Tuesday March 21, 2023

ECC links SOCAR deal with price discovery mechanism

March 16, 2023

ISLAMABAD: The ECC has linked the approval of SOCAR’s agreement for a distressed LNG cargo with the price discovery mechanism, which was not mentioned in the draft summary, a senior official the energy ministry told The News.

The recommendation for linking the approval of the agreement with the price discovery mechanism was given by former PM Shahid Khaqan Abbasi, who is currently acting as chairman of the task force on energy.

More importantly, Abbasi said that the Petroleum Division is also needed to establish the demand for LNG from any sector of the economy for procuring distressed LNG cargoes.

Abbasi, who is also an ECC member, asked ECC participants not to approve the agreement framework to be signed with SOCAR, until and unless the price discovery mechanism for any distressed LNG cargo was not carved out. He recommended issuing a tender inviting bids for the LNG cargo and harnessing the bid price prior to taking the decision to procure the distressed LNG that SOCAR will offer.

The ECC chair after listening to Abbasi, asked authorities in the Petroleum Division headed by the State Minister of Petroleum to come up with a price discovery mechanism.

The Minister of State tried to convince the ECC, arguing that Pakistan LNG Limited (PLL) will evaluate the offered price in comparison with the prevailing international price, and also consult downstream customers (power sector) to ensure affordability. However, the meeting participants asked the authorities to first carve out the price discovery mechanism, and then come up with the revised summary draft.

Under the proposed framework agreement for distressed LNG cargo, the initial one-year term would be extendable to another one year. One LNG cargo per month will be offered by SOCAR 45 days prior to the start of the relevant delivery window time.

However, PLL will be required to decide in 24 hours whether it will purchase the distressed cargo or not. Each offer for the cargo will have a set validity period during which PLL may accept the offer.

The payment should be made within days following PLL’s receipt of the invoice, while PPL has to issue the credit letter from a local bank(s). LC confirmation charges should be on the sellers’ account.

The port charges for SOCAR were capped at $500,000 whereas all PQA costs, including taxes, would be defined as port charges.

The proposed Framework Agreement does not contain any specific pricing formula and the LNG price will be quoted for each cargo by SOCAR in USD/ MMBTU.

PLL has not received any bids against recent tenders and has also been facing LC issues and cancellation of the term cargoes. Under the given circumstances PLL may execute the framework agreement with SOCAR as there are no financial obligations or take or pay commitments. However, LNG may only be procured under the said agreement if an attractive price is offered or expensive LNG is desperately required as a last resort.

Pakistan State Oil (PSO) and Pakistan LNG Limited (PLL) are currently importing LNG under long-term LNG supply contracts to minimise the gap in demand and supply of gas under three pacts.

The first long-term agreement was signed by PSO with Qatar Gas in 2015 at 13.37 percent of price (slope of Brent) for five cargoes monthly for 15 years.

The second PSO-Qatar Gas agreement was inked in 2021 at 10.2 percent of price (slope of Brent), for 10 years, according to which Qatar Gas is to supply three cargoes monthly from July 22 to December 23 and four cargoes monthly from Jan 2024 to December 2032.

PLL-ENI signed an agreement in 2017 at 12.05 percent of the price (slope of Brent) according to which ENI is to supply one cargo per month for 15 years. In addition, PLL has been importing up to 3 LNG cargoes/ month through spot tendering conducted from time to time to meet seasonal peak demand.