LNG

A prospective source of energy

By AMANULLAH BASHAR
Oct 04 - 10, 2004

Even the best ideas, theories, potentials and resources make no impact on the social and economic life of a nation unless they are made use of or put to good use.

This observation deem fit in the context of available energy resources but they are just on the papers and frequently referred to by the leaders, economists and government spokesmen over the decades, but the situation remains stagnant for various considerations.

Unfortunately, most of the governments preferred to go for short term planning or ad-hoc decisions for reaping immediate political gains instead of thinking in terms of the needs of the coming generations. They floated schemes like "Yellow Cab" or "Green Tractors" to befool the poor by throwing such attractions to make headlines but such politically motivated slogans hardly produce any tangible result or help generating sustainable economic growth or redress sufferings of the poverty-ridden masses in the society.

It is painful to see that despite having huge natural resources such as huge coal deposits were left untapped for the last 56 years in district Thar of Sindh province. The country has rich hydel resources capable to generate over 34,000 megawatt of power at the cheapest rates, but how much of these resources were utilized for the economic and social benefits. By and large, half of the population has not access to the electricity while remaining part of the population has not option but to consume electricity at an exorbitant price.

The natural gas, yet another available low cost indigenous fuel, which can be used for generating low cost electricity. However, it cannot replace the entire thermal power generating system in the country, as it has to cater to the needs of the other segments of the economy such as transportation, fertilizer, and other industrial consumers unless other alternatives are made available. In this contest, the present government has accelerated the gas pipeline projects to import gas from Turkmenistan and Iran. Each of these pipeline projects will cost $3.50 billion and would take 2-3 years for completion. The idea to import natural gas through pipeline was conceived in 1994 but could not materialized mainly due to disturbed political conditions in Afghanistan, an ultimate route of the proposed gas pipeline project.

LPG

The unusual rise in Liquefied Petroleum Gas (LPG) price, which is estimated to over 60 percent during last 9 months is a glaring example of how the producers taking undue advantage of the fuel constraints which had recently created serious crisis for the users especially in Northern areas and the transporters using LPG as a cheaper alternative fuel for transportation.

It may be recalled that LPG was available at Rs14000 a ton in January 2004, which touched a level of Rs22000-23000 per ton since January last. Taking advantage of the oil price crisis in the international market, the LPG producers in Pakistan also linked up prices of the locally produced LPG with rise in the international oil prices. The situation was, however, subsided after a week long protest by the dealers and other consumers of the LPG as the producers had to lower LPG prices by Rs 93.

LPG is an unregulated segment of the energy sector; hence it does not come in the domain of the Oil and Gas Regulatory Authority (OGRA). The total volume of LPG production is estimated around 350,000-400,000 as against the demand of around 500,000 tons all over the country. The demand growth for LPG goes up in winter, which has already set in the Northern part of the country. Besides increased use of LPG during winter in Northern areas due to non-availability of gas distribution network of SNGPL, the consumption of LPG was registering a rapid growth in LPG in the transport sector especially by the taxi and auto rickshaws in Karachi giving a tremendous jump to the LPG consumption. Despite being costlier than CNG in terms of price, the cab and rickshaw driver prefer to go for LPG because conversion of LPG kit is much cheaper than the conversion of CNG kit in the vehicles.

Reacting strongly over the exorbitant rise in LPG prices, the LPG distributors had also went on a four-day strike besides staging demonstration in front of the Karachi Press Club last week.

The LPG producers on the intervention of the Ministry of Petroleum and Natural Resources, however, announced a reduction of Rs4000 per ton. The increase in LPG prices on the basis of increase in international oil prices seems a lame excuse on the part of the producers, as the LPG is produced from indigenous resources. It may also be noticed that Pakistan imports crude from the Middle East where the prices were round $34 dollar a barrel last fortnight as against the unusual jump of price in US crude which had touched a level of $50 per barrel but Pakistan has nothing to do with the US crude prices.

It is the time that effective measures are required against such hikes in fuel prices as it is the fuel, which is the major contributor to the price inflation and causes multiplier effects on general prices.

LNG

Pakistan's recent energy requirements may have gone a change in mix but on growth basis as well as overall situation remains the same. Pakistan still is and remains energy deficient for foreseeable future.

The energy mix changed to an extent that natural gas now contributes 53% of the mix increased from 42% (year 2000). This growth is due to government's initiative in the year 2001 to fuel switch power/cement sectors and other furnace oil based units to gas in short-term and coal in longer-term.

Pakistan being energy deficient cannot remain immune to what is undergoing internationally in field of energy therefore best would be to keep abreast with opportunities.

With the major LNG project coming on-stream in Qatar and another near completion in Iran pose an opportunity for Pakistan to plan comparatively very cheap, effective and tailor-made incremental growth scenario for Pakistan.

