Government is buying the most expensive LNG in the history of the country. These are the headlines frequenting in mainstream media these days. There is truth in absolute terms. The main criticism is that the government lacks foresight by not ordering in advance. In such an unprecedent volatility in the energy and other commodity markets, even hindsight is not 20/20.
PSO and PLL on average buy 4-6 cargos a month on spot and this number may reduce to 2 after November once the new long-term contract with Qatar kicks in. The criticism the government is facing due to extreme volatility in the energy market ever since COVID related supply disruptions started. The main premise of criticism is the lack of foresight of the government. There is a clear lack of analytical thinking reflected in commentators who keep on propagating the same mantra, without considering the issue at length.
Last year, a few major LNG traders including Vitol, Trafigura, Gunvor and Glencore defaulted in the Far Eastern markets due to price fluctuations in the spot market. Earlier in 2021, SOCAR and ENOC defaulted in the Pakistan market on spot cargos. And lately, ENI defaulted on a cargo within its long-term contract in Pakistan.
In times, when big boys are defaulting in bigger Far Eastern markets, Pakistan stands little chance. The case of these defaults is simple. If a seller commits for supply in the near future (2-3 months), it always has an option to sell in the spot market at the time of supplying by paying liquidity damages to the first buyer and sell at spot to a new buyer if the seller (or a trader) still makes money, given the price differential of selling in the spot and if the pre-agreed price to the first buyer is more than the liquidity damages to be paid to the first buyer for not honoring the contract.
Then the government is blamed for not keeping long term contracts last year when the prices were low in days of lockdowns. The premise is that the government is inefficient, and a smarter player could have locked the sweet deal. Well, if the case of buying long-term in falling market is so obvious, everyone else would have done the same. Or if everyone starts doing it, there is no arbitrage. Such things exist only on paper. Even private sector is not capturing such opportunity. For example, coal prices have more than doubled over last year, one may ask why did private cement players in Pakistan not lock in the long-term contracts.
The point to ponder here is that in days when, within a year (or even less) prices moved from negative to multiyear high, timing the market gets trickier. And even if some buyer is timing it right by fluke or having exceptional decision making, sellers would default in such a moving market.
Having said that, government should try to lock in the contracts earlier and should sway away from dealing with traders. The problem is PPRA rules and time required by seller to hold till the government decides. These conditions sway away direct sellers to come in the market and the government ought to largely rely on traders who always keep a margin to satisfy red tape of buyer.
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