EDITORIAL: Last week, Pakistan signed another long-term contract for LNG supply with Qatar. The contract is at market rates and is at a steep discount to the first contract in 2016. At that time, given the LNG market dynamics and Pakistan’s lack of experience in LNG buying, it was a fair deal. That said, 2016 contract was at 10-15 percent premium to market rates at the time. In 2021, the new contract is at market rates – 10.2 percent slope of Brent. Then, there are additional benefits of winter-summer arbitrage, and higher cargo charges to be shared by Qatar. This makes the effective rate even better. The key reason behind this good price is that the government has struck a package deal with the sheikhdom. There are probably several other economic and defence deals that have been made alongside the one on LNG. On the economic front, the chatter is that Qatar, which will be hosting the FIFA World Cup 2022, has agreed to get manpower from Pakistan to boost our home remittances. It is, however, important to note that the LNG price offered to Pakistan is no different from those China and Singapore received from Qatar recently. With Pakistan at two days of shipping distance from Qatar as compared to China at 15 days, Pakistan’s shipping cost is around 1/5th of China’s. However, the terminal handling charges in Pakistan are much higher.
Without getting further into these finer points of pricing, the more important point is: another long-term contract of take or pay at a time when Pakistan’s exposure on LNG supply is increasing. A good trader would rather pay a premium on pricing (such as at 10.5 percent) to counter the exposure of take or pay. Pakistan handles too much of its existing FRUs and is already at higher throughput risk. The new deal will add two cargos a month to make nine cargoes a month on take or pay. This will increase to ten cargoes in 2024 (with addition of 2 cargoes under the new contract and by then a contract of one cargo a month will expire). The demand is not an issue. The domestic gas supply is falling and there is pent up demand from power, fertilizer, CNG and industry. There is and will be shortage of gas in the domestic sector. Indigenous gas is not enough to cater to the demand in winters. But the consumer is not willing to pay the LNG price which is higher than the price of domestic gas. If the government supplies LNG at lower rates, it will end up paying a subsidy or adding to an already growing gas circular debt problem.
Then there are problems in terminal handling. In the past few years, there were occasions when Pakistan paid demurrages due to delays on account of one reason or another. With higher number of cargoes per month after the new contract (especially after 2024), the frequency of demurrage incidents may increase. One cargo delay can cost up to $5-10 million. The government was already carrying this risk, which will enhance now. The bottom line is that the present LNG deal is better than the one in 2015-16. There were take-or-pay related risks associated with that deal; these risks persist with this deal as well. The government is increasing its exposure. It would have been better had this additional supply been left to the private sector. If the government is going to do it all by itself, why did it recently issue two more terminal licenses? Is there any plausible reason?
Copyright Business Recorder, 2021
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