PD rejects media reports, says Govt decision saved $237mn in last 27 months

The Petroleum Division (PD) has rejected media reports alleging mismanagement of spot buying of LNG resulting in "alleged" burden of billions of rupees on national exchequer, terming these reports as based on false assumptions & incomplete facts.

The Petroleum Division in a statement responded to the questions raised stating: To the question pertaining to LNG procurement to run both terminals in full capacity & import of six cargoes in December. The Division said that it must be understood that the two terminals together have operated on 65 percent or less capacity in 9 months out of last 27 months.

The division added that another factor 'that must not be ignored' is that the previous government signed long term contracts for 800mmcfd for supply of LNG.

“Unless this is sold first, buying more is not possible, even if it is available cheap. It also signed 1200mmcfd of terminal capacity on a Take or Pay basis which results in $527,000 per day payment, regardless of the level of use of these terminals,” the statement read.

The division informed that the current government purchased 41 spot LNG cargoes on much less average for the whole year than term slope of 13.37% Brent, which enabled us to save USD 237millions in last 27 months.

“Also, once you award a cargo, which has a fixed delivery date, it is near impossible to move it, especially in winter peak. Hence, if you do partial ordering of spot cargoes, you may not be able to slot more cargoes later, because that results in change of delivery date of all cargoes,” it said.

To the question regarding why GoP invited tenders for December in November. The Petroleum Division termed it as ‘factually incorrect.’ It said that Pakistan LNG Ltd. placed tender notice for 6 LNG Spot cargoes for use of December on October 2, 2020.

To the question pertaining to forward purchasing in summer for winter delivery when global market prices were down due to less demand in summer. The division said that it must be understood that spot cargoes are generally for ready delivery (ie within 30-60 days).

“While you can do forward buying (ie order today for delivery many months later), the pricing for such purchases is done on a forward curve for Brent and Swap Spreads for slope. So, if spot cargoes were available in July for 10% of Brent, resulting in say $4/mmbtu delivered price, an order placed in July for delivery in December does not get priced at $4/mmbtu. The sellers will use forward projections of Brent in December and Swaps Spreads for slope in December, resulting in a much higher price for delivery in December.”

The division said that an expectation that we can get ready price of summer for delayed delivery in winter, “assumes that the sellers are so naïve, and we as buyers are so smart, that we can take advantage of them. This simply shows lack of understanding of how forward market works.”

To the fourth question revolving around the comparison between India and Pakistan on spot purchasing of LNG claiming that India saved billions of rupees by placing orders for November three weeks before Pakistan. The division again termed the comparison as factually incorrect.

It said that Pakistan placed tender for November delivery on Sep 9 and Sep 15 with the PPRA compliant mandatory 30 days. India placed a one day tender on Sep 29 and awarded on Sep 30. The price of this one cargo was $ 0.98/mmbtu less, as reported by Bloomberg than the November average of Pakistan. Many major suppliers like Vitol and Trafigura have bought December cargoes at prices higher than Pakistan as reported by Bloomberg.

“Are they all incompetent? Single cargoes cannot be compared because they depend on the day of award and conditions of the tender,” it said. Giving example the divison said that PLL requires 21 days credit period & 10% of performance guarantee on LNG supplies. “Also our port cargoes are 400 percent higher. India does not have these conditions. An example of the reverse situation was PLL spot cargo of July 27, 2020 at price of USD 2.2 but Reliance, India awarded a cargo only 3 days later on July 30, at 2.7 USD, a full 20 percent higher.

To the last media claim that the spot buying this year has caused Rs 122 billion loss to the exchequer. The division said that the total of all cargos bought in 2020 on spot was USD 353 million, or Rs 57 billion, with an average just below 12 percent.

“So, it is illogical to say that when money spent is Rs 57 billion, somehow a loss of 122 billion has been created. This is nothing more than cheap sensationalization,” the statement reads.