Planners must keep Iran-Pakistan-India gas pipeline option open

Oct 16 - 22, 2006

Natural gas plays a key role in Pakistan's energy requirement as it currently accounts for more than 50% of the country's primary energy supplies. With accelerating economic growth, the demand for gas is projected to increase sharply and the country's recoverable indigenous gas reserves will be insufficient to meet this demand.

Gas shortage is expected to start emerging by 2010 and to increase substantially in the following years, if indigenous supply is not supplemented through imports. In order to overcome the emerging shortage government is actively considering import of gas from neighbouring gas-producing countries, through cross-border gas pipelines and also in the form of liquefied natural gas (LNG).

It is expected that LNG receiving, storage, re-gasification, and distribution infrastructure, for the distribution and sale of re-gasified LNG in the domestic market, will be installed in due course of time and expanded periodically, as necessary. The LNG industry is capital-intensive and requires a multi-billion dollar investment in the complete supply chain. It is critical, therefore, that LNG import projects are planned such that they are able to attract quality project developers, with the technical expertise and the financial resources required for their successful implementation.

Pakistan's Gas Demand and Supply Projections indicate a widening gap of approximately 500 MMCFD by the year 2010. The gap starts to emerge in 2007-08 and builds up to 2100 MMCFD by 2015, as the current gas fields gradually go off plateau. Any commitments of additional gas supplies to industries, power or fertilizer plants on a long term basis are not possible, without confirmation of additional sources of gas supply.

This may be possible through an import gas pipeline which at the earliest could come on-stream or alternately a major on-shore / off-shore gas field discovery. A third alternate is the LNG import option which will be able to provide gas by the year 2010. To achieve the desired target the GOP has nominated Sui Southern Gas Company (SSGC) as the project proponent for the establishment of 3.5 million tons per annum (mtpa) to be enhanced to 7 mpta (equivalent to 500-1000 MMCFD gas) LNG import project with a re-gasification facility to be located in the vicinity of Karachi. It is estimated that the gas would be available through LNG import in the year 2010. The GoP has prepared this policy package for potential investors in order to facilitate the successful implementation of LNG import projects.

The GoP offers two options (a) Integrated project structure, under which a private or public sector party, joint venture or consortium is responsible for purchasing LNG supplies, transporting them to its LNG import terminal (comprising receiving, storage and re-gasification facilities) and ultimately supplying the gas to the domestic market. The entity would have to enter into long-term gas sales and purchase agreement directly with a government-designated buyer, gas utility or bulk customers. (b) Unbundled project structure, under which a government-designated buyer, gas utility or bulk consumer would import the LNG from another country/supplier under a LNG sale and purchase agreement either on 1) a delivered ex-ship (DES )basis, or 2) a free-on-board (FOB) basis. For a DES or FOB purchase, the LNG buyer would have entered into an agreement with the LNG terminal owner and/or operator for the provision of LNG receiving, storage and re-gasification services at its terminal under a tolling agreement. For FOB purchase, the LNG buyer would, in addition, enter into an agreement with a shipping company to transport LNG to the receiving terminal.

In order to realize the project, SSGC has carried out an exercise to enlist services of a major financial advisor/investment banker and consulting companies, having expertise in the LNG business, to advise and assist the company in carrying out the requisite steps for the development of an LNG import project on BOO basis. An LOI was issued to the highest ranking bidder for the above project and the formal contract agreement was signed on 18th October, 2005.

To date, the consultant has completed a pre-feasibility study (the Concept Report) covering business, technical, commercial, legal and other issues concerning LNG import, and has also provided input on Pakistan's LNG policy. In the next phase, the consultant has conducted prequalification of interested project developers, to be followed by formal request for proposals for the project. It is expected that the first LNG parcel will be received and re-gasified in the first quarter of 2010.

The government wants to implement this project in two phases. In the first phase facilities will be created for the storage of 3.5 million tons per annum by 2010. In the second phase additional capacity will be added to raise the total capacity to 7 million tons per annum by 2012. The project cost is estimated around US$ 400-500 million and the project is expected to become commercially operational within three years from the date of award of contract.

While the government seems to be fully committed to implement the project some of the analysts term the project 'too ambitious and waste of precious foreign exchange'. They say that instead of using gas as fuel the government must develop alternate sources of energy, particularly coal. The successful switchover from furnace oil to coal in cement industry has helped in containing furnace oil import bill. They say now it is time to switchover from furnace oil and gas to coal in power generation.

Another group of analysts say that Pakistan should opt for Iran-Pakistan-India gas pipeline. They also say that even if India does not join this project Iran and Pakistan must go ahead. It is true that the US is the biggest opponent of this project. They also say that if the sole super power is supporting India in development of nuclear energy project but not reciprocating Pakistan with the same, the only alternate to overcome energy shortage is to go ahead with Iran-Pakistan-India gas pipeline project.