WILL PAKISTAN IMPORT LNG?
Dec 10 - 16, 2012
Liquefied natural Gas (LNG) is natural gas in its liquid form, achieved by reaching temperatures of minus 259 degrees Fahrenheit (-161 degrees Celsius). Unlike traditional natural gas, LNG has been traded on long term basis through storage facilities and ships that are specially designed to tolerate low temperatures. It is a very closed industry with limited flexible cargoes with efforts now to increase such cargoes beyond 25% and develop an alternate Asian index.
GOP has been in the process to make framework for the import of LNG to meet energy needs of the country and realizes that "the import of natural gas in the form of LNG is one of the basic priorities of the government to overcome looming energy crisis. The government has been working on short-term, medium-term and long-term plans to resolve thecrisis; LNG import is a short-term solution. In the longer run, the government is working to explore new oil and gas reservoirs to increase domestic gas production."
Gasport has been keen to develop LNG terminal since Musharaff era and without any GOP guarantees and assurances with subsequent entry of Global Energy end of 2010 to deliver infrastructure within 6 months. Both did not realize or understand the LNG business and its fundamentals. On July 20 last year, OGRA issued three conditional licenses and one provisional license to LNG project proponents. The conditional licenses were issued to Pakistan Gasport Limited, Elengy Terminal Pakistan Limited (ETPL) and Global Energy Infrastructure Limited (GEIL), while the provisional license was granted to DSME ENR Limited.Global Energy and Elengy Terminal Pakistan Ltd were to import 500 Million Cubic Feet per Day(MMCFD) each, while Pakistan Gasport was to import 400 mmcfd and sale to IPPs at a discount from furnace oil.ETPL committed to deliver within 12-15 months upon closure of outstanding items by MP&NR, OGRA & PQA. Recently, FOTCO has been issued NOC at Gharo Creek at PQA with condition to use Chan Wadoo and understand provisional license has been obtained with QRA, ESIA studies pending.
In parallel, PQA has been unable to approve the QRA to ensure handling of LNG around the year with appointment of consultant to review the QRA pending for 3 years. OGRA issued TPA Rules in April 2012 and Ministry of Water & Power has been unable to resolve the circular debt. The incentives highlighted in LNG Policy 2011 and suggested by the developers have not been notified / approved by ECC. Finally, the policy of MP&NR to not WACOG of LNG in the portfolio of SSGC & SNGPL provided no incentive to users of LNG to switch to a new fuel as their capacity payments are assured under the Power Policy and current fuel pricing is well below international prices.
GOP also declined to provide sovereign guarantees to LNG suppliers despite the Rs. 450b+ circular debt, country credit standing of below investment grade or priority in payments for imported LNG. Given the non investment grade credit rating, LNG suppliers required elaborate transaction structuring to sign long term take or pay contracts with guarantees in case of cancellation of contracts.
There was surprisingly resistance from MoF despite the country standing, the policy incentive for IPPs and E&Ps already in place including sovereign guarantees. Again assurances are likely to be provided to TAPI/IPI. It was thus another spanner in the import of LNG as no financing could be arranged without this facilitation.
Petroleum Ministry's proposal that the cost of imported LNG should be factored in the weighted average cost of gas and the impact passed on to all consumers had not received any support. The Planning Commission was of the opinion that implementation of the proposed pricing mechanism would increase the gas price for domestic consumers and suggested that imported LNG should be dedicated to the power sector and bulk consumers. Another suggestion made by the Planning Commission was to keep the price of imported LNG below the imported furnace oil price. In any case, the commission said, LNG's landed price should not exceed 80% of the imported furnace oil price at BTU parity.
It was disappointing that LNG was being imposed with unnecessary restrictions whereas IPI gas @ US$11 would be part of WACOG and so will TAPI gas @ US$ 13. Both projects will require investments of around US$ 15 billion and the tolling/operational cost of pipeline is not accounted for. More the concept is in vogue for other fuels!
