LNG deal approved by ECC

Economic Coordination Committee (ECC) of the Cabinet which met with Finance Minister Senator Ishaq Dar in the chair on Wednesday approved the much-awaited 15-year (2016-2031) $15 billion Liquefied Natural Gas (LNG) deal with Qatar at 13.37 per cent of Brent instead of the earlier offer of 13.9 per cent of Brent. The ECC also approved an increase in volumes from 1.5 million tons per annum (mtpa) to 2.25 mtpa (pro rata to the remainder of the year) in 2016 and 3 mtpa to 3.75 mtpa from ramp up.
Official documents available with Business Recorder reveal that the ECC has also approved an increase in the SBLC value from 2 to 3 cargoes when the volume is equal to or less than 2.25 mtpa and from 5 to 6 cargoes when the volume is equal to or greater than 3.75 mtpa.
The document disclosed that the Price Negotiation Committee (PNC) during its 15 sessions considered the consultant's recommendation, regional pricing and, more importantly, the recent outcome of the 5-year term LNG supply tendering process. The PNC has now succeeded in convincing the Qatar side to match the lowest price quoted for the 5-year tender. The earlier pricing formula of 13.9% of Brent now stands at 13.37% of Brent resulting in an additional saving of $42 million per year for Pakistan at a $40 Brent index.
In the fitness of the matter, the second 5-year term tender which has secured 13.87% of Brent will be scrapped and this volume will be procured from Qatar so as to get maximum benefit of the low price now finalised for a secured supply of gas. Moreover, the Qatar side has also agreed to extend the payment terms from 10 days to 15 days by increasing the SBLC by one more cargo value.
The period of the SPA will end in 2031. There is however a price review provision which allows either party to seek a price review after 10 years and if not agreed the SPA may be terminated. The price of LNG is pegged with oil prices and is priced as a direct percentage of Brent and under current prices the value of potential LNG supply under the SPA is about $15 billion at $40 Brent index. The Qatar side is also liable to pay port charges of $320,000 per cargo.
The document further reveals that in order to commission and operate the re-gasification facilities in Pakistan, it was agreed as part of long-term arrangements between PSO and Qatargas that the initial cargoes (including the commissioning cargo) be supplied by the seller under a master FOB Sale and Purchase Agreement(SPA) and related confirmation notices. Accordingly, six FOB cargoes were arranged from Qatargas.
Ministry of Petroleum and Natural Resources, in its earlier summary of November 20, 2015, submitted the following proposals (proposal 'e' now slightly amended) for consideration and approval of the ECC: (i) recommendations made by Price Negotiation Committee (PNC) may be approved; (ii) PSO as buyer may be allowed to execute the Sale and Purchase Agreement along with Side Letter with QG2 as Seller pursuant to the G to G Agreement; (iii) MSPA on FOB/DES with Qatargas Operating Company Limited may be approved; (iv) Section 3.2(a) of the LNG Policy 2011 provides that Procurement of LNG by the LNG Buyer(s) will be undertaken through direct negotiations with one or more LNG suppliers for supply of LNG for a reasonable time to be determined by Ogra. In view of the said section of LNG Policy, Ogra be directed to approve the terms of the SPA;(iv) port charges in excess of $320,000 (being the maximum payable by QG2 under the SPA) will be invoiced in the DES price and will form part of price of RLNG/Swapped gas as determined by Ogra and notified by PSO; and (v) since SSGC has already entered into an LNG Services Agreement for receiving, storage and re-gasification of LNG with EETPL, therefore PSO will not be required to enter into such arrangement/agreement. Accordingly, PSO may be allowed to sell the LNG/ RLNG to the gas utility companies or third-party consumers.
Pakistan is currently facing a severe shortage of natural gas, both for its electricity generating plants and for general use, by all sectors. Domestic gas production of 4,000 MMCFD is unable to meet the country's demand; the supply-demand gap is approximately 2,000 MMCFD and keeps on rising. This shortage of energy is not only causing hardship for the people but is also inhibiting the economic growth of the country. Therefore, the government of Pakistan is pursuing, inter-alia, import of LNG to minimize the gas shortfall. For import of LNG, ECC on July 2, 2013, authorised Petroleum Ministry to negotiate with Qatargas on Government to Government basis for importing LNG upto 500 MMCFD on delivered ex-ship (DES) basis. Accordingly, Pakistan State Oil Company Limited (PSO) and Qatargas Operating Company Limited (Qatargas) were nominated by their respective governments to negotiate the LNG Sales Purchase Agreement.
To negotiate the LNG price and other important aspects with Qatargas, on August 15 2014, approved the constitution of an LNG Price Negotiation Committee (PNC) comprising Secretary Petroleum (Chairman), Representatives of Finance Division, Water and Power and BOI not below the rank of Additional Secretary, Managing Director SNGPL, Managing Director SSGCL, Managing Director PSO and Managing Director ISGSL (Secretary Committee). So far 15 meetings have been held and the price finalised by the said committee is part of the proposed Sale Purchase Agreement (SPA) with Qatargas.
Pursuant to bidding process and ECC as well as Cabinet's approvals, Sui Southern Gas Company Limited (SSGC) and Engro Elengy Terminal (Pvt) Limited (EETPL) executed an LNG Services Agreement (LSA) on April 30, 2014 for provision of LNG receiving, storage and re-gasification services under a levelized tolling fee of $0.66/MM BTU. For the first year the tariff is $1.42 per MMBTU and will further reduce to $0.63/MMBTU from year 2 onwards because the RLNG supply volume will be increased to 400 MMCFD. The terminal was commissioned on March, 27 2015, in a record time of less than 11 months and so far 17 LNG cargoes have been handled at the LNG terminal. The terminal has an additional re-gasification capacity of 200 MMCFD available which SSGCL may procure for additional gas needs in the country as per applicable rules.