Pakistan State Oil(PSO) and Qatargas have agreed to revise the price of Liquefied Natural Gas(LNG) after ten years and, in case of disagreement between the parties, the contract will be annulled, sources close to Secretary Petroleum and Natural Resources told Business Recorder. The Economic Co-ordination Committee (ECC) of the Cabinet is expected to approve $16 billion deal (Sale Purchase Agreement (SPA) between PSO and Qatargas on Monday.
According to sources, PSO as the buyer will sell RLNG to gas utility companies or third party to be procured from Qatar Gas Company 2 instead of Gas Company 3 as was assumed earlier. 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 rising. The shortage of energy is not only causing hardships for the people but is also inhibiting the economic growth of the country. Therefore, the government of Pakistan is pursuing import of LNG to minimise the gas shortfall.
From import of LNG, ECC in its decision of July 2, 2013 had authorised the Ministry of Petroleum and Natural Resources to engage in negotiations with Qatargas on Government to Government basis for importing LNG upto 500 MMCFD on delivered ex-ship basis. Accordingly, Pakistan State Oil Company Limited (PSOCL) and Qatargas Operating Company Limited (QOCL) were nominated by their respective governments to negotiate the LNG Sales Purchase Agreement (LNG SPA) which is expected to be signed shortly. In the first year, it is expected that Qatargas will supply a minimum of 1.5 million tons per annum (MTPA) of LNG which can increase up to 3 MTPA at PSO discretion during the first two years and from January 2016 the volume will be 3 MTPA. The LNG consultation is being provided by M/s Fact Global Energy, engaged by USAID involved in the process of advising PSO about the commercial aspects of the LNG procurement process.
To negotiate the LNG price and other important aspects with Qatargas, ECC in its decision on August 15, 2014 had approved the constitution of LNG Price Negotiation Committee(PNC), comprising of Secretary Petroleum(Chairman), representatives of Finance Division, Water and Power, and Board of Investment (BoI) not below the rank of Additional Secretary, Managing Director, SNGPL, Managing Director SSGCL, Managing Director PSO and Managing Director ISGSL( Secretary Committee). The price finalised by the committee would become part of the sale purchase agreement with Qatargas.
Pursuant to a bidding process and ECC as well as Cabinet's approvals of February 28, 2014 and April 18, 2014 respectively Sui Southern Gas Company Limited (SSGCL) 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/ MMBTU. The terminal work began in April 2014 and completed in 11 months on March 27, 2015 in 11 months and so far 13 LNG cargoes have been handled at the LNG terminal. In the first year, it is planned to inject 200 MMCFD re-gasified LNG (RLNG) into SSGC's system for onward supply to SNPGL through swap arrangements. In the second year, it will be increased to 400 MMCFD. The terminal has an additional re-gasification capacity available which SSGCL may procure for additional gas needs in the country.
ECC, in its decision of June 6, 2015, also allowed that PSO being a commercial entity has the autonomy to import LNG either on FOB or C&F basis and take appropriate commercial decisions for import of LNG at its own level. The ECC, however, directed that the PSO must keep commercial prudence and provision of the relevant rules and regulations in view while making such decisions.
A copy of the Sale Purchase Agreement (based on take or pay concept) basis between PSO and Qatar Liquefied Gas Company Limited 2(QG2) along with a side letter will also be tabled before the ECC. The side letter envisages potential LNG supplies for November and December 2015. PSO has also provided a summary highlighting important aspects and salient features of the SPA. It may be noted that the Qatargas will supply LNG through its Qatar Liquefied Gas Company 3. However, Qatargas has now proposed that for LNG supplies under the SPA be through QG2.
According to sources, in the first two years (2016-17) it is expected that QG2 will supply a minimum 1.5 million tons of LNG which will be increased to 3 million tons from third year onward (2018-2030). The period of contract will end in December 2030. There is, however, a price revision provision which allows either party to seek a price review after 10 years and if not agreed then SPA may be terminated. It may also be noted that initial supplies on FOB were undertaken pursuant to Master FOB LNG Sale and Purchase Agreement as part of the overall long term arrangements which is also referenced in the SPA to be considered by the ECC.
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 $16 billion. The SPA is take or pay contract and as such PSO will be liable to pay for all the quantities as per the contract. However, certain mitigating provisions have been included in the agreement. The seller liabilities under the contract are capped at 20 percent in case of non delivery of LNG or where off-spec LNG is delivered and is accepted by PSO subject to the fact that the costs are reasonable and incurred by PSO or billed by the gas companies. In case off-spec LNG is delivered where neither PSO nor seller was aware that LNG was outside specification, then subject to the above conditions the cap liability is 25 percent; refer section 6.2 of the SPA PSO has also requested that the port charges in excess of $32,000 (being the maximum payable by QG2 under the SPA) will be paid by PSO and will form part of price of RNLG/swapped gas as determined by OGRA and notified by PSO direction may be made to Ogra for this purpose. Moreover, PSO has also proposed that the company may be exempted from any arrangement under which they have to get the LNG re-gasified and the company would have no responsibility for blending / dilution of RNLG as envisaged in LNG policy, 20111 and that it be clarified that sale of LNG/RLNG by PSO (as LNG buyer) to the gas companies or third party is not inconsistent with the LNG policy.
Petroleum Ministry has proposed to the ECC to approve the recommendations of Price Negotiation Committee. Other recommendations of the Petroleum Ministry are as follows: (i) PSO as buyer may be allowed to execute the sale and purchase agreement along with a side letter with QG2 as seller pursuant to the G to G agreement; (ii) MSPA on FOB/ DES with Qatargas Operating Company Limited may be approved; (iii) section 3.2(a) of the LNG Policy 2011 provided procurement of LNG by the LNG buyer(s) will be undertaken through direct negotiations with one more or 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 $320,000 (being the maximum payable by QG2 under the SPA will be paid by PSO and will form part of the price of RNLG/swapped gas is determined by Ogra and notified by PSO; and (v) since SSGC has already entered into a LNG 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 RLNG to gas utility companies or third party consumers.