Is OGRA not weight-averaging cost of gas from all the indigenous fields and determining tariff for various sectors? Is OGRA / MPNR not doing same for 9 mtpa of furnace oil, 6.9 mtpa of diesel oil and imported petrol today?? And does NEPRA not use same concept/mechanism in adjusting fuel prices when determining tariff to DISCOs by CPP? Then why is it not to be done for LNG?
Advisor to Prime Minister on P&NR, realizing the deadlock, initiated efforts to bring in policy changes to facilitate LNG imports early this year and diligently sought approvals of ECC. Efforts were made to incorporate the requirements of the LNG sector with meetings held with Qatar Gas, ConocoPhillips, suppliers from Algeria, Brunei and Malaysia, Consultants, FSRU Operators and the developers of LNG Terminals. Also MP&NR reviewed possibility of import of 200 mmscfd of gas from India at USD 20 per mmscfd.
After building consensus through deliberations of subcommittee of ECC and various committees set up by the Prime Minister and President, the out-of-box, innovative strategy of MP&NR is now based on the following premise to ensure staged development of infrastructure to import 1.5 bcfd:
i. Long-term LNG import under integrated project structure for 400mmscfd with delivery point at SSGC receiving point;
ii. Fast-track LNG import on tolling basis for 200 mmscfd; under this arrangement LNG would be procured from international sources through any of the three approaches allowed under section 3.2 of the LNG Policy, 2011 i.e. direct negotiations, competitive bidding or spot purchases;
iii. Handle LNG/RLNG delivery to SSGC's receiving point, the Aggregator (subsidiary of SSGC and SNGPL) would invite proposals for setting up of terminal for tolling on competitive basis;
iv. A second round of long-term LNG import under integrated project structure for 400 mmscfd, similar to the first one will be advertised within four (4) weeks of receipt of bids for the first long-term LNG project.
Policy changes recommended for ECC approval are:
i. For the long-term projects, the contract would be for 15 years with 5 years price review clause;
ii. Fast-track would be short term depending on the commercial needs of the Aggregator and gas utility companies will open revolving standby letter of credit up to three months' value of RLNG/LNG to guarantee gas off takes, which shall be backed by GOP's sovereign guarantee;
iii. LNG users mainly the power sector would establish letter of credit for three months' LNG value to back up the gas utility companies' letters of credit.
iv. Gas utilities will ensure transportation of LNG to the consumers only through transmission and high pressure distribution network for isolation from their spaghetti gas distribution networks; and
v. SSGC would immediately finalize the appointment of consultant against the bids received through international bidding process for import of LNG/RLNG for both the tolling and integrated projects;
vi. Cost of LNG will be factored in weighted average cost of gas of the two utility companies as per existing arrangement for power sector only. However, the RLNG volumes and price will not be considered for UFG benchmarking/disallowance calculations. Any financing cost for LNG/RLNG purchase will be allowed as admissible expenditure under the revenue requirements to the Gas utilities
The following aspects still needed closure and clarification to ensure early execution of the projects by the proponents:
(i) The price after 5 years is not supportive to achieve financial close of a US$ 200 m infrastructure project as it creates an element of risk for the lenders;
(ii) The LNG suppliers require a performance bond/guarantee to protect against cancellation of the take or pay contract by Aggregator;
(iii) Clarification on the roles of USAID consultant and SSGC Consultant to avoid over lap and conflict;
(iv) The developer needs to confirm and demonstrate availability of LNG for 10 years from upstream supply source to avoid risk of obtaining bids without an actual supply arrangement in place i.e. "going short" bids should not be allowed;
(v) Import of LNG by IPPs be allowed and added to the WACOG. This be limited to spot cargoes and for utilization by the power plants only.
(vi) All new power plants be CCGT and based on gas. Per GE's Chief Executive, investments around the world are starting to invest in gas fired plants to provide base load electricity replacing coal, oil and nuclear. FT Sept 27, 2012. IEA argued in May this year that natural gas was "poised to enter a golden age" in which it could be cheaper than coal as a fuel for power generation in both EU and the US.
