Pakistan faces LNG glut as demand plummets

ISLAMABAD: Pakistan is facing operational hurdles in its LNG supply chain due to a significant drop in demand, particularly by the power sector, exacerbating financial challenges for the state-run Pakistan State Oil (PSO).

Pakistan State Oil, which imports LNG under a long-term contract with Qatar, is now dealing with an oversupply problem, not due to increased imports but because the power sector has drastically reduced its LNG consumption.

“Earlier, the power sector was off-taking two LNG cargoes a month, but now the demand has plummeted,” PSO managing director (MD) told the National Assembly’s Standing Committee on Energy (Power Division) which met with MNA Syed Mustafa Mehmood in the chair here on Thursday.

“We have a supply agreement with Qatar, but the power sector, which initially consumed 600 million cubic feet of LNG, has significantly reduced that quantity,” the MD said, adding that this situation created operational challenges for PSO.

MNA Syed Naveed Qamar stressed the need for an urgent agreement between the power sector and PSO to address this inconsistency. “The current situation is unsustainable,” Qamar warned.

The committee also discussed the issue of substandard fuel in the country. Representatives from Ogra, PSO, and Hydrocarbon Development Institute of Pakistan (HDIP) briefed the committee on fuel benchmarks. “Fuel and diesel standards are set by the DG Oil Office,” explained Director General (DG) Oil Imran Ahmad, adding that the Ogra ensures compliance with these standards.

“Imported fuel in Pakistan is Euro-4 and Euro-5 compliant, while the locally refined products meet only Euro-2 standards at the minimum,” said the DG.

However, Syed Naveed Qamar asked whether the local refineries had upgraded their facilities in exchange for the financial incentives they received from the government. “The refineries have been benefiting from a 3 percent guaranteed return and a 7.5 percent deemed duty,” the DG oil noted.

Ogra Chairman Masroor Khan acknowledged this, saying, “It’s true that the refineries received financial incentives, but what have they done to upgrade their products?” He informed the committee that the five local refineries had until October 22 to sign an ‘upgrade agreement’ to take their operations to international standards. He further said, “Earlier, these refineries were ready to upgrade but were reluctant after the Budget 2024-25 was announced with taxes increased.” He noted that discussions with the refineries had resumed.

He emphasized that the future of local refineries depended on their ability to upgrade. “Without upgrading, these refineries have no future,” he said, adding that the refineries must meet the Euro-5 fuel standards. “We cannot allow the public to suffer due to the refineries’ failure to improve,” echoed the committee chairman Mustafa Mehmood. He accused the local refineries of producing substandard fuel that was contributing to cancer and asthma. “These refineries are not even meeting the Euro-2 fuel standard,” he said.

However, at the same time, he asked why not the government increase their refining margins to encourage them to upgrade. He further asked, “Why don’t we leave these refineries to compete in a free market?”

Petroleum Secretary Momin Agha emphasized that the country still required national refining capacity strategically. They reasonably produce good quality of fuel. Locally, they produce 45 to 50 percent diesel and petrol and jet fuel. They also export $150 to $200 million worth of fuel each year.

The chairman also highlighted that the local refineries had failed to reduce the manganese levels in petrol and sulfur content in diesel, both of which posed serious health risks to the population.

The committee members raised the issue of deregulating the petroleum products. The Ogra chairman said deregulation was possible and was under consideration but it would require a careful consideration by the government. “Deregulation could lead to price variations in different regions,” he noted, calling the matter “complex and requiring a thorough deliberation”.

Earlier, the chairman committee expressed anger over the absence of heads of E&P companies, including ODGCL, PPL and Mari from the meeting. Petroleum Secretary Momin Agha confirmed that the officials were attending a crucial meeting in London. Mahmood remarked, “The committee should have been informed. We could have rescheduled the meeting.”

He also questioned the absence of Petroleum Minister Musadik Malik, to which the secretary responded that the minister was attending the Russian Energy Week. “We will issue summons if future foreign trips are made without notifying the committee,” Mahmood warned, stressing that overseas travel was typically planned well in advance.