LNG Regasification Terminals: Unutilized capacity of government to be auctioned

ISLAMABAD: The government has decided, in principle, to auction unutilized capacity of government in LNG Regasifi-cation Terminals, well-informed sources told Business Recorder.

A committee comprising Ali Zaidi, Minister for Maritime Affairs and Nadeem Babar, SAPM on Petroleum has been tasked to look into the commercial terms of the proposal. The Committee may submit their report to the ECC in two weeks time. This decision was taken by the ECC in its meeting held on July 28, 2020 with Prime Minister Advisor on Finance in the chair.

The Petroleum Division stated that at present two LNG Regasification Terminals were operational in the country. Total physical capacity of Terminal-1 and Terminal 1-2 was 690 MMCFD and 750 MMCFD respectively. For Terminal-1, SSGCL has contracted regasification capacity/ 630 MMCFD with a peak capacity of 690 MMCFD on best effort basis as and when required and is utilizing it fully through PSO contracted term cargoes. For Terminal-2, PLTL has a contracted capacity of 600 MMCFD with a peak capacity of 690 MMCFD on reasonable endeavour basis, as and when required. At Terminal-2, Pakistan LNG Limited (PLL) is importing two LNG cargoes per month (nearly 200 MMCFD) on term contract basis whereas additional LNG imports are made through spot tenders to meet gas requirements of the country. This 2nd LNG Terminal is under-utilized with average utilization of nearly 62% and 51% during FY 2018-19 and FY 2019-20 respectively, with the drop in demand primarily on account of COVID-19. Terminal utilization may go above 70% with start of 150 MMCFD of RLNG to Karachi Electric , on firm basis, expected in March 2021. Due to under-utilization of 2nd Terminal, regasification tariff was around USD 0.6159/MM8TU and USD 0.7273/MMBTU during FY 2018-19 and FY 2019-20 respectively against levelized tariff of USD 0.4177/M1VIBTU had the Terminal operated at 600 MMCFD. For 2nd Terminal, regasification rate (MMCFD) vis-à-vis terminal tariff (USD/MMBTU) was presented.

The resulting higher Terminal tariff has caused additional burden of USD 32.5 million and USD 43.2 million during FY19 and FY20, respectively, which has been shifted to the end- consumers of RLNG in the form of higher gas prices. Therefore, in order to enhance utilization of LNG Terminal(s) and reduce Terminal tariff, it would be economical to offer idle/ un-utilized capacity of Terminal(s) to private/third party (ies).

The Petroleum Division further informed that regarding excess capacity' if any, at the Terminal(s), beyond the capacity contracted by state-owned companies (SSGCL and PLTL), ECC of the Cabinet on 31st July 2019 decided that LNG Terminal operator(s) may allocate their excess re-gasification capacity of Terminal(s) (not contracted to GoP) to third party (ies) on commercial basis, subject to the conditions stated in the decision. However, besides various commercial and operational issues, ongoing litigations /international arbitration (LDs and GSA termination) between PLTL and PGPCL have been the major barrier in materializing excess capacity, at 2nd LNG Terminal.

At Terminal-1, the sponsor is in the process of replacing the FSRU with a bigger ship to create excess capacity. On the directions of Cabinet Committee on Energy (CCoE) dated 2nd April 2020, legal opinion was obtained from the legal firm appointed by AG for the litigation on PGPCL, indicating that third party access can be given without compromising the underlying litigation. A Summary of June 18, 2020, to effectuate TPA to excess capacity, was considered by CCoE in its meeting of June 20, 2020. In the matter, Federal Cabinet on July 1, 2020 referred the matter to the ECC for further discussion in detail along with the earlier decision on third party (ies) use of excess capacity. The discussion in the Cabinet focused on revenue sharing while maintaining the priority rights of government on use of contracted capacity.

Given that sale of un-utilized government contracted capacity has a direct bearing on excess capacity, the two issues were addressed together in this summary.

