Money Matters

How energy traders left a country in the cold

By News Desk.
Mon, 12, 23

P­akistan, one of the world’s poorest nations, thought it had secured natural gas to fuel its economy. Commodities firms had other ideas.

How energy traders left a country in the cold

P­akistan, one of the world’s poorest nations, thought it had secured natural gas to fuel its economy. Commodities firms had other ideas.

Toward the end of 2021, in an office block above the luxury boutiques of Geneva’s Rue du Rhône, Ksenia Alleyne called her team into a meeting. Alleyne is the co-head of liquefied natural gas trading at Gunvor Group Ltd.—a Swiss-based commodities firm with customers around the world. Once everyone had assembled, she delivered a message to her fellow traders and analysts. Above all, she said, they needed to find more LNG—fuel that’s chilled to -260F and loaded onto ships for long-haul export—and fast. Russian forces were massing on the borders of Ukraine; one certain result of an invasion would be a spike in global energy prices.

The traders began to scour Gunvor’s existing sales agreements, which promised to deliver gas at rates far lower than where Alleyne believed prices were going. Specifically, according to a person with direct knowledge of the situation, they looked into which ones Gunvor could cancel. Like most of the dozens of LNG traders and government officials Bloomberg Businessweek interviewed for this story, the person asked not to be identified describing private deliberations.

Within a few weeks, Alleyne’s colleagues identified a candidate: Gunvor’s deal with Pakistan, which depends heavily on LNG but is a far smaller customer than major importers such as China and Japan. After some internal debate, the traders ran the idea of scrapping it past the firm’s legal team and decided to proceed. When the Russian army invaded Ukraine on Feb. 24, 2022, gas prices soared more than 150% in 11 days. Around the same time, according to people familiar with the events, Gunvor stopped responding to communications from the Pakistani government. Then it terminated Pakistan’s deal, saying the country had underpaid for one of its LNG shipments. (Pakistan disputes this.)

Under the terms of the contract, Gunvor was supposed to supply Pakistan with five tankers’ worth of LNG over the next several months. Instead, ship-tracking data show, Gunvor sent the cargoes to countries including the UK and Italy, where buyers paid the “spot,” or market, price. If the gas had been delivered to Pakistan as originally planned, the value of the sales would have been about $200 million, according to calculations by Businessweek. By the same arithmetic, Gunvor’s traders unloaded it for more than $600 million. Some would receive seven-figure bonuses for the year, the highest of their careers.

Gunvor’s decision to redirect its supplies—and other canceled gas deliveries by Eni SpA, a state-controlled Italian energy group—helped prompt an energy crisis in Pakistan that continues today. The nation of 240 million people, which has a per capita gross domestic product of just over $1,500, uses natural gas to heat homes, power industry and even run cars and buses. When it ran short, factories were forced to shut or dramatically cut their output, throwing workers into poverty; so were fertilizer plants, threatening food production. As it scrambled to procure replacement LNG, Pakistan paid record spot-market prices, draining its modest foreign currency reserves and pushing it to the brink of default. Now its government is trying to implement economic reforms after receiving a bailout from the International Monetary Fund before elections scheduled in early 2024.

Pakistan has brought arbitration claims against both Gunvor and Eni in the UK, seeking compensation. A spokesperson for Gunvor—declining to comment on the matter in detail, citing confidentiality requirements—says “we stand by the decisions we make and will address those in arbitration.” The spokesperson adds that Gunvor “has a rigorous governance process for decision-making” for trading matters, including input from legal, compliance and risk staff as well as senior traders, with “no single person” determining strategy. An Eni spokesperson says its failure to deliver gas was “beyond the control of Eni,” with supply disruptions to blame. “Eni has not benefited from the situation,” the spokesperson says, and sought “alternative commercial solutions among the affected parties, including supply of replacement cargoes.” (The spokesperson said that Eni is not involved in arbitration with Pakistan over undelivered shipments.)

There’s no suggestion that Gunvor or Eni acted illegally. Both appear to have operated within the bounds of their contracts—albeit in a way that’s all but unique in an industry where suppliers have traditionally done whatever they can to meet customers’ need for gas. Moreover, Pakistan’s woes are the result of much more than a fuel shortage. Successive governments—some installed through military coups—have mismanaged its economy for decades. Notably, politicians have long subsidized power and gas rates, providing little incentive for energy efficiency and forcing the government to pick up the difference between the true cost and what consumers pay.