ECC has approved the following
a. 2x400 mmscfd integrated LNG import projects
b. 1x200 mmscfd tolling fast track LNG import project with intermittent spot supplies of 500mmscfd for 5/6 days every 2 weeks
c. And not for a 500 mmscfd tolling LNG import project by SSGCLPG, or procurement of 500 mmscfd supplies to be arranged by SSGCLPG for which no sovereign guarantees or SBLC arrangements have been approved for SSGCLPG.
d. Involvement of private sector, transparent process and following of PEPRA rules and regulations
Pakistan also needs to build infrastructure to handle LNG and learn from experience of others. Institution building requires up gradation of skill sets of those involved in the decision making with vision on approach. Hiring of consultant with USAID support will not bring desired results. Same funding should be spent on training and developing resources in the country thru programs arranged by PIP with international experts to teach innovation, flexibility and adaptability without continuing to provide subsidies to APTMA, CNG and IPPs.
We should evolve our own energy strategy aimed at not only achieving only self sufficiency but also prudent portfolio of fuel. The Supreme Court gas an opportunity to declare that CNG be deregulated and should go one step further by declaring that the energy sector /fuel sector be immediately deregulated as was done in the Philippines by its Supreme Court
Bangladesh has taken a step by passing Act no 54 of 2012 that aims to assist decision making and India continues to build infrastructure of ~20mtpa with supply plans lagging behind but actively engaged in taking equity in liquefaction facilities to ensure continued supplies while we struggle to put up the first 500mmscfd import terminal.
The Ministry of Ports and Shipping (MP&S) whilst improving on existing infrastructure, has also shown technical adaptability by facilitating LNG terminal developers via allocation of feasible sites. MP&NR's ambitious plans to eliminate Pakistan's energy shortage will start to materialize only by allowing use of existing multiple product handling berths to also handle LNG using FSRU as trading vessels, followed by development of a world class LNG terminal in the Port Qasim jurisdiction. Unfortunately the fast track project has been deferred.
Instead the desire to have LNG infrastructure developed in the public sector has also created uncertainty. SSGCLPG instead of focusing on its business to import 200-250 mmscfd equivalent of LPG (1.4 to 1.75 mtpa) and to cater to expected switch over from CNG to LPG including use of LPG in commercial buildings had solicited proposals to retrofit the PROGAS terminal acquired!
It is of concern that subsidiary of SSGC/SNGPL may be used as a vehicle to promote LNG terminal development by the SPV or SSGCLPG i.e the public sector. GOP should instead consider Gwadar Port for development of LNG land terminal with later possibility of export facility for gas imported from Iran and/or under TAPI.
To show progress during the upcoming visit of the President to Qatar, SSGC has raised the demon of retrofitting the SSGCLLPG terminal that had been decided against by the previous Secretary, MP&NR. This has again caused confusion on the intent of GOP.SSGCL has violated the ECC approval of October 2012 as follows:
a. And instead, SSGCLPG has been allowed to develop RFP with QED and issue it to those firms (Granada, 4 Gas and Global Maritime) to only those firms that expressed interest in assisting retrofit of SSGCLPG terminal to handle both LPG and LNG.
i. The RFP instead is for developing a new terminal at a new site
ii. The new site has not been issued NOC by PQA
iii. Envisages a joint venture
b. The project estimated at USD 200m has not been publicly advertised and does not meet PEPRA rules and requirements although its funding are going to be from tax payers money.
c. The supplies are supposedly to be on GoG basis as suggested by recent statements of President Zardari in Qatar.
i. This means long term supplies for which GOP would need to provide SBLC and sovereign guarantees that ECC had approved for the projects presented to it (as stated above)
ii. And at the expense of both the integrated projects' of 400 mmscfd, as the private sector cannot progress supplies in presence of SSGC as a Buyer in the international market and the 2x400mmscfd projects be converted to tolling as well by ECC.
