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    LNG Procurement Crisis


    December 1, 2021 - Monthly Energy Updates

     

      During the entire pandemic period Pakistan has maintained some economic activities and now it is making good recovery as the global economy is taking a liftoff. This unexpected global recovery is creating nightmares for the energy sources and is disrupting its entire supply chain, including the downstream.

      As a result of the revival, shortages and price hikes are becoming rampant, not only for the food, raw materials, parts, and the merchandise, but also for the energy supplies, the lifeline for the everyday life and all kinds of economic activities! Transportation, power generation, heating, cooking, agriculture (fertilizers), all sectors need steady supply of oil andamp; gas at reasonable prices. Higher prices not only inhibit job creation and value addition, but they also add inflation and bring more misery to every segment of the society, from the poor to the middle class.

      There is no doubt that Pakistan desperately needs strategic energy policy for its national security like every other nation has developed. The policy should include substantial increase of the energy (oil andamp;gas) storage capacity for its ever-increasing demand. As a matter of fact, Pakistan started importing LNG on a regular basis just recently as a cheaper and cleaner energy source for its power generation, industrial needs and for everyday cooking and heating source for its fast growing middleclass. As a result, its LNG volume is experiencing steady growth and manifold increase since its first import in 2015. This clearly shows that Pakistan is becoming one of the major consumers of LNG in South Asia.

      In the pursuit of supporting its LNG demand for the industry, power generation and for consumers cooking and heating needs, in July Pakistan revived its old project with Russia that was initiated in 2015 but never finalized due to the USA sanctions on Russia and its major companies, including ROSTEC, the developer of the project. Even though the sanctions environment has not changed but due to the recent changes in the geopolitical landscape, Pakistan has signed the deal with Russia to build 1,122 Km pipeline for the LNG supply. According to the published reports, the pipeline will cost about $2.5 billion and is projected its completion by 2023. Pakistan will have 74% project’s ownership while Russia will have the remaining 26% of the ownership. According to some industry experts, it is a very ambitious timeline, besides its logistical and political challenges, funding of the project has not been secured!

      In the interim, the supply of the LNG is getting volatile, and the prices are skyrocketing. Compared to the past, currently the entire Middle Eastern energy producing region is in a hotspot with higher volatility. In spite of the LNG supply sensitivity, no one in the PTI government is working to chart out strategy for its national “Energy Policy” for securing longer term supply agreement/s, supply diversification, storage increase, and secure distribution channels for the “National Security.” Because of the inexperienced staff (at PSO and PLL, the procurement agencies) in the modern-day trading and lack of negotiation skills in the energy sector, Pakistan is paying an exorbitant price by following Brent crude marker. Following of this pricing model is creating unnecessary depletion of the hard-earned foreign exchange, namely the USA dollars, and is adding further deficit to the trade balance.

      During the last couple of months, Pakistan bought LNG cargoes at prices that were not only the highest in the history of Pakistan since LNG purchasing was undertaken but to some industry observers, the second highest price ever paid in the LNG history! In August, PSO bought a cargo of 140,000 cubic meters of LNG at a price of ~$20.06 per unit, almost about 29% of Brent.

      According to some reports, due to poor planning and lack of experience in forecasting, the country has to purchase even more expensive LNG after cancelling just a few weeks ago cheaper spot offers ranging between $13-$16 MMBtu. As a matter of records, offer of $13.79-$13.99 from Pakistan’s main LNG supplier, Qatar, were also rejected with the hope that the prices will go down further. As a result, one of the procurement agencies (PLL) had no choice but to purchase four (4) spot LNG cargoes at $15.4 MMBtu price for September. The concerned authorities tried to justify expensive cargoes by saying “no one without a crystal ball can perfectly time or beat an international

      commodity market”, which is NOT true. If crystal ball is needed to predict the prices, then highly paid managers are not needed, a high school graduate can do the job! In the USA and the EU, private sector, like the petrochemical, power generation and the aviation industries, all heavily depend their survival on the oil and gas commodities and also operate in the same highly volatile global market. To name a few, Dow chemical, DuPont, BASF, LG Chem, Samsung, ExxonMobil, Lyondell Basell, Boeing, Airbus, United Airlines, Delta Airlines, Southwest Airlines, Ryanair, Wizz Air, Blue Air, etc. But with good planning, having LNG-industry experienced staff, using modern analytics for supply, demand, and pricing modeling for forecasting and deliveries of the LNG and other raw materials at the precise timings, they procure the commodities at very competitive prices.