Trans-border energy proliferation through pipelines if limited to two states is driven by immense scale of mutual interests and has sufficient momentum to overcome technical and financial hurdles. In Asia there are several examples such as three pipelines carrying 150-325 million standard cubic feet of natural gas per day to Singapore. These sub-marine pipelines of 300-625 Km length from Malaysia, Indonesia and West Natuna pass through deepest seas were constructed in 90's. These projects were structured and executed while in Pakistan we kept on wasting time and money on three competing projects i.e. Dolphin Gas Project carrying gas from brotherly country Qatar, Iran India gas pipeline carrying gas from Paras fields in Iran to India and third from Turkmenistan through Afghanistan.

To structure these projects posed on very on-set problems beyond the capabilities and political will (owing to its short supply in the region). The result was millions of dollars were spent on feasibilities and foreign tours starting from 1994 to date.

For example the Dolphin project envisaged the route as per which pipeline enters the sea twice, once between Qatar and Abu Dhabi and then at Sohar again entered Arabian Sea en-route to Gwadar. This project was initiated by World Bank loan in 1992 and US $ 4 million were spent on it.

Ever since natural gas scenario has undergone tremendous change with LNG facilities in proximity India, the targeted market has simply vaporized. India has in last years installed fourteen LNG re-gasification terminals with guaranteed business for time frame ending twenty years from now. Any other market availability of Indian market is not there any more with major off shore gas field finds last year. Pakistan has also signed long-term agreements with gas producers thus the gas marketing issue does not support projects of US$ 4-5 billion as these will not be sustainable. India has time and again raised security issues of land-based pipeline. These have been although brushed aside by Pakistan but the fact of matter is in last two years 24 Km pipeline in Sui has become a cause of concern due to pipeline attacks by the miscreants and it has been sabotaged no less than 15 times.

In view of the prevailing oil crisis resulting to shoot up of US crude to a peak of $50 per barrel and $34 a barrel in Middle East and in full cognizance of the present economic scenario, the Asia Petroleum Limited, operating in Pakistan has moved a plan for consideration of the government to import LNG by establishing a LNG terminal at Gadani Beach near Karachi, it is reliably learnt.

The proposal, which according to informed sources, is under study of the authorities says that Pakistan can benefit a great deal by the private/foreign joint venture for setting up the terminal for import of LNG. The project as it has been structured on private/foreign JV and Pakistan will not have to cough up any finances for the project, as claimed by the APL, which has presented the plan.

The project if implemented will provide natural gas not only to adjoining areas, power plants but also provide load balancing when natural gas becomes in short supply by the year 2007. This project can support gas supply till government embarks upon fuel switch to coal on completion of mining facilities for Thar Coal.

Considering logistic issues including critical evaluation of site selection options, technological preferences, overall economical parameters as well as weight-age assigned to regional gas projected demand patterns point towards construction of a fully capable terminal and storage to supply 750 MMSCFD to cater to demand figures for the foreseeable future.

The capacity can be enhanced if the government considers using LNG for vehicular transport, providing economically natural gas to far-flung areas. The major factor to establish power plant is transmission line availability and any long-term LNG deal also depends of essential and critical base load.

These both factors point towards Gadani area as the prime site for terminal. This area provides natural draft availability, for incoming ship, thus cutting tremendously capital cost and also avoids red tape delays of existing port authorities.

Owing to economic merits of availability of connecting power plants to under utilized national grid PPIB, in September, 2003 had announced several gas based power plants in this specific area but these all were shelved as SSGC declined to supply natural gas at this particular site.

This is similar kind of fate to the projects where several of economic and viable projects were scuttled in recent past purely on basis that these were located in Balochistan.

After careful study and optimization of gas market profiles, future environmental issues, storage and dispatch infrastructure, cost and land availability around the North West of Karachi, the coastal region is termed as ideal for setting up of proposed LNG terminal, the proposed plan said.

This coastal zone of Pakistan is at a reasonable distance from Karachi and above all the sea in this region is silt free allowing inter-connection for gas Load Balance. The project is to be initially developed together with foreign equity stake holders later as per law can be linked with stock market as listed company as subsidiary of APL.

The project cost estimates taken in the proposal will ensure sufficient profit for any donor financial institutions while fulfilling the stringent National Environmental Quality Standards (NEQS).

Product sale prices have been based on the international contracts recently awarded/inked between users and Iran/Qatar. The proposed facility will employ state of the art technology and would be the first of its kind in Pakistan.

The key features of the proposed scheme are:

-To off load and store LNG to sustain 500-750 MMSCFD of natural gas into Pakistan.

-The project can be developed and constructed in period of two years upon award of supply agreement from power plants.

-The proposed project will also be associated with energy free cold storage facility using extremely low temperatures of LNG for fisheries and other agro-based products.

-Fully integrated facilities to be engineered and design as per international standards.

-To have independent utilities such as power, water etc. and independent gas receipt infrastructure.

-It will provide Pakistan an alternative to Mega Projects based on incremental nature sustainable to cater to growth and depletion of Sui Field.

Other key features for the proposed project are:

1-The proposed project would save millions in transmission costs being much nearer to consumer.

