The LNG scam or non-scam?

LNG is again in the news; firstly a high-level Pakistani delegation went to Qatar in the hope of getting a direct and concessionary LNG deal from government of Qatar; secondly, a retired federal secretary of the Ministry of Petroleum (G. A. Sabri) has come out with his book, “The proclaimed LNG scam”, making important revelations.

We will examine the issues, and try to understand why attempts of successive governments have failed to get a favourable deal from Qatar and discuss some policy issues in the light of the revelations made by the author in his book.

The desire and efforts of the successive governments to get a better deal from both Iran and Qatar is based on some genuine reasons. Here we will focus on LNG and Qatar. The issue is what the fair price of natural gas is. In quite a few jurisdictions, it is priced at 4-5 USD per MMBtu. In Europe, where gas comes from a wide variety of sources including local production, pipeline gas from Russia and LNG from Africa and the Middle East, the average gas price has hovered between 8-10 USD per MMBtu.

Thus a fair price to a lot many of us appears to be somewhere between 4 and 10 USD per MMBtu. Both Iran and Qatar have set the prices far above this figure at 17-18 USD per MMBtu (at 80-85% of the price of oil). India did not accept this price and withdrew from the IPI deal, although there was more to it than the pricing issue.

However, it is highly likely that India may not have withdrawn from IPI had the price been attractive. For a 15 percent margin, India did not find it worth the fuss. Coming back to Qatar, they are already selling to Europe at half the price offered to Pakistan. There is a legitimate expectation of a brotherly Muslim country to expect some concession or lenient terms.

To be fair, the counter argument has to be stated. Price offered to Pakistan is the same as it is to India and Japan. This is a standard going price for the region, it is argued (however, the morality or fairness is questionable). In case of Iran, gas belongs to government of Iran as bulk of their production is in public sector and the gas is produced there under service contracts rather than on royalty terms.

In case of Qatar, Shell owns the gas, as far as I understand, by virtue of investments made by the latter in gas production and liquefaction. Government of Qatar may not have much of leverage, commercially speaking. However, under a political arrangement, possibilities may be much wider. Rumours have been around that in order to compensate Pakistan vis-à-vis Iran pipeline gas, some political arrangement of LNG supplies facilitated by the US may be possible.

The question, however, is who foots the bill? What is the quid pro quo for Qatar? The possibilities and potential are many and may be best reserved for comments by diplomats and security analysts. Why don’t Americans compensate Pakistan. They are in an enviable position vis-à-vis the gas glut they have these days due to the advent of Shale gas. They used to import LNG and now they are about to start exporting, mostly across the Atlantic to Europe to counter Russian moves in Gas Politics of Europe.

In fact, an agreement to supply LNG has been signed with India as well. The US can do many things; support local gas production in Pakistan, conventional and Shale and Tight gas, all of it; the US government can facilitate the transfer of LNG regasification facilities which have become redundant in the circumstances of gas glut there. All they are doing is financing consultancies and may be travelling expenses under USAID grants.

There is yet another horrible side of LNG that has not been discussed in our public debate on the issue, which is ‘Take or Pay’ conditionality. This is to say that if for some reason, the buyer is not able to lift the quantities agreed in the contract, he or she has still to pay and not only the capital cost of the assets and infrastructure, but of the commodity (gas) also. And one is bound for twenty years for such terms. In integrated projects, this condition can be implemented with harsh consequences for the buyer. I am not sure, if the counter-clauses were also built into the contract conditions, like diverting the gas to other customers and adjustments of non-lifting penalties.

The author does not elaborate on that. However, Iqbal Z. Ahmad a prominent figure in gas industry argues against ‘Take or Pay’ contracts. He makes a case for ‘Take and Pay’ contracts, which mean you pay for what you take and do not pay for what you do not and cannot take. So, if ‘Take or Pay’ conditions are applicable in the LNG projects offered to us, the margin of 15 percent price advantage withers away against the risks associated with ‘Take or Pay’ clauses. Such clauses may be swallowed at classical commodity (gas) prices but not at the LNG prices that are under consideration.

A merchant terminal providing services to importers and end-users may be ideally suited to Pakistan market and circumstances. There is no need of tying it with gas supplies. In fact there may not be any need for a long-term contract. Importers and end-users may rely on fast expanding spot market. Platts maintains that spot market stands at 25 percent of total global LNG sales. Interestingly, Hazira LNG terminal in India is based on this business model. Hazira is owned 75 percent by Shell and 25 percent by Total, a 100 percent FDI. We should apply our minds to learn as to why Shell invested in a Terminal next door in India without insisting in long-term supplies contract, and in Pakistan Shell did just the opposite, as the author reveals. If there is a clear-headed policy environment and full openness and transparency, a similar project can be attracted. An IPP cost-plus model should be good enough.

There is ample experience in it. A private-public partnership arrangement may also be considered, if FDI is not forthcoming. The proposed Gas pipeline from India could also be implemented on the same lines. If well functioning markets are to be established in the region, supplies (commodity) have to be separated from network operating business.