Regarding providing TPA to un-utilized GoP contracted capacity of 2nd Terminal, the most viable option with GoP would be to offer such capacity of Terminal(s) to private party (ies) on short-term 3 month forward visibility basis, keeping in mind the increasing utilization by GoP itself. While offering un-utilized capacity to third party (ies), GoP would continue to have priority rights of Terminal(s) utilization and maintain operational flexibility to be agreed in lending/borrowing agreement for commingled cargo (es). However, it was important to highlight that provision of TPA to terminals may result in shift of some bulk consumers to private suppliers thus increasing take-or-pay risks for GoP. Therefore, it would be imprudent to make any long-term commitments for sale of un-utilized capacity.

The Petroleum Division apprised the meeting that various private parties had expressed their interest in availing un-utilized GoP contracted capacity at 2nd Terminal. All interested party (ies), having necessary regulatory authorization and contractual arrangements, may be given access to the available un-utilized terminal capacity, without discrimination. Under this TPA framework, third party (ies) would import LNG, holding title of the commodity (LNG & RLNG). Relevant state-entity (SSGCL, PLL) would only provide regasification services and deliver RLNG at CTS to importing private party (ies) on Ogra determined tariff. TPA arrangements (for excess and un-utilized capacity) would be exercised through agreement

between the stakeholders on storage/handling of commingled cargo(es) and would be administered by Ogra in line with clause 6.2(a) of LNG Policy 2011, till promulgation of TPA Rules for LNG terminals. Upon notification of TPA Rules for Terminals by Ogra, it would also provide a mechanism for converting existing TPA arrangements to such Rules, except for gas pricing which will remain a bilateral matter to be settled between the parties. Third party importers of LNG may sell RLNG to end consumers based on a negotiated price in accordance with clause 6.3(b) of LNG Policy, 2011.

The Petroleum Division submitted the following proposals for consideration and approval of the ECC: (I) TPA to excess capacity: ) a) Authorize LNG Terminal operator(s)/state-entities (SSGCL, SNGPL, PLTL, and PLL) to proceed with TPA for excess; (i) re-gasification capacity, if any (not contracted to GoP) to third party (ies) in accordance with the ECC's decision July 31, 2019 to the extent of all matters in that decision except for commercial terms, which may be reconsidered, to further safeguard the interests of the government entities; (b) the fact that tariff for Terminals was offered for entire infrastructure, dedicated use or sale of Terminals' excess capacity and allied infrastructure should entail additional financial benefit to the relevant state-entity (SSGCL, PLTL). A committee headed by Deputy Chairman, Planning Commission, with Secretaries of Petroleum, Finance and Maritime Affairs Divisions as its members, may be constituted to assess and finalize financial benefit to the relevant state-entity for a policy decision, based on consultations with both Terminal developers, within two weeks and report back to the ECC.

(II) TPA to Government contracted un-utilized capacity: (a) Authorize relevant state-entity (SSGCL for 1st Terminal and PLL for 2nd Terminal) to offer the operationally possible un-utilized regasification capacity, as and when available, to the interested eligible party (ies) on OGRA determined tariff on short term rolling basis (3 month forward) having necessary regulatory authorizations and related contractual arrangements; (b) In case the total requirement of all eligible interested parties exceeds the total offered capacity, such capacity will be allocated proportionately; (c) Third party (ies) will import LNG holding title of the commodity (LNG & RLNG). Relevant state-entity will only provide regasification services and deliver RLNG at CTS to importing party (ies); (d) Authorize OGRA to determine margins of relevant state-entities (SSGCL, SNGPL, PLTL, and PLL) and inclusion of such margins in the tariff to be charged to third party (ies); (e) Power Division and Ministry of Industries to firm up its RLNG requirements of at least six months in advance on recurring basis enabling state-entities to assess un-utilized capacity and seek private sector's interest for utilization of such capacity, if any.

On July 28, 2020 Economic Coordination Committee (ECC) of the Cabinet decided the following on proposals submitted by the Petroleum Division regarding Third Party Access (TPA) to LNG Terminals: (I) Excess Capacity and (II) Government Contracted Un-Utilized Capacity and approved, in principle, the concept of auctioning the unutilized capacity of the government, and constituted a two- member committee comprising Ali Zaidi, Minister for Maritime Affairs and Nadeem Babar, SAPM on Petroleum to look into the commercial terms of the proposal. The Committee may submit their report to the ECC in two weeks time.