Alternative RLNG approaches

Five RLG plants have been planned. One has already been installed at Port Qasim. Contract for another has been awarded which is expected to come online within 2017. Three more RLNG plants to be installed of which one at Gwadar is at an advanced stage of Planning. Although there has been a meaningful progress and performance in RLNG, we would like to examine if there are alternative and better approaches in building further RLNG capacity.
Local gas potential is there, but immediate prospects of major finds and their development are not very promising. The dramatic reduction in international oil and gas prices has further deepened pessimism. Law and order situation in Balochistan has not improved significantly enough to enable launching of a major exploration effort there. However, there have been success in KPK in discovering new gas fields and prospects for further developments appear to be attractive. But it takes about seven years to bring a discovered field's gas into the pipelines. With the advent of Donald Trump and recent aggressive statements against Iran, it appears that sanctions on Iran may not be lifted very soon, thus putting Iran-Pakistan gas pipeline project at a distant future on the timeline. All of this indicates that the short- to medium-term future belongs to RLNG. In this timeframe, RLNG is expected to remain competitive. It may be noted that in India several RLNG plants have been closed down, as being under older expensive LNG contracts have been rendered uncompetitive. In addition to a long-term LNG supply agreement with Qatar, LNG is also being procured under spot arrangements, based on international tenders. Controversy on this account appears to have been eased off, although it should be examined if more transparency can be brought in LNG contracts and the classical traditions of price secrecy even at the behest of credible suppliers like Qatar can be shun. This has become even more important in the context of the Panama leaks litigation. It is in the interest of all that the old commercial traditions are modified along the lines of emerging local and international consensus towards accountability and transparency.
The two RLNG plants (Engro and PGPL) at Port Qasim have been installed on a lease basis. Engro has a tariff of 66 cents per MMBtu (rather too much) and PGPL has a tariff of 41 cents per MMBtu which is lower than a similar project in Bangladesh in which a tariff of 47 cents has been agreed to. There is an excessively higher tariff given to Engro which deserves some explanation by the company itself (although both have been as a result of international tender). The most convenient explanation would be that experience and competition are bringing down the tariff. The fact is that there was much lesser competition in case of the second project (PGPL). There were two bidders, one was technically disqualified and the remaining single party got the deal, perhaps the bid offer was very good compared to the last one. However, one would like to bring the future tariff rates of newer projects at more reasonable levels in order to be able to bring down RLNG tariff at consumer end. It has been estimated that due to the existence of a number of intermediaries the end tariff increases by 2 USD over the imported price of LNG (about 33%).
FRSU has become very popular and almost a standard technology for RLNG projects these days. It takes lesser time, on the average, of almost one year to install FRSU, if the FRSU are in the market. Existing LNG transportation ships are also converted to FRSU rather swiftly. New FRSU, if built, would take more than two years. Leasing is always expensive as is readily discerned from everyday life experience. However, individual motivations and profitability of leasing are different than national and institutional ones. Leasing is definitely a very profitable business for lessors dealing with customers who may not have other choices and may have other benefits like tax deduction which justify even expensive leases.
FRSU of comparable capacities (650 MMCFD and 150,000 M3 storage) these days are available at a net price of 270 million USD. Local expenditure charged shown by Engro of Jetty and pipeline investment is 125 million USD, (actual can be much less) taking the total to around 400 million USD. International lease rates of FSRU (alone) are around 130,000-150,000 USD per day, depending on leasing terms and who is buying and who is selling. However, total leasing charges (FSRU and local facilities together) per day are 272,000 USD in case of Engro and 255,000 USD. It is take or pay contract, simply meaning that irrespective of utilisation level, these are fixed charges. The calculated tariff is notional, for comparative purposes only. If the utilisation rate is lesser than the design capacity, the charges would be higher in proportion to the lack of utilisation. It actually means an annual fixed charge of around 100 million USD .Compared to an investment of around 400 million USD, a payback period of four years is a really good deal for suppliers.