      People who try to justify paying higher prices, don’t survive a day longer. In the business world, it is called strategic thinking, forecasting, hedging and execution! If the private companies will be using PSO and PLL’s justifications for purchasing expensive LNG and other raw materials for their operations, those companies will go out of business in no time! This writer is a veteran of the energy industry and has negotiated andamp; mastered dynamics of the supply agreements by being on both sides of the table (procuring/selling) for over two decades while working for the Fortune 100 companies.

      As of 2021, three largest exporters of the LNG in the world are Australia with 87.6 MMT per year, followed by Qatar with 77.4 MMT per year and the USA, the new entry in the energy export market since year 2016, with 71.6 MMT per year volume. Industry co-leader, Qatar is already ahead with the expansion project to increase its capacity much higher. Similarly, in the USA more export terminals are reaching their completions, thus much higher export volume will be possible for Asia and Europe.

      GCC+ Iran Natural Gas Statistics (2020)

      ======================================

      Country Reserves Production
      (BCF) (BCF)

      ======================================

      Qatar 871,100 16.53
      Saudi Arabia 212,600 10.82
      UAE 209,700 5.35
      Kuwait 59,900 1.44
      Oman 23,500 3.56
      Bahrain 2,300 1.59
      Iran 1,133,600 24.20

      ======================================

      Source: BP Statistical Review 2021

      Currently, Qatar has the world’s lowest production costs mainly due to abundance of easy-to-extract gas, most of which is located in the North Field that is shared with Iran.

      Qatari Energy Minister (Saad Al-Kaabi), in a recent interview reiterated LNG capacity expansions whereby in its first phase in 2025, its capacity is targeted to increase to 110 million metric tons (MMT) per year, followed by 2027 expansion that will make its total yearly capacity to 126 MMT. These expansions will cost about $30 billion, making Qatar the undisputed leader and the lowest cost producer of the LNG industry. According to Wood Mackenzie, a premier management consulting firm, Qatar’s LNG production cost is just above its long-term breakeven price of $4/million Btu, thus at the bottom of the global LNG cost curve. This means that Qatar can cut its prices significantly and still make good money compared to some of the other industry players. As a matter of fact, in the recent past, Qatar offered 22% lower prices to secure its new clients.

      Thus, it is a great opportunity to sign a longer-term agreement with Qatar using many indices to adjust the prices automatically like most of the contracts are signed by the experienced traders and users in the world, particularly for the commodities. As a matter of fact, only recently President Putin in a televised address underlined the wintertime misery that Europe is going through is because of not having longer term supply agreements. As a result of this, not only Europe is paying extremely high prices but also experiencing a limited supply of natural gas for heating and power generation during the unseasonably cold and longer winters.

      Most commonly used indices in the energy industry for the longer-term supply agreements are:

      Brent oil

      WTI

      Henri Hub

      NBP

      Nymex

      TTF

      Since Pakistan is also committed to complying with the Paris Agreement and is determined to transition its power needs through the same pathway as the others, securing LNG supply at competitive prices has become now more of a paramount importance. Thus, right now, it is in the vital interest of Pakistan that its policy makers and the procurement agencies must devise their strategy for securing longer term supply agreements with diversification in mind and using formula driven price matrix to guarantee never to pay again exorbitant prices in the future. Recently, two of the major Houston (Texas) based leaders in the LNG sector, namely Cheniere (producer andamp; exporter) and Glencore (trader), have announced a binding long-term agreement indexed to Henry Hub price plus a fixed liquification fee for thirteen (13) years period, starting from 2023. Thus, this longer-term supply agreement between these two players further reinforces the importance for Pakistan to have its own longer-term supply agreement for its critical LNG volume ASAP.

      This strategy will not only support Pakistan’s steadily LNG volume growth for its power, industry and consumers cooking and heating needs but will also help the cost savings for improving and expanding the current inadequate LNG storage and distribution infrastructure. The investments made in the infrastructure will be readily available to use when ready to migrate to non-fossil fuels, like hydrogen, ammonia, etc. with no or a very little modification cost! Therefore, it is in Pakistan’s national security and vital interest to use its brotherly relations with Qatar’s rulers to chart out longer term LNG formula-based supply agreement with upfront discounted prices in reflection with the planned new capacity increase. This will be not only a win-win situation for both brotherly countries, Qatar andamp; Pakistan, but it will also help Qatar to secure certain volume of its added capacity regardless of the volatility of the market and future overcapacity as numerous brownfield and greenfield LNG plants are coming on the horizon.

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