‘Contracts allow LNG supply security to Pakistan’

Anser Ahmed Khan is CEO for ENERGAS LNG Terminal. He is a seasoned LNG professional with more than 17 years of professional experience in the Oil and Gas Sector. In his previous role he was Vice President LNG at EDF (Trading), London one of the largest Utilities in the world.

Khan has been associated with the International LNG Industry for over 13 years and with the Energy Industry for over 18 years (8 yrs. with Shell and 8 yrs. with Electricity De France). He has overseen Sales and Procurement LNG cargos globally, negotiated LNG Purchase contracts with Qatar, Australia, United States, Malaysia, Oman, Abu Dhabi, Nigeria, Trinidad etc. He has in depth knowledge of Liquefaction and Re-gasification Plants across the Globe and has deep and tested relationships with Key Suppliers and Buyers across the Globe.

BR Research sat down with Khan and discussed the happenings around the LNG market, particularly in Pakistan’s context. Below are edited excerpts from the conversation

BR Research: LNG has been tipped to carry the base load of Pakistan’s energy mix in the near future. Tell us about the timelines, size, and the cost of your project.

Anser Ahmed Khan:  The project is Pakistan’s first private sector LNG terminal. Energas is a consortium represented by Younus Brothers, Sapphire & Halmore, that have partnered with U.S. energy giant ExxonMobil. Energas LNG terminal’s tolling capacity shall be between 750 MMCFD and a maximum of 1000 MMCFD. It is designed to berth an FSRU of approximately 170,000m3.

The estimated cost of infrastructure at PQA, to berth the FSRU is roughly $120-130 million. Along with the infrastructure, is a leased Floating Storage Re-gasification Unit that will connect incoming LNG vessels to the Terminal which in turns feeds the gas to the national grid?

We are a buyer’s consortium, with some of the largest business groups of Pakistan.

This essentially means we have existing base load demand. Our timelines are dictated by regulatory approvals, and fiscal regime. We have applied for these and once received, we intend to start construction with an expected 16 months to commissioning.

BRR: What do you expect to gain from having Exxon in the consortium? Will it be beyond just the technical expertise?

AAK: There are some international best practices and the way ExxonMobil have supported LNG companies like the Korea Gas Corporation and others, where they became a catalyst in encouraging development of LNG infrastructure and value chain in various countries across the world.

Our business model is slightly different and closer to model applied in other parts of the world like Japan which is the largest LNG importing country in the world, taking almost 85 million tonnes of LNG per annum. A host of customers got together and they formed the consortium, to manage the inherent risk in the entire LNG value chain. Setting up an LNG terminal is easy; the value chain is significantly more fragile and also more important to manage.

The good thing about our project is that Exxon is giving us entire technical support. But we do not want Exxon in a limited role. We want Energas to be a world class organization, and we want to excel in technical details, commercial expertise, assistance needed to develop the entire value chain (in line with successful models across the world) and also support the government understand how LNG can support the nations development.

We will have a long-term agreement with ExxonMobil and hence it’s very important to work with a credible supplier, as there will be times during the long term contract when the demand supply situation can turn dicey. On the commercial side, the same thing applies. We want to create a sustainable market, and long term sustainable supply helps you achieve that. I foresee them helping in the development of infrastructure, and will also help us in developing the downstream sector. So ExxonMobil will be a long term partner for Energas.

BRR: Is there not an adequate level of understanding in Pakistan on how LNG works, especially given that the country has been in the LNG business dealings for quite some time now?

AAK: I do appreciate that Pakistan has done really well in setting up the first terminal; I think we need to make sure that the value chain works really well now. The international oil companies can be a catalyst in this regard. We hope to develop a free market and creating competition is essential in this regard.

BRR: You talk about managing the risks in the value chain, what sorts of risks are we talking about?

AAK: The risk of supply and demand is the most critical. When you have a consortium of customers running the chain, that risk is well spread and better managed.

BRR: So in the initial phases, you expect to deal with customers other than the partners as well?

AAK: For Long term LNG to be successful in Pakistan, there are two key customers. One is the IPPs, the other are going to be the CNG customers. The IPPs are making the switch from diesel and furnace oil. CNG, on the other hand, is always going to be cheaper than petrol / Diesel, and there is enough demand for it. Once you have the value chain working well, the government will possibly encourage more development in the CNG sector helping create more SME opportunities and thereby direct job creation opportunities.

BRR: Looking at the aggressive plans of more and more imported gas in the system, what is your assessment of the current gas shortfall in Pakistan?

AAK: We estimate that the current gas shortfall at 2bcf and is expected to rise to 4bcf by 2025 as demand grows. However, the biggest challenge with servicing this gap lies in getting the associated infrastructure to transport the gas. We need close this shortfall since energy is a key ingredient for any economy to reach its potential. The current shortfall can be covered using a mix of both, LNG imports and increasing domestic exploration activities.

At this point in time, it is more important the government allows private buyers and industry to import gas themselves, and help them build a competitive LNG market.

BRR: What is the level of readiness on Pakistan’s part in terms of infrastructure and investment?