Floating terminals are to be delivered by PQA as per cabinet decision. Mashaal therefore, cannot be promoted by/or for 4Gas as it had decided to no longer pursue the land terminal option for which SSGC had been given authority to progress by GOP. 4Gas is no longer in business and GDF understandably not part of the consortium any more.
COURTESY: EXCELERATE ,USA
The do nothing lobby talks of gas import from USA because it is under USD 3 per mmbtu not realizing the surrounding issues hampering the import. Pakistan is a non FTA country, it requires equity in liquefaction facility or take or pay arrangements for 20 years with developers wanting AAA credit rating buyers. The delivered cost at Karachi is estimated at USD 10-11 per mmbtu and requires trading expertise. Who will negotiate and implement under current circumstances with Pakistan. Moreover, supplies will not be available before 2016-17!
MP&NR efforts notwithstanding, GOP needs clear energy strategy for next 10 years and PIP had formulated a proposal last year. An earlier Integrated Energy Plan developed during the last government also awaits implementation. Our actions now need to be based on a vision that ensures energy at market prices under an unregulated regime and supportive of a competitive market environment. The focus has to be in parallel on optimizing gas being used in captive power plants and CNG including energy conservation.
Captive power plants gas prices need to be raised to the equivalent of industrial tariff offered by the utility companies (Rs 13/KWh equivalent gas pricing that discourages inefficient usage and generation cost of Rs 6/kwhr). CNG priced at 60% of petrol rate needs to be be raised to 90 %. Both these measures could spare around 1.5 bscfd to power sector thereby reducing power tariff and facilitating industry. The recent decision of Supreme Court has facilitated in the conversion with CNG under pressure due to court activism and decision. Pricing is the domain of market forces, not GOP and nor the Supreme Court.
Importing LNG from India at US$ 20, electricity from Iran @ Rs. 9.50 per KWhr and 500-1000 MW at Rs 14.7 KWhr from India or CASA 1000 @USD 0.09-0.13 per KWhr may make sense from a regional perspective but all options need to be evaluated and developed by keeping Pakistan's energy security in perspective. All these ideas at least have been explored by GOP as the shortage is projected at over 5 bscfd by 2020. The current plans will only deliver 1.5 bscfd within 15-24 months. Even after TAPI and IPI, the gap will still persist.
Wind power (USD 0.1466 per KWhr) and solar is for the developed world and not for Pakistan that requires base load power generation capacity. Investment in that sector is best spent elsewhere for now. What about the power shortage that under constraint demand is around 2500-5000 MW this fiscal year! Are we going to continuously daily pump around 28,000 tons of furnace oil and build the circular debt of Rs. 20-30b every month.
32% of electricity generated in August 2012 was based on diesel and furnace @ Rs.15.74 per KWhr. LNG based generation would be lower than the Rs.24.35 KWhr cost on diesel as well as on furnace oil!!
This is based on the following fuel costs:
. . PRICE USD/MMBTU Crude Oil USD/bbl 104.18 . Imported Coal USD/ton 120.4 5.00 RFO USD/ton 745.2 19.18 LNG USD/Mmbtu 16.8 16.8 Natural Gas USD/Mmbtu 5.8 5.8 Diesel USD/liter 0.8 25.8
And if we were to WACOG, the levelized tariff for electricity would decrease using LNG as fuel. Tariff at various WACOG of LNG is shown herewith:
What is required: One Energy Minister with one empowered, diligent, competent and strong regulator-autonomous, responsible with political support to develop a competitive energy market/sector and implement the energy security assurance vision. The recent suggestion of a caretaker energy setup for ensuring continuing focus on energy issues is laudable and is part of the consensus being worked on the interim government formulation next year.
Secondly, deregulated energy sector with market forces determining fuel prices, level of service and policy enforcement by a honest broker-the regulator with high level of competence.
The third question to be debated is on how best to attract investment not only to develop the infrastructure (USD 15-20b-pipelines, terminals) but also into new power generation (USD 15b for 18,000 MW would increase to USD 20b if the cost to upgrade/replace existing inefficient power units to CCGT is taken into account).
