Legitimising LNG

It appears that liquefied natural gas (LNG) has emerged from a political controversy as PM Imran Khan visited Qatar last month to get credit terms for LNG and possibly to renegotiate its contract price. As a quid pro quo, it is possible that more LNG supplies from Qatar may also be agreed to.

There is the possibility of bringing LNG contract prices down, as Pakistan is getting cheaper LNG from two other sources. However, international contracts can only be opened and renegotiated on the basis of a mutual agreement or as provided under the terms of the contract itself. It will take some time to expect concrete results in this respect. But this is a welcome U-turn that should be appreciated. LNG has been legitimised.

In the absence of local gas or the falling reserves of conventional natural gas, LNG has been increasing its market share by the day due to its falling prices; better environmental footprint; clean and convenient burning as a cooking fuel; and the high thermal efficiency of a new generation of combined cycle plants and other useful features. Pakistan jumped on the bandwagon like others in the region and elsewhere. India and Bangladesh entered LNG contracts with Qatar for significant LNG quantities at almost the same terms as those that were agreed with Pakistan. In fact, India entered into the LNG market much earlier than Pakistan.

In India, the LNG market share is 50 percent, which is almost equal to that of local gas. The gas-consumption share would be increased to 22 percent on the strength of LNG imports. There are five LNG terminals, with a combined capacity of 26.6 mtpa. Another seven terminals are in the pipeline with an aggregate capacity of 29 mtpa, which would increase the total to more than 50 mtpa. The domestic CNG and fertiliser sectors are the main drivers of LNG demand in India. India ventured into piped gas distribution as late as 2008. There is a programme to provide 10 million domestic gas connections by 2022. All of these ambitious targets cannot possibly be achieved without LNG.

In Pakistan, the market share of LNG in 2018 stood at 18.6 percent and has a potential market share of 24 percent once the full capacity of the two terminals is utilised. The LNG market may rise to 50 percent if local production stagnates at the level of four Bcfd while the demand increases to eight bcfd.

There are two LNG terminals, with a capacity to handle 10 mtpa of LNG, which can fire 11,000 MW of RLNG combined cycle (RLNGCC) power plants or about 7,000 MW of ordinary thermal steam power plants. We have three RLNGCC power plants, with a combined capacity of 3,500 MW, which means that 25 percent of the terminal capacity is required to run these three RLNG power plants. The rest can be made available for other power plants or other end-users like domestic or industry. However, the terminal capacity has been utilised in June 2018 when 12 LNG ships were ordered – six each for two terminals. On average, eight to nine LNG ships have been ordered as a routine. This means that between 25 percent and 33 percent of the capacity remains unutilised. This may be all right for non-peak months.

In summer, there is a heavy demand of electricity while there is a strong demand for gas in the domestic sector in winter. If the full capacity of LNG terminals, is utilised in winter, there would probably be no shortage of gas for domestic, industry and CNG users. Despite the hue and cry of gas shortages this winter, only 10 LNG ships had been ordered for January 2019.

While local natural gas resources are depleting, no new ones are in sight. Drilling activities have been in the Kekra-1 project and considerable hopes are attached to other such endeavours. But even if gas is excavated through these activities, it may take five years for us to be able to utilise it. The wellhead gas price is expected to be double that of onshore gas rates but 70 percent of the LNG rates. Production is expected to vary between 0.2 bcfd and 0.4 bcfd (around five percent to 10 percent of the demand).

The demand of gas will double from four Bcfd to twice that level – though no formal study has been conducted in this regard. However, the growth in gas demand is certain due to economic growth, and increasing expectations and rising living standards. More and more people are getting used to heating in winter and air-conditioning in summer. While there are substitutes for gas in the power sector, there is no substitute for gas in the domestic or industrial sectors. While LPG, biomass and electrical cooking and heating do offer substitution opportunities, they are limited in their scope. It should be noted that more gas is required for non-electricity generation uses than for electricity where there are substitution possibilities.

There are talks of creating a third or even a fourth terminal under free-market operations. LNG terminal investors in the private sector will install terminals and import LNG at their own risk and management, and sell it to the unregulated sector. There is no harm in this as long as FDI is available and international oil and LNG companies chip in. Despite its earlier aversion to LNG, the incumbent government is now trying to procure LNG at better terms through cooperative and political negotiations.

There is an argument against imported energy, including LNG, for causing a foreign-exchange drain. The additional problem that is being faced at the moment is that, while there have traditionally been credits and deferred payment arrangements for oil, a similar arrangement doesn’t exist for LNG that requires $5 billion per year. That’s why the prime minister and his team decided to visit Qatar to conduct negotiations. It is time to depoliticise LNG, if we want concessions and investment in the LNG sector.

Despite many difficulties, one of the good things in Pakistan has been the availability of piped natural gas since the 1950s.Cheap and clean local gas have been firing cooking stoves, replacing dirty kerosene, and polluting biomass. This must continue and be expanded through LNG or local gas, as may be feasible. Contrary to technology and petrochemical extremists, household usage is more valuable if quality of life is made a priority.

Pakistan needs to develop its local gas resources on a fast-track basis. National E&P companies – such as the OGDC and the PPL –should be energised and possibly reorganised by inducting and developing technology, fostering top-quality leadership and cadre, and carrying out stringent performance-monitoring. People have been earnestly hoping that something will come out of these two large companies. Until this is done, LNG appears to be a good transitional solution.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.