The situation nonetheless provides a stark example of how traders in the cutthroat world of commodities can profit at the expense of some of the world’s least developed nations. When they agreed to long-term gas deals, Pakistani officials thought they were protecting their economy and citizens from the vagaries of commodity markets. Instead they learned just how quickly, and brutally, those markets could turn against them.

At Al Karim Weaving, a textile mill in Pakistan’s commercial capital, Karachi, owner Ayaz Nagaria had no choice but to dismiss his almost 30 workers when power prices soared last year. Today half-finished sheets of fabric are still lodged in the electric looms, as though the building was suddenly evacuated. The sole remaining employee is a bearded security guard with a shotgun, who protects a shed full of empty spools and discarded white cloth. “With each passing day, with each factory shutting down, the writing is on the wall,” says Nagaria, who’s considering breaking down his looms and selling the parts to generate cash. Many other companies in Pakistan’s textile sector, which accounts for 60 percent of national exports, are in the same predicament. “This industry will never come back.”

For countries that can’t meet their energy needs domestically, LNG provides major benefits. Until it was commercialized in the 1960s, the most common way to ship large quantities of gas was through pipelines, which have obvious disadvantages for places that are isolated, far from reserves or both. By contrast, a tanker full of LNG can be sent to any port with a so-called regasification terminal, where the fuel is heated up into usable form. To ensure reliable supplies, governments and utilities try to make long-term LNG deals to guarantee deliveries at a relatively stable price, rather than take their chances on the spot market. Even a single shipment that arrives late—or, worse, not at all—can have a significant impact on local energy supply.

Pakistan’s entry into the LNG market was engineered by former Minister of Petroleum and Natural Resources Shahid Khaqan Abbasi, who’d worked in the Saudi energy industry before shifting to politics. (He later served as prime minister.) In 2016, Abbasi made a $15 billion, government-to-government deal for LNG imports from Qatar. The shipments made up for dwindling production from domestic gas fields and eased conditions for Pakistani companies almost overnight. GDP grew more than 5% in 2016, the biggest rise in more than a decade, in part because of stronger output from large manufacturers.

Abbasi wanted to do more, and he opened two additional requests for LNG contracts: one for a five-year supply deal, the other for as long as 15 years. Roughly two dozen companies expressed interest, including Gunvor and Eni. Some had concerns about dealing with such a poor country. According to a person who participated in the tenders, gas traders applied an unusually high degree of scrutiny to the proposed contracts, seeking terms that ensured Pakistan would pay in full and on time. Pakistani officials, who were focused on securing the best possible price, didn’t insist on strict penalties for failing to deliver gas; at the time, cancellations were rare. (The Gunvor spokesperson says the company was “required to sign up to terms stipulated” by Pakistan, without amendment. The Eni spokesperson says that the relevant agreements “were not the results of a bilateral negotiation,” and that Pakistan set out their contents.)

In late 2016 potential suppliers delivered offer letters in Islamabad. The envelopes were opened one by one, with a camera rolling to deter any attempts to rig the deal. Gunvor and Eni offered the lowest prices on the five- and 15-year contracts, respectively. They began deliveries the next year, each sending a tanker a month to Karachi, which augmented larger shipments from Qatar and an earlier supply pact with Gunvor that would expire in 2020. (A single LNG tanker provides enough gas to run Pakistan’s entire industrial sector for about five days.) Abbasi—who’d later be briefly jailed on corruption charges, which he denies, relating to the construction of an LNG terminal—declared Pakistan’s energy dilemma solved. “As long as our demand increases, we will keep making arrangements to meet it,” he said.

In December 2020, Pakistani officials received a curious email from Eni. The Italian company said it would deliver only part of its LNG shipment for the following month, explaining that an unnamed supplier had failed to make its own delivery. Eni’s head of LNG portfolio, Ilaria Azzimonti, apologized and said her team would try to send replacement gas later.

In fact, say people with knowledge of the situation, a team of lawyers had earlier told Azzimonti that Pakistan was a “marginal customer”; shortchanging it wouldn’t risk a blacklisting by a major importer. Meanwhile, an early winter cold snap was pushing up gas demand in East Asia. From November 2020 to January 2021, spot prices would jump more than 400%, increasing the value of a shipment from about $20 million to $100 million or more—as long as it was sold to a spot buyer.

