Sharing details, sources said international LNG market has been facing supply glut due to addition of new liquefaction facilities resulting in higher production than demand. This situation has been further compounded by the Covid-19 pandemic. The net result is that spot LNG prices have plunged to historic lows. At present, PSO and PLL are engaged in importing LNG, which is handled at two LNG terminals at Port Qasim, Karachi.
PSO has executed two long-term contracts with Qatargas (3.75 MTPA) and Gunvor (0.75 MTPA), while PLL has also executed two long-term contracts with Eni (0.75MTPA) and Gunvor (0.75 MTPA). The contract with Qatargas was executed under Government- to-Government (G2G) arrangements whereas three contracts have been made through a competitive bid process. PSO's contract with Gunvor is for a period of five years at LNG price of 13.37 percent of Brent. PLL's with Gunvor is for five years at LNG price slope of 11.6247 per cent of Brent. While the other of PLL with Eni is for a period 15 years at a price slope of 11.624 per cent of Brent during years 1-2, 11.95 per cent of Brent during years 3-4 and 12.14 per cent of Brent during years 5-15.
Petroleum Division is of the view that since the execution of these contracts, the prices of long-term LNG contracts in the international market have come down. Also spot prices, while volatile have shown a downward trend. At the same time, with the Coronavirus infection, and the resulting lockdown, the demand for LNG has dropped significantly in Pakistan and this trend is expected to continue for the rest of the year and possibly into the next year.
Given the global dynamics of LNG supply, a number of new production facilities that were planning to get Final Investment Decision (FID) are now likely to be delayed for several years (on account of global economic slowdown). This will result in LNG price strengthening in the coming years as the global demand recovers but the new supply gets delayed.
According to sources, the government wishes to evaluate possibilities of declaring force majeure as well as negotiations to lower supplies and / or improving pricing. The Cabinet Committee on Energy (CCoE) notified a sub-committee to look at the issue of force majeure which held its meeting on April 4, 2020. Those attended the meeting included the Attorney General for Pakistan.
The advice from the Attorney General was that force majeure is a very high bar in this instance and it was not advisable to go that route. It was recommended that mutual consultations be held with supplies to see if any relief could be obtained. In its recent opinion, AG is of the view that all efforts should be made to address difficulties in the contracts through negotiations with supplies rather than terminating the contracts, as termination will lead to legal claims worth hundreds of millions of dollars against the Government of Pakistan.
In this backdrop, the Ministry of Energy opened an informal dialogue with ENI and Gunvor to explore possibilities. A discussion with Qatar Petroleum had already been ongoing for several months with participation at the highest level on both sides.
According to sources, all three suppliers have unequivocally rejected any possibility of termination or renegotiation. The examples of other nations declaring force majeure recently, which have been rejected by all major global LNG suppliers is also in front of Pakistan. However, some operational flexibility has been indicated by all given the actual situation on the ground. In light of this, the Ministry of Energy (Petroleum Division) has explored the following two possibilities with Gunvor and Eni; (i) deferring some cargoes that may not be needed today and agreeing to future dates when they can be used and ;(ii) take benefit of historically low Brent prices and convert the floating price of LNG to a fixed rate for the next 6 to 24 months.
As far as Qatar Petroleum is concerned, there is no possibility of changing existing pricing, until end of 2025, as already explored at the level of Heads of State; there is an ongoing discussion for additional supplies starting from next year, under a new medium-term contract, for further LNG requirements when conditions normalize, in order to bring domestic average price down. Meanwhile, Petroleum Division has already been able to defer two cargoes in the last 45 days through mutual consultations.
"We want PSO/PLL to negotiate with Eni and Gunvor for a fixed price of supplies for the next 6-24 months. We have recommended that the target be a bank for $ 4-4.5/ mmbtu DES price and we bind as many cargoes as possible in this range. Given that the market price is changing every day, if we get proposals within the desired range, we will need to call an emergency cabinet to get approval of the proceed," the sources added.
Petroleum Division also wants to reschedule some cargoes, especially in the next six months based on projected demand, the sources said, adding that the GoP will continue dialogue with Qatar Petroleum, with ongoing involvement at the highest level, and any final arrangements would be brought back to cabinet for approval.