DELAYED LNG SOLUTION

A SAD STORY OF MISPLACED PRIORITIES, BAD GOVERNANCE AND INEFFECTIVE POLICIES

SHABBIR H. KAZMI
(feedback@pgeconomist.com)
June 28 - July 04, 20
10

Pakistan's gas demand and supply projections indicated a widening gap of approximately 1000mmcfd by year 2010. The gap started emerging in 2007-08 and likely to exceed 2000mmcfd by 2015, as the current gas fields gradually go off plateau. Any commitments of additional gas supplies to industries, power or fertiliser plants on a long term basis remained impossible without arranging additional gas supply.

While efforts were accelerated to enhance exploration and production activities two other options were also being pursued 1) construction of Iran-Pakistan-India (IPI) gas pipeline and 2) setting up LNG terminal and allied infrastructure. According to original plan, a LNG terminal with 3.5 million tons/annum or 500mmcfd handling capacity was scheduled to become operational in 2010-11. However, the project ran into snags and not likely to become operational before 2014-15.

Ideally, by this time Pakistan should have finalised arrangements for the second terminal because the gas shortfall has already exceeded the capacity of proposed terminal and realisation of IPI seems most unlikely due to mounting US pressure on Pakistan to abandon the project. The extraordinary delay in implementation of LNG project is cause of concern. Lately, gas load shedding has become a routine and the worst sufferers are fertiliser manufacturing companies and textile processing units.

The LNG project ran into some serious snags but seems to be getting back on track. According to reports, Ministry of Petroleum and Natural Resources has proposed to Finance Minister Dr. Abdul Hafeez Sheikh to award the multibillion dollar project to Dutch company '4Gas' in integrated structure following directives of the Supreme Court of Pakistan. As per the apex court order of 28 April 28, 2010, the project structure will be integrated and 4Gas will be the Integrated Developer of Mashal LNG project. Earlier, Economic Co-ordination Committee (ECC) of the cabinet allowed Petroleum Ministry to ink a US$25 billion LNG deal with French firm GDF Suez which was earlier annulled by the Court after observing some procedural irregularities.

After consultation with the Finance Minister, Petroleum Ministry has decided to move ECC for award of contract to 4Gas and the company would be responsible for procurement and transportation of LNG, setting up and operation of terminal, unloading, storage, re-gasification and supplying re-gasified LNG to the two gas marketing companies SSGC and SNGPL as per the agreed terms and conditions.

4Gas has offered maximum indicative terminal tariff of US$0.5/mmbtu to be firmed up after EPC award on finalisation of charter agreement and placing order for major equipment. According to terms and conditions: 1) terminal capacity will be 3.5 million tons per annum (mtpa) minimum; 2) terminal will be located at Port Qasim Karachi; 3) gas supply will start in first quarter of CY12; 4) As per ECC approved Letter Of Support (LoS), government of Pakistan (GOP) shall enter into an Implementation Agreement with 4Gas and GoP Guarantee for SSGCís payment obligation will be available; 5) 4Gas to finalize the project timeline within two weeks of the award of contract to meet the project completion by the agreed date; 6) 4Gas to submit performance bond as per RFP requirements; 7) after the award of PMLP to 4Gas as an Integrated Developer, 4Gas will enter into formal/final negotiations with the LNG suppliers and submit documentations for review by SSGC/Consultant and the approval of GoP; and 8) the 4Gas to fulfill the requirements of PQA and execute an implementation agreement with the Port Authority.

In September 2009, a Price Negotiation Committee was appointed by Ministry of Petroleum comprising of its Special Secretary (Head), Member Energy Planning Commission (Member) and Additional Secretary ministry of Finance (Member) to negotiate LNG supplies. As some of the suppliers were reluctant to supply to 4Gas and preferred supplying directly to GoP/SSGC, the PNC negotiations was based on an unbundled approach rather than integrated as approved earlier by ECC in February 2007.

Long/medium term volumes offered ranges from 0.5 to 3.5 mtpa and were based on the pricing mechanism generally followed in the Asia Pacific region. 4Gas offer was for a Conventional Land based terminal of 3.5 mtpa capacity with an early supply option utilising the FSRU till completion of onshore storage and re-gasification facility. Keeping in view the requirement of gas by end 2011 and to lower the terminal tariff, it was decided to continue with the FSRU based solution for a period of 5 years or more.

Requirement and design capacity of a conventional land based terminal shall be established after two to three years of operation of floating type. The maximum indicative tariff offered by 4Gas is US $0.5/mmbtu. Channel widening and dredging activities required to be carried out by PQA on fast track to meet the PMLP timeline.

SHORT-TERM STRATEGY

Since gas availability is not likely to improve in the short term, the policy planners should order running of thermal power plants on fossil oil. They should also come out of the illusion that using gas for power generation can help in improving cash flow of electricity distribution companies.

Gas marketing companies should also try to reduce UFG. According to the sector experts the supply could be enhanced by about 250mmcfd, at least by containing UFG. The rising UFG is often attributed to aging pipelines but it is also a fact that gas pilferage is on the rise, gas pilferage is most unlikely without the connivance of the staff of gas distribution companies.

Last but not the least, additional 500mmcfd supply can be ensured by resolving the litigation going on in case of already discovered gas fields. These litigations are going on for years and costing huge economic losses.

In other words it could be said that like electricity crisis, gas crisis is also an outcome of bad policies, lack of good governance and inability of the decision makers to see the things in right perspective. The situation can't be improved without accountability of the top management of energy supplying companies.