Reducing RLNG costs: lessons from regional strategies

LAHORE: Pakistan’s regasified liquefied natural gas (RLNG) tariffs for the industrial sector remain higher than those in other importing countries, such as India and Bangladesh. This disparity is driven by long-term contractual obligations, significant system losses and infrastructural challenges, all of which impact export competitiveness.

As of November 2024, the Oil and Gas Regulatory Authority (OGRA) set RLNG prices in Pakistan at $13.06 per million British thermal units (MMBtu) for transmission and $14.01 per MMBtu for distribution under Sui Northern Gas Pipelines Limited (SNGPL). For Sui Southern Gas Company Limited (SSGCL), the rates stood at $11.89 per MMBtu for transmission and $13.58 per MMBtu for distribution. These rates have risen due to increasing international prices and account for system losses, which were recorded at 9.65 per cent for SNGPL and 13.14 per cent for SSGCL.

In India, RLNG prices are dynamic, influenced by global market trends and domestic policies. As of mid-2023, prices ranged between $10 and $12 per MMBtu. India benefits from a diversified import strategy, blending long-term contracts with spot purchases, which allows for more competitive pricing. Bangladesh, on the other hand, relies heavily on long-term contracts for RLNG imports. In 2023, its average RLNG import price was between $11 and $13 per MMBtu. However, the country has struggled with price fluctuations and limited negotiation leverage in the global market.

Pakistan factors significant system losses -- termed unaccounted-for gas (UFG) -- into RLNG pricing. As of August 2024, these losses were recorded at 9.65 per cent for SNGPL and 13.14 per cent for SSGCL. Bringing these losses down to the global benchmark of 2-3 per cent could substantially lower costs. Addressing this issue requires investment in pipeline monitoring, leak detection and replacing outdated infrastructure.

Several factors contribute to RLNG price disparities among Pakistan, India and Bangladesh. Long-term contracts provide price stability but can become disadvantageous when global prices decline. India’s strategy of balancing long-term contracts with spot market purchases offers greater flexibility and cost-effectiveness. Bangladesh, with a stronger reliance on long-term contracts, often misses out on lower spot prices. Infrastructure plays a crucial role in determining RLNG prices. Efficient port facilities, storage capacities and distribution networks help keep costs down, while constraints in these areas can lead to higher prices. In Pakistan, government-imposed taxes and charges on RLNG, including customs duties and surcharges, further drive up costs. These rates vary based on policy decisions and are subject to periodic revisions. In India, LNG imports are generally subject to customs duties, though exemptions or reductions are sometimes introduced to support the energy sector. In Bangladesh, RLNG imports are taxed, with rates adjusted according to fiscal policies and energy demands. These taxation structures, combined with other levies, directly impact the final price of RLNG in each country.

To reduce RLNG costs, Pakistan must adopt a more balanced approach. Instead of relying heavily on expensive long-term LNG contracts, the country should follow India’s model, securing 50-60 per cent of RLNG through long-term contracts while purchasing the remainder on the spot market. Rigid long-term agreements should also include price revision mechanisms to align with global market fluctuations. Expanding the pool of suppliers would further strengthen Pakistan’s bargaining power.

System losses must be addressed through stricter enforcement against gas theft and improvements in transmission infrastructure. Pakistan’s LNG terminals currently operate at full capacity, limiting flexibility in imports. Expanding terminal capacity would allow for greater spot purchases at lower costs. Encouraging private sector participation in LNG terminals, as India has done, could improve efficiency and cost-effectiveness. Establishing strategic gas reserves would also enable Pakistan to purchase RLNG at lower prices and store it for future use, reducing dependence on high-priced emergency purchases. Tax reform is another key area for improvement. High import duties, GST, and other charges increase the final cost for consumers. Reducing these taxes, particularly for industrial use, would enhance competitiveness. Advance planning and flexible procurement strategies would also help prevent price spikes, as Pakistan often buys RLNG at inflated rates during shortages. Exploring alternative procurement strategies, such as commodity swaps -- where agricultural products like rice are traded for LNG, as Bangladesh has negotiated with Qatar -- could further ease foreign exchange pressure and lower costs.

A combination of these measures would allow Pakistan to make RLNG more affordable, improve industrial competitiveness, and enhance energy security.