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February 28, 2021

LNG deal

Editorial

 
February 28, 2021

The signing of another long-term deal on liquefied natural gas (LNG) between Pakistan and Qatar appears to be good, at least for the time being. But if you look at the broader picture there are some salient points that we must keep in mind before reaching a definitive conclusion. First, the present deal. The new long-term deal is an LNG-supply contract for an additional 200 million cubic feet a day (MMCFD) at a lower rate than the 2015 contract for 500 mmcfd. This is a ten-year agreement which the government claims entails the ‘lowest-ever publicly disclosed price under a long-term contract in the world’. This, the government claims to have achieved through joint efforts of the political and military leadership, as Special Assistant to the Prime Minister on Petroleum Nadeem Babar disclosed at his presser after the signing ceremony.

Without going into the details of who played their roles in it, let’s brief try to understand the deal. The PTI government has been trying to renegotiate the long-term contract with Qatar that the PML-N government had signed in 2015-16 with similar claims. Qatar was reluctant to discuss the existing contract, as it had similar long-term contracts with other countries. Now the new deal will replace existing and expiring long-term deals. It is noteworthy that the new agreement will not take effect immediately but will be effective from January 2022. So it is at least a year before the new deal gives us some benefits at the rate of 10.2 percent of Brent. The new contract has a price renegotiation option after four years rather than ten years that had been fixed in the previously signed contract. Initially the government was of the opinion that there should be no long-term agreements, and Pakistan should purchase the required LNG only on the spot rate. Now the government has signed a long-term contract on the spot rate, and then there is no agreement for price recovery.

If you look at it in dollar terms, the new price does not offer much to celebrate as the Pak rupee has depreciated drastically in the past 30 months or so. Had the government been able to keep the rupee at the same conversion rate to dollar which was prevalent in 2018 at around 120 rupees to a dollar, the new agreement would have been more beneficial. The inability of the government to prevent the rupee depreciation has cancelled all the possible good effects of the new deal. Then, had the government signed the contract in the middle of 2020 when the rate was even lower, Pakistan could have reaped better benefits. The government kept dilly-dallying and people ended up suffering from energy shortages during the winter and the economy also could not take off.