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October 4, 2018

The power of LNG


October 4, 2018

The contracts for, and import of, liquefied natural gas (LNG) by the previous PML-N government have been subject to much speculation. A lot of airtime has been devoted over the years by anchors, politicians and pundits pontificating on LNG without, I’m afraid, studying the subject in any detail.

I will try to present some facts today about those deals and the use of LNG, and then readers can decide if LNG imports were beneficial for the country, and whether these contracts were carried out in a transparent manner while securing competitive prices for us.

When the PML-N came to power, there was not just a debilitating power shortage across Pakistan but also a serious shortage of natural gas. Moreover, the power plants that were being run on furnace oil were old and inefficient, and furnace oil is, of course, an expensive fuel. The furnace oil plants we have in Pakistan typically ran at about 28 percent to 40 percent thermal efficiency, which means that they only converted 28 percent to 40 percent of the energy contained in the fuel to electricity. The rest of the energy was wasted.

Gas plants in Pakistan usually have 44 percent to 52 percent efficiency and the latest turbines produce electricity with 61 percent efficiency. This suggests that gas turbines will give you almost 50 percent more electricity for the same amount of fuel energy. But the question is: what is the relative price of gas as compared to the price of furnace oil?

Gas produced in Pakistan is, of course, much cheaper than furnace oil. But since we had a huge shortage of gas in Pakistan, it would be wrong to compare the price of domestic natural gas and furnace oil. The real comparison should be between imported LNG and furnace oil. (Liquefied natural gas is how natural gas is transported across oceans in large tankers, and RLNG is regasified LNG that is then transported in pipes).

The prices of both furnace oil and LNG are linked to the price of oil and in most parts of the world, LNG is quoted as a fraction of Brent Crude prices. As a rule of thumb, LNG bought at less than 15 percent of Brent will be cheaper, per unit of energy, than furnace oil. Of course, even if LNG and furnace oil have the same price per unit of energy, LNG is up to 50 percent more efficient. This suggests that it will give 50 percent more electricity per rupee of fuel. But if LNG is actually cheaper than furnace oil, then the savings are even more.

The PML-N’s big strategy to solve Pakistan’s energy needs cheaply was to import LNG, install pipelines to convey the RLNG from the south of the country to the north, install the most efficient gas plants, and produce electricity as quickly and cheaply as possible. Luckily, all the elements fell in place and in five years we were able to do that and more.

The first task at hand was to set up LNG import terminals. The first terminal was set up in less than a year and the second one after two more years. The first terminal is costing us less than $0.48 per million British thermal units (mmbtu) to regasify and the second is costing us $0.42 per mmbtu to regasify. Both are contracted by government companies to regasify 600 million cubic feet of gas per day (cfd) or about 4.5 million tons of gas per year.

These turn out to be two of the cheapest regasification terminals in the world. In addition, a 700 kilometre-long pipeline, able to convey 1.2 billion cfd, was set up by the two Sui companies. Due to some reasons, the Sindh government wasn’t allowing for the completion of only 400 metres out of this 700 km-long pipeline. But this was finally finished during the caretaker government’s tenure.

But before that, we somehow managed to convey most of the requisite gas from the south to the north of the country through a swap arrangement between both companies. Since not all gas was able to be transported and LNG in the Sui Southern system was being sold as domestic gas, it caused a liquidity issue and an unaccounted-for gas upsurge. Now that the pipeline is completed, both these issues will be automatically resolved in a year’s time as the SSGC conveys its borrowed gas back to the SNGPL.

The losses in the SSGC that current government ministers have been talking about and using as an excuse to raise gas prices are partly the result of this issue. But as I said, this will be automatically resolved and this was no reason to raise gas prices so much. This urgency to raise prices tells me that the government has decided to go to the IMF. It just hasn’t disclosed its intention.

Our first goal in negotiations with Qatar for LNG was to bring their price below 14 percent of Brent. After protracted negotiation, they offered us 13.9 percent of Brent for a 15-year contract when a delegation came to Islamabad, but we didn’t sign it. Then we opened tenders for two five-year contracts. One was won by a Russian company Gunvor at 13.37 percent of Brent and the second had the lowest bid from Shell for 13.78 percent of Brent. We offered Shell to meet Gunvor’s price, but it refused. So, we gave one contract to Gunvor and the then petroleum minister Shahid Khaqan Abbasi travelled to Qatar and offered that they match the five-year offer from Gunvor with a 15-year contract from Qatar.

The Qataris were naturally reluctant as they had never offered such low prices in our part of the world and a 15-year contact is more risky. Moreover, Qatar is a premier producer and supplier whereas Gunvor was just a trader. After some time, the Qataris agreed to match the price. That’s how Pakistan was able to secure 4.5 million tonnes of LNG at 13.37 percent of Brent, which at that point was the lowest price in the world and about 0.83 percent lower than what our consultant had told us was a fair price for Pakistan to pay Qatar.

Subsequently, before the second terminal and the three new gas-fired power plants came online, we made two more gas deals. By then, the gas market had eased a bit more and we were able to get even better deals. One was with Gunvor for 10.3 percent of Brent for five years and one with the ENI of Italy for 11.99 percent of Brent for a 10-year contract. This means that our cost of imported LNG is less than that of India, Japan, Korea, Malaysia, Thailand, Singapore and Taiwan.

The imported gas or LNG is now used to power most of our gas power plants, including the three new ones of around 1,200 MW, each running at 61 percent efficiency. These are the most efficient plants in the world and produce the cheapest power from RLNG in the world.

The writer has served as federal minister for finance, revenue and economic Affairs.

Twitter: @MiftahIsmail

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