Pakistan’s agreement stipulated that in the event of a missed or partial shipment, Eni would pay a penalty equal to 30 percent of the value of the undelivered cargo, calculated on the basis of the long-term contract. While richer importers can demand compensation of as much as 100 percent, that was the stiffest fine Pakistan could get suppliers to accept, says Imran Maniar, the managing director of distributor Sui Southern Gas Co. Propose anything higher, he says, and “people don’t really want that in the clause.” In this case the penalty amounted to just $2.8 million, pocket change in the energy business.

Under the terms of Eni’s contract, it didn’t have to provide details about the supplier default. But even after telling Pakistan it lacked sufficient gas to meet its commitments, according to a person with direct knowledge of the transaction, Eni sold an LNG shipment elsewhere at the spot price of roughly $100 million.

Although it was just part of the expected cargo, representing less than 10 percent of the country’s monthly supply from long-term contracts, losing the Eni gas put Pakistan in a difficult position. Cold weather was coming, increasing the need for fuel, and domestic production had declined significantly, the result of years of underinvestment. The government tried to find a spot-market shipment to make up the shortfall, but it deemed all the options too expensive. It had no choice but to temporarily curtail supplies to some households and factories.

There are occasional cancellations in the LNG business, often when problems at an export terminal affect supplies, and at first the undersize Eni delivery looked like a one-off. Regular shipments resumed in February 2021, coinciding with a collapse in spot prices. But later that year, with the recovery from the Covid 19 pandemic driving energy demand, more of the gas expected by Pakistan failed to arrive. In August, Eni blamed reduced output at an Egyptian LNG plant for a missed shipment. (Ship-tracking data indicate Egypt’s exports fell that month compared to previous trends.) In October a Gunvor-chartered vessel docking near Karachi didn’t unload its full payload, according to ship-tracking data. The remainder of the fuel went to Turkey—where, traders involved with the transaction say, it yielded three times the price it would have in Pakistan.

Then, in November 2021, both companies canceled their deliveries, documents reviewed by Businessweek show. Gunvor cited a “force majeure,” a legal term for an unavoidable event that makes it impossible to fulfill a contract. Specifically it blamed an outage at a plant in Equatorial Guinea, a tiny, hydrocarbon-rich Central African dictatorship. (Although Gunvor didn’t offer details, there had been technical problems at a facility at the country’s Alba gas field that September.)

That justification from Gunvor, as well as the earlier statement by Eni about production in Egypt, took advantage of another part of Pakistan’s contracts. Unlike other LNG deals, which stipulate where a supplier will obtain the gas it’s selling, the Pakistani agreements said shipments could come from anywhere within Gunvor’s and Eni’s global portfolios. Pakistani officials have said they believed this would insulate them from disruptions, by allowing the companies to provide any gas they could source.

In their communications with Pakistan, people with knowledge of the discussions say, Gunvor and Eni turned that logic on its head, arguing that because no source was specified, a disruption anywhere gave them the right to cancel delivery. Problems in Equatorial Guinea therefore qualified as a force majeure, even though Gunvor rarely shipped gas from the plant to Pakistan. Over the next several months, Gunvor declared force majeure on two additional shipments and only partially delivered one more. At the same time, it was continuing to sell large quantities of gas to wealthier countries at spot prices, according to traders who participated in the deals.

This was a novel interpretation of contract terms. “It is not typically sufficient for a seller to simply say, ‘My unrelated project on the other side of the world that has no connection to this contract is down, and therefore that’s force majeure under this contract,’ ” says Jessica Ham, a special counsel at US law firm Baker Botts who’s advised clients on LNG deals. “The buyer might have the ability to claim that this event is unrelated, and it doesn’t actually prevent you from performing, which is a key element of a force majeure claim.”

Any claim against Pakistan’s suppliers could take years to resolve. In the meantime, the country needed gas. After the cancellations, the board of Pakistan’s state-owned LNG importer authorized an emergency tender to procure more fuel. Qatar stepped in to fill the deficit, but at a price at least 230% greater than the Gunvor and Eni contracts.

