LNG import: a quick fix solution

Sui Southern Gas Company has invited EoIs for Liquefied Natural Gas (LNG) import under a 'third party access regime'. The bidding companies are expected to develop their own LNG Floating Storage Re-gasification Units (FSRUs), arrange their own supply of LNG and sign firm contracts with buyers of re-gasified LNG which may also include Sui companies.
It increasingly appears that the Federal Minister of Petroleum Dr Asim Hussain has decided with dogged determination and dour persistence to solve this perennial problem by ensuring urgent and uninterrupted supply of energy on a fast-track basis through LNG import by connecting the re-gasification unit at the port with the transmission system of SSGC for onward transmission and distribution to Sui Northern Gas Pipeline Company (SNGPL). This may be a quick fix solution of gas shortage problem acutely affecting the gas users in Punjab in particular. At present, four fertiliser units, namely Pak-Arab, Dawood Hercules, Engro-expansion and Agri-tech are operating on SNGPL network for urea production. The contract of four power plants - Sapphire, Orient, Elmore & Saif Power - for uninterrupted gas supply ends in June. From July onwards, they can get gas supply for only 9 months in a year. Conversion by these gas-based Gencos to high speed diesel will be astronomically high in financial terms. Not for the IPPs whose fuel consumption is a pass-through, but also for the buying power distribution companies (Discos) which are groaning under the pressure of adverse cash flows.
There needs to be a clarity in petroleum ministry's thinking and also a critical realisation that the bidders' task would be doable if the government first addresses the fundamentals of energy distribution. LNG importers may be able to sign up for their off-take with various power generation companies such as KESC in the south and other gas-based Gencos like Kapco and Uch in the north already on the SSGC and SNGPL systems. However, LNG importers would need to obtain leasing rights for connection of their LNG terminal at the port to the closest SSGC transmission line. LNG importers can sign long-term contracts for supply of gas to IPPs. But other users such as industry, commercial, fertiliser and domestic do not enjoy a pass-through tariff for fuel; they also compete in the market place for their produce/products. Therefore, a weighted average base price will be needed to be worked out for the imported and domestic gas mix and tariff has to be re-fixed by Ogra for all gas users. Agreements between Gencos and LNG importers will determine the tariff approved by Nepra. Both the regulatory bodies-Ogra and Nepra-need to be more agile in relation to timely determination of gas and power tariffs based not only on swapping cost between SNGPL and SSGC, but also on the weightage of imported LNG and domestically produced natural gas mix in the pipeline. The landed cost plus transmission and distribution of imported LNG may be three times higher than the locally produced gas. However, it would still be highly economical as compared to furnace oil and far more cheaper than the electricity produced by diesel.
Pakistan is geographically and strategically well placed. Over 40 percent of LNG passing through Straits of Hormuz is bound to the Far East. Several countries in the region are exporting LNG. They are Qatar, Iraq, UAE, Oman and now Yemen. Mid-size vessels carrying 80,000 to 100,000 tons of LNG can be handled at Port Qasim. However, environmental studies and quantitative risk analyses are needed to be undertaken quickly because not only our ports profoundly lack required experience in handling such kind of delicate cargo, they also lack effective logistical support mechanisms at their disposal.
While the interested parties firm-up their plans in order to provide EoIs, governmental policy should not permit any monopolies. Any company with financial capability and technical experience and holding long-term supply contracts from LNG exporting countries willing to enter business in Pakistan should be allowed to do so. Pakistan needs not one but several players as it desperately needs energy. In the medium- to long-term, we need to get the thermal fuel formula pricing right based on calorific values instead of keeping domestic production cost artificially low or allowing one sector (fertiliser) enjoying cross subsidy against other sectors of users (industry and commercial). Since the discovery of gas in the 1950s, we have been selling natural gas to upper middle class and the rich for almost free. Even in fertiliser sector, the subsidy is improperly and disproportionately benefiting the non-poor rural farmers.
Establishing LNG import facility and re-gasification units will be capital intensive. The investment cost could be between $250 million and $300 million. The government should therefore encourage the big boys to sign up with international firms just like the Musharraf government successfully persuaded them to put up power units. This, however, can become a reality if existing businesses caught in the circular debt are paid-off. And also in future, payments are made with regularity with a view to avoiding the creation of another circular debt.
Petroleum ministry's LNG policy is very strongly and intricately dependent on both Ogra and Nepra. They would need to devise a formula in which the cost of every single cargo is plugged in and payments against back-to-back letters of credit are cleared off. The sailing time between load and off-load port is only three days. There has to be on sight L/C payment before breaking bulk or prior to the commencement of discharging from the ship. At present, both the regulatory bodies are not functioning in the mode that is required for smooth operation of imported LNG. The formula for LNG import would need to be on the volumetric average on basis of prevailing price - at least for three months. Ogra must timely notify the same so that there is clarity of air for importers, distributors and end users.
Another major challenge that needs to be addressed is the financial capacity of both SNGPL and SSGC to make payment against LNG import. If these gas companies' balance sheets are any guide, their ability to pay $50 million to $60 million for every cargo of 100,000 tons of LNG becomes highly doubtful. Nor does the cash flow situation of major Gencos such as KESC and Kapco offer much comfort. These issues underscore the need for addressing the basic problems and appreciating the operational difficulties. Investors require firm commitment from the government on pricing formulae and guarantees of minimal volume purchases.
LNG import is a major part of the solution, not the whole solution; it may be the best way to quickly overcome the existing shortage. However, it cannot be a permanent substitute for efforts aimed at initiating a flurry of domestic exploration and production (E&P) activities. The present petroleum policy needs to be looked afresh. We must offer 60 to 70 percent of the crude price for newly discovered gas in order to attract investment. We could also allow 5 to 10 percent domestic investment in place of government holding to attract local investors.
Pakistan's balance of payment position has mostly been negative with brief periods of marginal positivity. The availability of required foreign exchange for imported energy is only possible if we are able to increase our exports in an effective and meaningful manner. The prevailing adverse conditions are a result of our failure to address hardcore management issues. Imported LNG can only help export industries provided we do not use it for CNG in vehicles and domestic use as we have been doing - so imprudently and so callously - in the case of gas commonly known Sui gas.