Although this scribe is not very fond of LNG for a number of reasons, primarily because of the marginal price advantage it offers vis-à-vis oil, while Oil is much more versatile, easily stored and transported etc (I do not belong to the so-called oil lobby or in any way beneficiary of or associated with oil interests, directly or indirectly). It is awfully expensive, four times as higher than our current gas rates and whole sale tariff. It may be swallowed as a bitter pill in an emergency situation for short-term purposes or for diversifying and broad-basing energy mix for enhancing energy security. If a reasonable deal is arrived at one or two LNG projects may be launched. No body is willing to pay the higher price of gas; CNG would be more expensive than petrol, if full LNG price is charged to it; fertiliser industry wants to get gas almost free as it has been getting and make 100 percent profits (ROE), with marginally lower fertiliser prices; with current gas rates of 4-5 USD per MMbtu to the power sector, the circular debt has been swelling which the present government has been doing its best to eliminate. However, it can come back very soon again, with LNG projects as these are structured to date. So if there is no success in LNG, the present government should not get disappointed. They did not lose something very valuable. The other measures the new government is taking like converting oil power plants to coal are more cost-effective and robust than mercurial LNG. The other steps required are shifting the demand away from Gas; phasing out CNG and conversion of fertiliser plants to coal.

A start may be made by enhancing gas prices both for CNG and fertiliser sector to be followed by banning CNG for private cars altogether. There may be a residual case for continuing with CNG for public transport. After all, most of the world does not use CNG, despite having gas. Those who used CNG have abandoned it. CNG sector may be encouraged, however, to develop alternative sources like Bio-CNG. To the extent, they are able to marshal the alternate resources, they should be welcome.

Let us come to the LNG scam or non-scam, the raison d’être for writing the book by G.A. Sabri. The author had been sidelined by his political bosses in the aftermath of the Supreme Court judgement. He should not hold any grudge against his political bosses as he was elevated to grade 22 and even given an extension, which is normally given to the blue-eyed boys and not the dissenters. The author successfully defends himself in the book, being innocent of any wrongdoing. He was head of the PNC (Price Negotiating Committee) which recommended award of gas supply contract to Shell and of LNG terminal to 4Gas.

Fauji Foundation’s protest was that their offer was the lowest and its offered project for an integrated/bundled project (both gas supply and terminal) was not selected. The (perceivedly) aggrieved party perhaps provided one-sided information to non-technical journalists, who raised a hue and cry that an LNG scam has occurred which led to the suo motu hearings by the Supreme Court. The author believes that the court did not have the full opportunity to examine the case in its totality and a judgement was issued cancelling the award and reordering of tender and thus delayed LNG imports indefinitely. The author shifts the blame of inadequacies of the tendering process on SSGC, conveniently forgetting that he was sitting at the ministry (MPNR) on a responsible and relevant position and should have put the things right in the first stance. On the other hand he readily owns the successes of all the companies in oil and gas sector.

The facts as narrated by the author, unless contradicted by the other parties, indicate that there was no scam as such. Fauji Foundation (FF) filed its proposal late, after the submissions had already been made to the ECC? Their offer was for a shorter period of five years and even the price was not the lowest as claimed by FF. This controversy throws open a rather technical question; whether one is better off with an integrated /bundled project or an unbundled project is better suited. The whole energy industry throughout the world has been going for unbundling, not only LNG but in other areas as well. That is how one sees IPPs as opposed to integrated utilities involved in generation, transmission and distribution.

The idea behind unbundling is the division of labour and dividing the cake into as many slices as specialties demand. Integrated projects tend to be more capital-intensive and throttle competition. The scale economies are only applied in theory and monopoly thrives in actuality. And as the author claims and rightly so that he unbundled it out of necessity; Shell was interested in supplying gas only while 4Gas had no gas and was interested in supplying the terminal only. The author says, Fauji appeared later in the day with an integrated proposal, after the submissions had been made to ECC. Did somebody leak the figures to Fauji? Should Fauji have been awarded the project on a single offer basis?

I do not have any independent sources to go into other details. Apparently, the author comes out clean as he puts together his side of the story. However, the author himself hints at the Minister Naveed Qamar’s predilection to Shell. The predilection may have been on merit, as Shell is a credible major player. The recent news that Qatar Government is asking higher rates than what was being awarded to Shell in the LNG tender, although one has to make detailed comparison in terms of Oil price then and oil price now.

The author may not have had to take the pains of writing the book and getting it printed at his own cost, if the Qatari prices were available earlier. One would, however, take his protestation and wailings with a pinch of salt when he describes the cancellation of LNG tender to have caused losses of billions of dollars and even a destruction of energy future of Pakistan. In the larger perspective, LNG share would be neither here nor there.

Concluding, local resource development including coal, gas and hydro is the solution. Thar Coal is ready for implementation. If Chinese come in, it may be a matter of 3-4 years to inject Thar coal electricity. The previous government put almost all its eggs in one basket. Engro has myriads of problems. It invested in a fertiliser plant based on gas which availability every body knows was at best shaky. Ironically, it is Thar coal which may deliver Engro out of its difficulties. They can switch to Thar coal, saving themselves and the nation and the dwindling gas resources. Local gas may take a little longer to come on stream. It may take about seven years. For this local gas prices have to be doubled, as India and China are poised to be doing, bringing it at par with International (European) prices. At these kinds of prices, investment in local gas exploration may be attractive enough to revive local exploration. Doubling the local prices would still be at one-half the import prices, be it Iran Gas or LNG. This one step would solve many other problems of driving inefficient users out of the gas sector.

Fast tracking conversion of oil-based steam power plants to coal is another step on which the present government is reportedly moving. Wind power is a ready source. It may take only a year or so to add several hundred MWs at 8 cents or even less (as opposed to the current approved tariff of 16 cents) if transparent tendering is adopted. The present government has not made its mind known on this issue. Solar tube wells can knock off around 1000 MW of demand from grid power at affordable investments made by the farmers themselves, if appropriate lending programmes are established. Remember, Energy scarcity is not the only problem.

Energy at affordable and competitive prices in the required volume is the whole issue. Rental Power types are lurking for the second round to make a killing. The new government should be wary of them. The nation is expecting a lot from them and we pray for their success.