My studies at Planning Commission have indicated that there is a margin of 100 percent which is devoured by RLNG developer and the lessor and there is a scope of reducing this surplus by either enhancing competition or introducing alternative financing such as debt financing. International loans are available at a rate of under 5% p.a., including all charges such as risk, servicing, etc. In fact, for shipbuilding, the lending rates are often subsidised by exporting country governments.
Alternative financing and even technology options have been explored and successfully implemented by India and Singapore and others. Lithuania, being a small and more conscientious country, has been trying to convert its lease agreement replaced by cheaper debt finance. However, it has not been successful, due to the unwillingness of the lessors. It is difficult to convert or change financing mode during mid-course, but it is certainly feasible in the beginning of the project, as is the case of our new projects. There are other cheaper options of buying old LNG ships (under 100 million USD) and having these converted into FRSUs. Minister Khaqan Abbasi is a successful businessman and I am sure he would appreciate these submissions.
If RLNG is to be a major cornerstone of our energy supplies as it is emerging, risks are to be evenly distributed. It may be a bit too risky to have all the RLNG projects on lease periods of around ten years. Some projects must also be on longer-term ownership or longer-term IPP basis. On ownership-debt terms, one may have a tariff as low as 25 cents per MMBTU or even less as opposed to 66 cents and 41 cents, respectively, for Engro and PGPL. The original Gwadar RLNG project had debt-financed IPP in mind. Apparently, Chinese have withdrawn from it in the interest of locals who are seeing a lot of cream in it. In fact, leased-based RLNG/FRSU is the easiest project to be installed, bringing in revenue and profit in one year only. It does not require much of an entrepreneurial know-how either.
Apart from alternative financing options, there may be more appropriate technical solutions. For example, Floating Storage Units (FSUs) could be installed at a jetty and regasification facility can be on the shore. Old LNG ships costing under 100 million USD could be purchased outright to serve as FSU. LNG ships are always available not FSRUs (Floating Storage Regasification Units). It may be more robust and less risky and even cheaper solution. A mix of approaches could be tried. The prospect of the FSRU sailing away leaving all our RLNG users high and dry appears to be rather scary.
There is a looming threat that future RLNG projects may be costlier making end tariff for RLNG even more expensive. We have already mentioned that there are a lot of intermediaries and overheads. For example, it has been proposed that a breakwater (protection from wavy ocean) costing more than 100 million USD has to be made at Gwadar for locating the RLNG plant there. Although, I am not a port expert, it is surprising that despite all kinds of praise being heaped on the Gwadar location, a small place cannot be found on the coast that does not require expensive breakwater. A very small port has been built there which can hardly host a small number of ships. Where is the space gone? Reportedly, all good spaces have been planned for real estate interests. This is major issue obstructing industrialisation in Pakistan. Industrial and commercial spaces are becoming unaffordable. How can we enhance our exports if we keep making inputs expensive? May be the long-term spatial plans have to be more realistic and grandeur based on dreams than sober thinking. May be RLNG is being considered as risky in terms of safety as nuclear plants are. Most RLNG plants in the world have been located with a peripheral requirement of one km only.
Two extreme situations can emerge in case of infrastructure projects; one is of the low price, less than average incentives and an undersupplied market affecting economic growth as has been the situation in the period prior to 2013 and overflowing until now; the other extreme would be of expensive projects under abundant incentives attracting developers and financiers resulting in an oversupplied market and high services prices which are not affordable by the users, as has happened in Greece, Spain and elsewhere where governments have defaulted on debts and facilities, eg, railways go under utilised as fares being unaffordable high. Both extremes are to be avoided and in an enthusiasm to end one extreme condition, another extreme condition should not be permitted to be approached. Despite the purported sophistication, all lenders engage in careless lending. Often they are powerful enough both to afford losses and as well extract repayments. Some leadership has to be shown by the people at the helm of affairs There is abundant advice available, including the free one as has been offered in this space. (The writer has been Member Energy Planning Commission until recently)