2- Many of the projects that could not be materialized in absence of utmost essential long term (Fuel Sale Agreement) FSA can be up and running.

3- Strong project economics with an adequate level of debt service for lenders and an attractive return for investors is also available. The project can be developed on fast track basis especially when the prevailing interest rates are on 25-year low and loans availability for such projects has considerably improved.

4-Introduction of sophisticated but flexible technology into Pakistan that permits easy adjustment to suit prevailing market conditions in the future.

5-The project will help transfer of LNG technology to Pakistan from the West.

6-Job opportunities during construction/operations phase of the proposed terminal adequate training of manpower shall be planned in order to provide young workers necessary experience of working on rapidly expanding LNG business world wide.

Investment Cost Estimates

The total cost of the project at present has been estimated at US $ 154 million. The financing plan is based on a debt equity ratio of 70:30 as per present financial market's prevailing dynamics.

FINANCIAL PLAN

The proposed financial structure of the proposed Refinery Project is designed to ensure acceptable debt coverage ratios to lenders over the full loan period. The basis of the proposed structure is outlined below:

EQUITY (30%)

(US $ MM)

Local in local Currency

23.1

Foreign

23.1

Total Equity

46.2

DEBT (70%)

Export Credit

53

Commercial Loans

30

Local Loan

24.8

Total Debt

107.8

Total Project Finance

154

The financial model is based on two years construction period. Escalation or inflation factor are not used. Base price, operating costs are kept constant for the project life span. Under the current LNG price trends the targeted financial returns are as follows:

1. Return of Equity (ROE) $ basis 25-30%
2.
Internal Financial Rate of Return $ basis 15-16%

EQUITY FINANCING

According to the project ownership structure, the equity is split 50:50 between foreign and local sponsors. It is assumed that local equity would be used to cover the local cost portion whereas foreign equity is provided in US $ and is used to partially cover foreign portion. The equity will be paid in pro-rata with the construction progress and the remaining sources of funds.

It is further assumed that the equity obligations of the owners under this facility will be guaranteed in an acceptable manner to the lenders of the project.

FOREIGN FINANCING

The foreign sources of funds are:

EXPORT CREDITS

The Export Credit Agencies are supposed to provide political risk coverage for the eligible part of the project cost. Under this scheme, debt will be provided by domestic and/or international bank through advances and letters of credit for the financing of the capital expenditures and other construction related costs. The terms used for carrying out financial analysis are as under: -

Coverage

100% of eligible loan amount

Eligibility

85%

Interest rate

5.0% or 3.1% above LIBOR

ECL Ins. Premium

2% one time at disbursement

Loan period

7 years

Repayment

14 semi annual payments at the end of each period

COMMERCIAL LOAN

Foreign currency loan in this category have been considered. It can be expected that this amount will consist of two to three different sources where financing conditions are most advantageous. The following terms are assumed to be associated with various commercial loans conditions: -

Interest

5.25% or 3.35% above LIBOR

Loan period

7 years

Repayment

14 semi annual payments at the end of each period

LOCALLY MANUFACTURED MACHINERY LOAN (LMM)

Interest

7%

Commitment Fee

0.375% of un-disbursed amount

Management Fee

0.5% flat of financed amount

Loan Period

7 years

Repayment

14 semi annual payments at the end of each period

DESIGN AND CONSTRUCTION

The design of the proposed LNG Terminal Project will be based on internationally accepted design codes and standards for the petroleum industry. A Project Management Contractor (PMC) of international repute will be appointed to support the proposed project through the detailed design and construction of the terminal and other associated facilities. The construction of the project shall be through number of turnkey EPC contract. The contract will be awarded through international advertisement and after a predefined process of pre-qualifications, bid evaluation etc.

Project Implementation and Way Forward

The APL envisages applying three-pronged strategy to successfully complete the project development stage. As per government policy the foreign counterparts shall approach the government of Pakistan through BOI at a later stage.

REVIVAL OF SHELVED POWER PLNTS

The announced 700 MW 3 power plants announced earlier in Gadani area based on economic merit. The restoration of these projects shall be sought with PPIB by having a MoU with at least one prospective sponsors of power plant by providing assured gas supply on long-term basis. The long-term demand supply indicates severe outages particularly in Karachi and generally all over Pakistan. The Thar Coal projects and Hydel prospective options are long gestation projects and in the intermediate period severe implications can thus be avoided.

The financial close achievement shall be run in parallel. SSGC and SNGPL shall be approached to integrate the proposed with gas network for gas load management to avoid gas outages.

With Ministry of Fisheries and Livestock and Export Promotion Bureau visualize international standard cold storage facility for fisheries and other agro-based export products.

As soon the as the critical base load is established the rates for LNG shall be negotiated with Qatar and NIOC for long-term sales agreement. We are confident to secure @ US$ 3-3.25 per MMBTU (Rate will dependent on the quantum of guaranteed throughput). This will enable us to carry out financial analysis and achieve financial close. The facilities shall be engineered designed through a reputed company based on optimization and prudent economical basis.