The cost to convert 400 MW to coal by KESC is USD 250m.And therefore USD 1.24b is required for the planned conversions of 2000 MW @USD 618 per KWh. And the recent decision of the Prime Minister to use indigenous coal has again sent a chill amongst investors (ADB) due to oscillating policies of GOP.
We are therefore talking of a USD 50b+ FDI!!!!!!!!!! Including (Bhasha) whereas it has been around USD 1 b in recent years and for a country with a dismal tax regime. There is no option but to mobilize local resources. Understanding the need to provide funds for the massive investment planned to build the infrastructure, MP&NR successfully implemented the GDIS which till last fiscal year had accumulated Rs. 54 b.
GOP could save around USD 1.5b+ per year if LNG was to offset all RFO imports. The saving could further increase if our imported gas portfolio was to include spot purchases of LNG. The impact would be higher for diesel. Depending on the volumes replaced, implication for Pakistan is: Lower tariff of electricity and reduced circular debt
Does it not make sense then to promote LNG on war footing basis?
Let us not live in utopia!
The uncertainty due to upcoming elections may further delay decision making and award of contracts. MP&NR needs to ensure confidence building by ensuring a transparent award process so that the contracts, if signed in coming months, are accepted to all stakeholders. Even under the best scenario, 100-200mmscfd of LNG can start flowing in 7 months with 1bscfd by 2015/2016. IPI and TAP are beyond that time realm. MP&NR suggests induction of 750 mmscfd by June 2012 (@USD 6-7 per mmscfd well head price? And consumer price would be 2-3USd higher) from indigenous sources. Hope their projections come true.
Smell the coffee country men and women; there is no free meal. Hard decisions need to be taken and swallowed by GOP and consumers.
Then why the hesitation and delay in implementation to import LNG?
a. The RFP for the integrated LNG import project approved by ECC has not been issued even after 6 weeks of notice in the newspapers, fast track approved by ECC has been deferred and SSGCLPG has issued RFP for a terminal not approved by ECC!
SUGGESTED ALTERNATE ROADMAP FOR CONSIDERATION
a. RFP being developed by SSGCL be amended to seek 1.0 bscfd terminal capacity
b. With supply of 600-800 mmscfd under an integrated and balance under spot cargo basis
c. Bidders have option to bid for the capacities as stated in ECC approval or combination or as one terminal
d. Additional ECC approval be sought to allow IPPs to import LNG on spot cargo basis upto 50% of their requirements with price to be added in WACOG for the power sector as already approved by ECC. The guarantees available to IPPs under their PPA will be applicable to LNG as well
e. Private Public Partnership be made a part of the RFP with upto 5% equity injection by each entity involved i.e. SSGCL, SNGPL and PQA
f. In addition, for all new IPPs, fuel will need to be arranged by the developer
g. OGRA will not be involved in determining terminal tariff
h. NEPRA will continue to determine power tariff based on SSGC gas rates for IPPs as determined by OGRA under current practice of WACOG.
i. Possible Benefits
i. Covers the volumes required per ECC decision
ii. Provides flexibility to GOP to work in the changing dynamics of the international gas industry without negotiating contract changes or putting in price openers
iii. And could reduce GOP exposure of SBLC and sovereign guarantees in case say 30% is allowed to be procured on spot
iv. And terminal tariff will be significantly lower as investment will reduce drastically compared to the staged approach of ECC
v. The LNG portfolio will be cost effective compared to long term contracts presently envisaged under the integrated structure
j. Selection criteria
i. Lowest tariff (terminal plus LNG price) over 20 years at a discount rate of 10% using nominal Brent price of USD 100 per barrel. Bidders can propose alternate index as a discount or premium to Brent and SSGCL would pay according to the Brent or the proposed index- which ever is lower
ii. Spot cargoes be indexed to HH, NBP or JKM
iii. Performance Bond of USD 35m at time of LOI
iv. Bid bond of USD 5m
Author: Shami is involved with the energy sector and can be contacted on twitter @imran220557