Meanwhile, tensions over Ukraine were mounting, pushing gas prices to more than $40 per million British thermal units, a fourfold increase from the previous year. That multiplied the rewards for anyone who could sell at spot rates. For one of the shipments Gunvor canceled—its January 2022 delivery to Pakistan—it had indicated it would use a tanker called Golar Tundra, a document seen by Businessweek shows. But after loading its cargo at an export terminal near Houston, the Tundra began steaming south, rather than toward Asia. Pakistani officials watched with rising anxiety as satellite tracking showed the Tundra making for Brazil—a country that buys LNG primarily from the spot market. They began frantically calling and emailing Gunvor’s local agent as well as its operations staff, who provided no explanation. Then they tried, without success, to reach Alleyne in Geneva.

Alleyne is a rare high-ranking woman in a male-dominated industry. Little about her career is public. According to her LinkedIn profile, she began her professional life as an analyst at the London office of a unit of Gazprom PJSC, Russia’s state-controlled gas exporter. Soon she became an LNG trader; Gunvor hired her in 2014, then transferred her to its head office in Switzerland.

Unlike Gazprom, which is a major producer of oil and gas, Gunvor is primarily a marketer, with few commodity production assets of its own. When Alleyne joined, it was a relatively small participant in LNG. She worked hard to change that, developing strong relationships with producers such as Abu Dhabi National Oil Co. In 2016, Gunvor delivered 4 million tons of LNG. By 2019 the figure had quadrupled—thanks in large part to Alleyne’s hustle, according to people familiar with the company. She was promoted to her current role, in which she shares responsibility for LNG trading with co-head Kalpesh Patel, the same year.

The events of early 2022 provided Alleyne and her team with an opportunity for a once-in-a-lifetime payday. At the average price of LNG from 2010 through 2020, a single tanker cargo could be sold on the spot market for about $30 million. Suddenly the potential number was north of $150 million. Alleyne and her colleagues, people with knowledge of the matter say, were under significant pressure from Gunvor’s billionaire chief executive officer and controlling shareholder, Torbjörn Törnqvist, to find ways to capitalize. (Gunvor denies this.)

Poor and politically isolated, Pakistan was an easy target. Gunvor traders were also conscious of an incident that had occurred in 2020, when the pandemic caused gas prices to crash globally. At the time, Pakistan had threatened to pull out of its LNG contract, since it was cheaper to pay the cancellation penalty and source gas on the spot market. Now it was the traders who had the advantage. As a preparatory step toward halting deliveries, the people say, Gunvor zeroed in on a contract term called a performance guarantee. This required the company to put up the value of a couple of coming shipments to Pakistan as collateral. The deadline for extending the 2022 guarantee was in March of that year; according to the people, Gunvor traders let it expire without providing the necessary documents, then ignored Pakistan’s demands for an explanation. (The Gunvor spokesperson says this account of the firm’s internal processes, and particularly of Alleyne’s role, “does not comport with reality.”)

In Islamabad, Pakistani officials had concluded Gunvor was looking for a way to prematurely end the contract, which had been due to expire in July. Seeking to cut their losses, they figured they should try to recoup about $10 million they believed the company owed them as a result of a separate dispute over port fees. Pakistan therefore reduced its payment for Gunvor’s February 2022 LNG shipment by the same amount.

The officials had inadvertently given Gunvor an even cleaner exit. Pakistan soon received a letter from Gunvor’s lawyers demanding the rest of the money. It refused to pay; about a week later, with gas prices in Europe near an all-time high, Gunvor gave notice that it was terminating the contract.

The company was within its rights to cancel the deal. But LNG agreements worth hundreds of millions of dollars aren’t usually scrapped over a single payment dispute, or so quickly. “In a term contract, it would be very rare in my experience to see that termination right triggered after a period of simply days. I would say a period of weeks is certainly standard,” says Ham of Baker Botts.

Starting in March 2022, Gunvor-chartered LNG tankers and shipments that would otherwise have been sent to Pakistan began going to much richer countries, ship-tracking data show. Kool Blizzard unloaded its cargo at the South Hook terminal in Wales, while Golar Tundra—the same vessel that had been sent to Brazil instead of Pakistan the previous year—docked in eastern England. Gaslog Shanghai delivered to South Korea; Seri Balqis discharged in northern Italy, and Gui Ying brought fuel to that country as well as France. The scale of the windfall became clear when Gunvor reported its 2022 financial results. Thanks in part to its LNG traders, the company had made a record $2.4 billion in profit.