AAK: Let me address your question on investment first. From an investment perspective, Pakistan is an attractive market for LNG suppliers for a host of reasons. It is strategically located near supply sources, where more than 70% of the Global LNG is produced in the Middle East and the Asia Pacific region

Pakistan’s Power generation mix is heavily skewed towards oil, where LNG provides an attractive and immediate alternative. The current length in the LNG market offers an attractive opportunity for Pakistan to secure beneficial terms.

Whilst, Pakistan is an attractive market, there continue to be significant challenges to the development of LNG imports and infrastructure. In my opinion and experience, an international oil company with extensive LNG experience can be a catalyst to further sustainable development, of course alongside able leadership and support from the government.

It is for this reason that Energas, a consortium represented by Younus Brothers, Sapphire & Halmore, has partnered with the largest public traded, international Oil & Gas Company, ExxonMobil that has over 69,000 employees & net revenues in excess of USD $ 237B. Energas is delighted to be partnering with ExxonMobil in this journey. ExxonMobil’s entry into Pakistan’s Oil & Gas industry will be a game changer showcasing Pakistan’s potential and attractiveness to the international business community.

On infrastructure, whilst there may be willingness to move things forward, significant delays are caused due to complicated government approval processes and lengthy permit authorization periods. Pakistan is ranked 127th by the IFC in the ease of doing business- the incoming government should try and address this issue. We need to, as an industry, continue to support the government in bringing global best practices ensuring transparency and good governance. I believe the incoming government aims to encourage ease of business.

BRR: How competitive are we in terms of pricing? LNG pricing gets a lot of flak in the media for being on the higher side.

AAK: It is very difficult to make comparisons on LNG pricing- There are various different gas hubs across the world where LNG has been delivered. Currently Oil based pricing is predominant or perhaps preferred by traditional LNG suppliers in Asia. Let me try and elaborate; The European market predominantly buys LNG on a European Index – The NBP in the UK is a case in point which is used as a proxy for LNG purchases in the UK and the markets connected to the UK. European LNG pricing on average has been much lower than Asian LNG pricing.

Buyers in the Fareast have traditionally bought LNG on a JCC index (Japanese Crude Cocktail) which is linked to oil- The Long term prices for these contracts have different inbuilt mechanisms including S curves, Price Caps etc.- It is therefore quite difficult to comment on the pricing of the contract without understanding the terms of the contract.

What is more important for us is to perhaps negotiate the right terms and put in place a value chain that offers sustainable business for the future- It is therefore essential to have the right supply partners – in my opinion, the right terms and price should be adjusted in a manner to provide balanced terms for both buyers and sellers for a sustainable long term relationship.

BRR: We are talking of building this LNG scenario for 10-15 years and long term contracts with every supplier. Are we going towards becoming solely a fuel importing country? How does that fit in with the broader plan?

AAK: Let’s start with the broader plan: As a country, I believe we need to develop a Long term energy scenario. Like other developed nations these scenarios are built keeping in view the growing energy demands, economic considerations and environmental concerns in general. Pakistan’s Energy Fuel mix is not sustainable due to the high share of oil based power generation resulting in very high cost of electricity.

Pakistan too, needs to keep its options open and based on its long Term energy scenario

encourage a diverse mix of economically feasible and environment friendly fuel mix. In my opinion Gas /LNG will play a significant role in Pakistan’s energy future for the next 10- 15 years.

Your question regarding us becoming solely a fuel importing country- I agree with you, it’s important that we balance different energy sources and allow the market to compete and provide the lowest cost most efficient solution of which gas and LNG will play a key part. Indigenous resources will be important so government needs to ensure that investment friendly climate allows international players to work together with local companies.

BRR: Would you always prefer contract over spot prices?

AAK: The LNG industry has traditionally been an illiquid market where long term contracts were signed to enable LNG liquefaction investments. More importantly because of the illiquidity in the market long term contracts protected buyers from price shocks. Until a decade ago spot or short term trade accounted for less than 10-15% of the total LNG volumes supplied- this has however changed and it now hovers around 25-30%.

My preference for a market like Pakistan would certainly be contract. Not only do contracts allow for greater security of supply, it also allows you to negotiate non-standard, mutually agreed contractual terms that make the overall value of the LNG contract more significant.

Standard contractual clauses should include price renegotiations, force majeure, and termination

rights, governing law, dispute resolution, seller’s liability for off-specification LNG and seller’s shortfall, tax indemnification and the indemnity regime.

BRR: What impact the LNG had on the economy?

AAK: Pakistan had never imported a cargo of LNG till three years ago and now it’s the world 7th-largest importer of LNG in terms of vessels docking the port, according to global berth data. LNG enters the natural gas pipeline system so the impact can go unnoticed but it has brought a positive impact throughout the economy.

The national fertilizer sector that was not operating at desired levels with many plants shut for many days in a year has turned into an exporter after many years. Reliable energy supply has removed an uncertainty for the textile industry that accounts for about half the nation’s export. LNG supply has resulted in new power plants that have added 3,600 megawatts to the national grid and allowed many old power plants to resume production. CNG industry supply has gotten a better supply and long lines have eased at fuel stations

BRR: Are you looking at any policy level changes from the government to facilitate the whole process of developing the LNG market?

AAK: Government should look to private sector to maximize value of existing LNG infrastructure assets. The government needs a national policy that balances different energy sources and allows the market to compete and provide the lowest cost most efficient solution of which gas and LNG will play a key part.