbtu following the second highest summer purchase in August 2021 at $20.55 per mmbtu.
In comparison, the shipments from the long-term contracts with Qatargas signed by the PML-N (Pakistan Muslim League-Nawaz) and utilized during the PTI (Pakistan Tehrik-e-Insaf) governments have been beneficial for the country in ensuring energy security; and LNG purchased in November 2021 based on these contracts cost $10.21 per mmbtu at 13.37% slope.
A leading English-language newspaper in mid-October reported that, “citing the example of an LNG contract from Qatar, the CJP emphasized that without having complete knowledge about the actual facts of the contract, especially when such deals were made at the state level, we tend to point fingers against people involved in it over situations beyond their control”. No society can totally eliminate crime or corruption. No one tolerates corruption or crime. Laws are made and should be enforced. But with the legal framework in place, society focuses in development and achievement.
Former PM Shahid Khaqan explained the benefit of long-term contracts with Qatargas but to no avail and is being prosecuted along with others despite an estimated saving of $4 billion over the last 6 months. Pakistan lost precious time and the PTI (Pakistan Tehreek-e-Insaf) government squandered the opportunity the Covid pandemic had thrown up. In its resolve to “bring the corrupt” to heel, the party couldn’t withstand the subsequent political fallout and pursued the easy decision to buy off the spot market instead of negotiating a long-term supply contract given the known demand growth and increasing shortfall which necessitated pursuing an agreement for an additional split 6-8 cargoes based on summer and winter loads even when LNG prices nosedived to $2 to $3 per mmbtu during the COVID outbreak as reported to the Senate Subcommittee on Energy on Oct 18, 2022. Eventually, it repented and signed a staged contract in which the initial two cargoes were increased to four over two years.
Despite the narrow operating space, the supply infrastructure was built in 2015 by this writer’s team who were key players and pioneers in bringing in Pakistan’s first-ever Floating Storage Regasification Unit (FSRU) unit at Engro Elengy’s Terminal in a world record of 300 days. This was achieved on the basis of the strategic vision of Ministry of Energy at that time of a phased upgrading to offload higher LNG volumes for re-gasification before dispatching it onwards to consumers at both terminals. To this objective, the terminal has been designed and built to handle a larger FSRU and LNGC, thereby allowing 4-6 additional cargoes at both terminals beyond the current contracted capacity for 12 cargoes. Unfortunately, the capacity increase was not allowed, nor utilized, nor volumes contracted during the last 4 years, which would have reduced the demand-supply gap cost effectively through additional long-term contracts.
A lack of vision has dominated the last 4 years including politicizing the Qatargas deal by reopening the “closed” inquiry with Sheikh Rashid becoming the complainant against those who evolved a solution through an out-the-of-box LNG import structure, GOP should have further built on the goodwill created via the government-to-government contracts and exploited the successfully positioned Pakistan as a reliable buyer instead of berating and castigating the largest and most reliable supplier of LNG in the world next to our shores, Pakistan’s gas supply position would have been manageable and we would have been less vulnerable to events beyond our borders.
These decisions have caused a significant crisis as the supply situation has worsened in 2022 combined with delays in increasing the gas tariff and that has resulted in a ballooning of the circular debt in the gas sector and negatively impacting the financial health of SSGC, SNGPL, OGDCL, PSO, PLL and PPL.
What has been done?
Plans are in place for a series of steps to manage the tight supply. Some of these include shutting down CNG stations, expanding and updating the gas load management schedules, switching to LPG including distributing 100,000 LPG cylinders to assist deployment and utilizing of electricity for heating homes and water.
Additionally, the logistical challenges at the port and transporting the supplementary LPG cargoes procured by SNGPL, SSGC, PSO and PARCO Pearl Gas (Pvt) Ltd for the winter needs immediate streamlining. SSGC LPG has recently highlighted achievement of bringing in a larger volume cargo.
More importantly, fuel is to be billed at cost and rates for commercial users have been raised recently.
