LIQUIFIED NATURAL GAS IMPORT

It could only be an interim and a make-shift arrangement

By SHABBIR H. KAZMI
Dec 12 - 18, 2005

Since independence Pakistan has remained grossly deficient in indigenous production of fossil oil. Discovery of gas was a blessing but policy planners opted for a wrong alternative, burning gas as fuel and are still doing the same. While new discoveries have been made the demand has been growing at much faster pace. Not only that the proven reserves are depleting fast the lack of development of alternative energy sources is making the country more dependent on external sources of supply.

The successive governments have been supplying gas to domestic consumers at subsidized rates. On top of this the switchover of power plants from furnace oil to gas has been responsible for substantial increase in gas consumption. This switchover is aimed at reducing cost of electricity generation. However, many analysts are of the view that the use of gas as fuel in power plants alone cannot improve the financial health of electricity transmission and distribution companies.

Some of the critics say, "We are burning dollars (currency) for cooking food and firing boilers of factories". While may not have to undertake some research to establish the credibility of this statement, it is clear that now gas demand has to be met through import, either through pipeline or Liquefied Natural Gas (LNG) import. Having reached the conclusion various options have to be explored in detail to select the best. A lot of talk has been going on for years regarding transnational gas pipelines. Three of the pipelines identified are 1) Iran-Pakistan-India pipeline, 2) Turkmenistan-Afghanistan-Pakistan pipeline and 3) Qatar pipeline. Each option suffers from many ifs and buts. Sector analysts believe that we are running against the clock. Even if decision is made about any of the pipeline project today, gas shortage would appear much earlier than the pipeline becoming operational.

Pakistan's gas demand and supply projections indicate a widening gap. The gap is expected to emerge in 2007-08 and build up to 1000 MMCFD by 2010-11, as the current gas fields gradually go off plateau. Further commitment of additional gas supplies to industries, power or fertilizer plants on a long term basis is not possible, without confirmation of additional sources of gas supply. Gas supply can only be ensured through import of gas, either through pipeline or LNG. While various gas pipelines are under consideration, it may not be possible to bring these online in next couple of years. Therefore, LNG has to be imported to keep the industrial and power plants in operation, besides catering to the needs of millions of domestic consumers.

The LNG import project is in line with the government's strategy to secure future energy supplies for the nation. With the vision of supplementing local natural gas supplies, Sui Southern Gas Company (SSGC) has envisaged an integrated LNG import project inclusive of procurement, transportation, storage and re-gasification facilities. The project is being set up on a Build, Own and Operate (BOO) basis at Port Qasim or near the Karachi Port. The expected delivery capacity would be 2.5 million metric tones of LNG per annum, equivalent to about 300MMCFD with the option for larger volumes of up to 3.5 million tones of LNG or approx. 500 MMCFD of natural gas. The LNG project is a vital component of the National Energy Plan of Pakistan as it will result in enhancing SSGC's supply capacity by adding from 350 to 500 MMCFD to the availability of natural gas, vital to meet the country's growing need for energy, by the year 2009 - 2010.

The SSGC has taken a major initiative towards implementing this integrated LNG project by signing a "Consultancy Advisory Agreement" with a consortium led by ABN-AMRO Ban, which also includes Poten & Partners. The signing ceremony was held at SSGC Head office on 18th October 2005. Munawar Baseer Ahmad, Managing Director SSGC and Mr. Naved A. Khan, Country Manager ABN AMRO Bank signed the agreement on behalf of their respective organizations. The Consultants will prepare a concept report on the LNG import project recommending appropriate options for the project structure. This will involve undertaking detailed studies of strategic, market, commercial and regulatory issues pertaining to the project. The first phase envisages the preparation of pre-qualification and bidding documents for the invitation and short-listing of potential joint ventures or consortia for the supply of LNG to SSGC. The consultants will also provide assistance in formulating the LNG import strategy in line with the National Energy Plan and provide input for the LNG import policy framework.

Keeping this demand and supply equation in mind, only one option seems workable, which is import of LNG. The work on this project has to be initiated to achieve completion before 2007-08. This means we have 12 to 18 months at our disposal to complete this project and avoid a crisis-like situation. The LNG complex has to be constructed at either of the two ports at Karachi or Gwadar. Apparently the government seems to have reached the conclusion to build this facility at Karachi. Port Qasim seems to be a better option due to availability of land and its location away from thickly populated areas of Karachi city.

It also appears that once the LNG complex becomes fully operational, Karachi and parts of Sindh and Balochistan have to be fed from this. Gas presently coming from Balochistan and upper Sindh has to be diverted to Punjab. Therefore, the most crucial item on the agenda should be what will be the tariff for imported gas? It is feared that imported gas would be more expensive as compared to indigenous gas, simply because of handling and storage expenses. These expenses would be on top of regular expenses incurred on transmission and distribution of indigenous gas.

Another fear is that once the country starts importing LNG the focus would shift away from exploration. At present the government has assigned top priority to oil and gas exploration. However, there is a very low success rate in drilling of exploration wells . It is on record that the average success in Pakistan is 1:4 as compared to a global average of 1:10. The empirical data also shows that prospects for gas discovery are higher than oil. In such a scenario one may even question the rationale behind importing LNG. Creation of storage and handling facilities needs not only additional capital expenditure in foreign currency but also making the country dependent on external sources of energy.

Some of the critics are of the view that opting for LNG import is another attempt to shift focus away from gas pipeline projects, particularly Iran-Pakistan-India gas pipeline project. At present the general perception is that this is the only economically viable project because the other two projects suffer from some inherent weaknesses. However, it is also a fact that the US administration is the biggest opponent of the project. Both India and Pakistan consider this pipeline most crucial for their sustained economic growth. Both the countries also say that they would not bow down before the US pressure but the delay shows the contrary. While India has been expressing its reservations about the pipelines it was very prompt in signing LNG import agreement with Iran. The analysts believe that terminating LNG import contract is much easier than refusing to buy gas being delivered by the pipeline.

Analysts are also of the view that LNG import would be economically viable from the Middle East. However, the geopolitical conditions of the region are highly vulnerable. While the Arabian Peninsula may be the best source of supply gas can only be procured from a few sources. Conditions in Iraq are still far from satisfactory and no one knows when it would become normal. Instability in Iraq also cast shadows on other neighboring countries. Iran has also become a flash point. Therefore, in case of any turmoil the movement of ships, carrying LNG, could be disturbed and restricted. Similarly freight charges would also be affected by the geopolitical conditions of the region.

OUTLOOK

Import of LNG may help Pakistan in overcoming its potential gas shortage but it cannot be termed a long-term and dependable source of supply. Pakistan has no option but to exploit other alternatives like coal and wind energy. To meet the growing electricity demand hydro projects have to be established. However, all these decisions could not be made in isolation. The government has to redefine its policies governing investment in oil and gas exploration and production, power generation, transmission and distribution, POL and gas distribution. Various mistakes have been committed in the past. It is never too late to rectify the past mistakes. However, these can only be rectified once the policy planners accept their mistakes.