While Eni also failed to deliver to Pakistan, unloading less than 60% of its promised shipments for 2022, its situation was slightly different. After striking its Pakistan deal in 2017, Eni had entered into a parallel contract with Trafigura Group Pte Ltd., a Singapore-domiciled commodities company, to source and deliver half the required gas. Only Eni, however, would have a business relationship with Pakistan.

When the Ukraine war began, Trafigura—like Gunvor—began diverting those shipments into the more lucrative spot market. Eni received notice just a week or two before each cancellation, according to people familiar with the deal; since spot prices had shot upward, it was far too expensive to replace the gas. The result was that Pakistan would go without. (Trafigura’s deal with Eni ended in November 2022. A spokesperson for Trafigura declined to comment beyond a statement that the company “did not have any contract to supply LNG to Pakistan.”)

Eni’s Azzimonti told the Pakistani government that the company would do its best to find replacement shipments. Ultimately, one of the people says, she appealed to her managers to provide a credit line that would allow her to source more gas. But her requests were rebuffed because of the high cost.

Market conditions, meanwhile, were proving immensely lucrative for Eni, which reported €13.3 billion ($14.3 billion) in 2022 profit, its best financial result on record. Its Pakistan contract still has a decade to run, and it resumed deliveries early this year—but only once spot prices had dropped.

Pakistan’s dependence on gas dates to the 1950s, when it discovered substantial domestic reserves. Subsidized prices meant there was little incentive to use it sparingly. Until rationing intensified recently, families would keep tea brewing around the clock and slow roast meat overnight. Textile factories depended on cheap gas—and, eventually, imported LNG. “If you give something away for free or nearly free, people are going to misuse it,” says Shehryar Omar, CEO of the Petroleum Institute of Pakistan, an organization that represents the energy industry. “If you had the right pricing, perhaps we may have another 20 years of gas left.”

After Gunvor and Eni halted deliveries, Pakistan turned to the spot market. From late February to May 2022 it paid $650 million for eight spot shipments, at rates more than two times what it would have paid under its long-term contracts. “The country had to suffer losses because of those diversions,” says Muhammad Ali, the current energy minister.

Since then, however, it’s struggled to secure any spot gas. With Pakistan’s foreign currency reserves depleted by mismanagement, debt payments and the cost of extra cargoes, LNG suppliers are wary of sending fuel for which they fear they won’t be paid. The energy system has been spared complete collapse by imports from Qatar, which were never interrupted, and more recently from Eni, which has made all its contracted shipments since February.

The situation remains desperate, exacerbated by recent floods and the political turmoil that followed the ouster of Prime Minister Imran Khan, a former cricket star who’d attracted the ire of the powerful military. Textile exports fell 15 percent in the most recent fiscal year. Households currently receive gas in two- to three-hour increments around mealtimes, but factories complain that during those periods, the pressure of the gas supply drops so much that they may not be able to operate. As a last resort, some have installed machines that illegally suck fuel from the pipeline grid.

Pakistan is now attempting to source imports from month to month. In September, according to people with knowledge of the discussions, the government tried to secure a replacement shipment from Eni to make up for losses in 2022. On a conference call, officials argued to Azzimonti that the Italian company still owed them more gas. Azzimonti wouldn’t budge. When the Pakistanis insisted, she grew frustrated, saying that her hands were tied—and that Pakistan’s predicament wasn’t Eni’s fault. She ended the conversation by reiterating that the company had no obligation to help. (The Eni spokesperson says Businessweek’s account of Azzimonti’s actions “is not correct,” without offering further details.)

In the long run, Pakistani officials concede, they’ll have to develop alternatives to imported gas, whether by increasing domestic production of coal or through a large-scale shift to renewables. But any solution will require years and billions of dollars—money Pakistan doesn’t have. The only near-term source of cash is the IMF; as a condition for securing a $3 billion injection from the fund, the government is slashing fuel and electricity subsidies, lowering the risk of default but putting households and industry under even more pressure.

Decision-makers in Pakistan’s energy industry say they’ve learned a painful lesson about international commodity markets. “As a supplier, if you have the option to sell it to Germany over Pakistan, 99 times out of a hundred you sell it to Germany,” Maniar, the Sui Southern Gas executive, says in an interview at the company’s offices in Karachi. To conserve electricity, the hallways of the building are dark. “You cannot stop people from making money.”