What more must
Immediate short-term consideration for 2022-2023 requires a multi-pronged strategy. Conserving this very scarce energy resource requires individuals being encouraged to wear an extra layer of warm clothing, commercial and wedding operating hours being enforced to utilize maximum daylight hours, energy efficiency standards be updated for buildings and heating equipment and enforced through incentivizing user and manufacturer through credit facility. At the same time incentivizing the use of NET metering for the first two years after installation will help manage the electrical load during the day including introduction of daylight-saving time.
We also must look at the way our existing and remaining reserves of natural gas are being allocated. Non-availability of cheaper indigenous gas and the provision of exorbitantly priced spot RLNG will be a double whammy for the residential consumers primarily if prices are increased in one step, and still, we will not have enough gas for their cooking and heating needs; that combined with utilization of spot RLNG or diesel to generate electricity will result in higher FCA but much lower than burning furnace oil and even more on long-term contracted RLNG in the lean hydel months.
At this point in time, when Petroleum Division is raising alarm bells on imminent shortages, it is imperative that we take a closer look at the Gas Allocation and Management Policy and consider allocating gas to the power sector to produce cheaper electricity, thereby by allowing additional power plants to operate at their full and efficient capacity.
Furthermore, behavioral changes through conservation PSAs to encourage use of electricity for heating and cooking will possibly absorb this increase in supply while also fulfilling the energy needs of residential consumers.
As far as pricing concerns go, a proposal for a Weighted Average Cost of Gas (WACOG) has already been approved by the Senate as early as February 2022. Under this, weighted average price of RLNG and natural gas would be used to create a single rate applicable across the country. Power sector will be more than willing to bear this cost as it would objectively be cheaper than the absolute cost of RLNG. It will also make residential, commercial, and the industrial sector appreciate the need for conservation, and increase efficiency in conversion as the true cost of a resource that is otherwise heavily subsidized to the point of incredulity.
The WACOG is detrimental to LNG import by the private sector and a solution needs to be evolved by the time the sector is deregulated.
Due to the shortage of gas within Pakistan’s power sector, the International Energy Agency’s gas outlook report for the fourth quarter has already made note that the price per unit of oil in the generation cost has increased fivefold in the last fiscal to date. Our energy mix change provides opportunity to optimize procurement and usage to reduce the costs of electricity and yet planners have sought HSD supplies to operate Bahadur Shah Havelian power plant at a time when HSD supplies are restricted. Current LNG spot would be cheaper than operating plants on HSD!
Following from this, however, medium to long-term consideration need to consider the delivery of energy (gas, oil-based fuels, electricity) at cost with reduction in supply chain expense with increased menu of handling liquid cargoes by Pakistan Railways. This means that a price rationalization plan needs to implement charging gas at LNG cost from the power, captive power, CNG, fertilizer and exporting industries with direct subsidies, if any, tied to the performance, productivity, and efficiency of the sectors in question. Competitive prices of energy will help to keep the circular debt from expanding and limiting its fallout on the energy organizations of the country that are moving towards bankruptcy.
We all need to understand that for the foreseeable future, a finite set of gas molecules are available and driving up the effective and efficient utilisation of scarce energy resources is the only way moving forward. The next article will focus on how and what structural changes are required to improve our energy planning efficiency.
(The writer has served as Managing Director of Pakistan State Oil (PSO), he has been Chairman of the Petroleum Institute of Pakistan and OCAC including serving on the Boards of PRL, Pak Grease, APL, PAPCO, OCAC, and PIP. He is currently part of the Advisory Board of FPCCI. He perused growth initiatives in marketing RLNG and importing LNG as CEO of Elengy Terminal Pakistan Limited)Sheikh Imran ul Haque, "Criticality of energy management," Business recorder. 2022-11-10.
Keywords: Economics , Spot market , Affordable prices , Energy crisis , Sheikh Rashid , Pakistan , Russian , Qatar , LNG , RLNG , FPCCI , PRL