Here’s a thought: Fuel shortages wouldn’t be as bad as they are today if bureaucrats hadn’t thrown a spanner into the works of two long-delayed LNG terminals.

One might be tempted to cite recent defaults by LNG suppliers under long-term contracts as well as record spot market prices to declare that the need for more LNG terminals has become moot.

But before jumping to conclusions, consider the following: it wasn’t state-backed Qatar Energy that defaulted on long-term contracts; rather the international trading houses – Eni and Gunvor – which have missed out on promised shipments and blighted the country’s power sector.

One of the two planned terminals is majority-backed by Qatar and has three local industrial groups as minority shareholders. After six years of navigating regulatory rigmarole, the terminal is still just a distant dream. If the terminal had received the pipeline capacity promised by the Sui companies in time, it would have already imported Qatari gas under long-term contracts, to resell it to local industry, without the need for sovereign guarantees.

The other planned terminal is 100% owned by Mitsubishi Corporation, one of the most influential players in the global energy market. No LNG trader in the world would have defaulted on its shipments as the Japanese player is responsible for more than half of the LNG imported each year by Japan, one of the biggest gas importers in the world.

Impact of the war in Ukraine

Pakistan started importing LNG in 2015 as national gas reserves began to run out at a faster rate. The country has already installed two terminals at Port Qasim. Pakistan State Oil Company Ltd uses the Engro Elengy terminal to import gas under long-term contracts, while Pakistan LNG Ltd makes spot purchases through the GasPort LNG terminal.

Less than 50% of annual LNG imports pass through the spot market, where prices soared after the Russian invasion of Ukraine on Feb. 24. No wonder no bidders responded to Pakistan LNG Ltd’s latest tenders for 10 cargoes. Previously, the state-owned company had made three unsuccessful attempts to purchase LNG in July.

Regarding the four long-term contracts supposed to bring more than half of the country’s total LNG imports at prices well below spot rates, global suppliers have consistently defaulted. Since the start of 2021, Eni has defaulted on at least four cargoes while Gunvor has defaulted on at least seven, according to data compiled by the Institute for Energy Economics and Financial Analysis.

Force majeure or not?

Pakistan reserves the right to impose a penalty on defaulting suppliers equivalent to 30% of freight cost. Suppliers invoke force majeure — unforeseeable circumstances preventing them from performing the contract — to avoid paying the penalty.

“Long-term contracts should always require the supplier to disclose the source of fuel and the name of the vessel. If not, what prevents him from selling the cargo on the spot market when the rate is high enough to justify a long-term non-delivery? said an energy expert with many years of experience in sourcing LNG for European employers.

It is difficult to invoke force majeure under a false pretense if the long-term buyer knows the source of the LNG and the vessel supposed to deliver it.

The developers of the two upcoming terminals have repeatedly requested the government to allocate at least 300 million cubic feet per day (mmcfd) of pipeline capacity each before making the final investment decision (FID), however, it there has been little tangible state progress. owned by gas utility companies on pipeline awards over the past few years.

Energas LNG, backed by Qatar, and Tabeer LNG, backed by Mitsubishi, have capacities of 750 to 1,000 mmcfd each. Given the already operational capacities of Engro Elengy (690mmcfd) and GasPort LNG (750mmcfd), the addition of the two “merchant” terminals could more than double the country’s regasification capacity. They will also increase the country’s LNG storage capacity, which currently stands at 320,000 cubic meters.

Pakistan is one of the world’s seven largest LNG importers, but only ranks 18th in terms of storage capacity. In fact, the country uses the floating storage and regasification units (FSRUs) of the two existing terminals simply as regasification units. This means that the system is highly dependent on the gas line, which is the volume that can be stored in a pipeline for planning purposes.

According to a July 4 Reuters report, Germany has leased up to four FSRUs in a bid to rapidly diversify away from Russian energy. “But here, foreign investors have been running from pillar to post for years just to get promised pipeline capacity,” the energy expert said.

Posted in Dawn, July 9, 2022