Sunday June 23, 2024

ECC defers LNG import deal with Azerbaijan

By Khalid Mustafa
June 08, 2023

ISLAMABAD: The Economic Coordination Committee (ECC) on Wednesday deferred a summary seeking approval for the import of liquefied natural gas (LNG) from Azerbaijan, asking the Petroleum Division for clarity on future LNG demand and price evaluation mechanism, a senior official said.The ECC was not satisfied with the Petroleum Division's summary, which did not provide a clear rationale for the urgency of the deal with Azerbaijan's state-owned company SOCAR, the official, who attended the meeting, told The News.

“The participants of the ECC meeting found the summary confusing with no tangible demand for LNG in the country and the issue of the price recovery mechanism not resolved to the satisfaction of the ECC,” the official said. Objections were raised once again by the chairman of the energy task force and former prime minister Shahid Khaqan Abbasi. It should be noted that secretary of petroleum was not present at the meeting to argue the case. However, State Minister of the Petroleum Division Musadik Malik tried his best to satisfy the ECC participants.

Abbasi has also questioned the urgency of the agreement with SOCAR and asked the petroleum division officials to first explain the rationale behind the ‘questionable’ urgency for signing the agreement with no clear price mechanism and solid demand as well. The official said that every cargo has its own cost. Long and medium-term cargos have different prices, which could be much less than the cargo in the spot market. Explaining the pricing issue, the official said that if the long and medium-term cargo was sold by SOCAR as a distressed cargo, its price would be much less price than that of the prevalent spot cargo. However, the summary mentions it as part of the price evaluation mechanism, which states that the offered cargo price would be compared with the prevalent spot cargo price.

Further, the summary does not mention of SOCAR-UK, a subsidiary of SOCAR, with which the PLL will sign the agreement. The ECC questioned the rationality of the Petroleum Division summary, which states that PLL will evaluatethe offered price in comparison with the prevailing international price as well as consult downstream customers (power sector) to ensure affordability. The summary said that PLL has developed the price evaluation mechanism for the assessment of price reasonability, which has been approved by the Price Negotiation Committee (PNC) in its meeting held on March 1, 2023.

Under the proposed framework agreement for distressed LNG cargo, the initial one-year term would be extendable to another year. One LNG cargo per month would be offered by SOCAR, 45 days prior to the start of the relevant delivery window time. However, the PLL needed to decide in 24 hours whether it would purchase the distressed cargo or not. Each offer for the cargo will have a set validity period during which the PLL may accept the offer.

Payment is to be within days following the PLL’s receipt of the invoice, while the PPL has to issue a credit letter from a local bank(s), with LC confirmation charges on the seller’s account. The summary also stated that port charges for SOCAR were capped at $500,000, whereas all Port Qasim Authority costs, including taxes, would be defined as port charges. The PLL has not received any bids against recent tenders and has been facing LC issues and cancellation of the term cargoes.

Under the given circumstances, the PLL may execute the framework agreement with SOCAR as there are no financial obligations or take or pay commitments. However, the LNG may only be procured under the said agreement if an attractive price is offered.Pakistan State Oil (PSO) and 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.