Natural gas is one of the cleanest burning fossil fuels (compared to coal, diesel, or furnace oil) and if burned in an efficient natural gas power plant, produces 50-60 percent less CO2 emissions as compared to new coal power plants. This, along with the cost effectiveness of the electricity produced from it, has rendered natural gas as the electricity sector’s best bet as a transition fuel till 2030.
For countries like Pakistan, which find it difficult to finance the much-needed transition from fossil fuel powered generation to renewable energy generation, natural gas-powered generation – a relatively cheap and clean source of energy – provides a much-needed respite for the time being. So, in pursuit of advantages associated with production of electricity from LNG, the previous government opted for long-term LNG contracts with the Qatari government. Furthermore, several LNG-based plants were installed during the tenure while some were shifted to LNG including Rousch, the Nandipur power plant and a plant near Lahore which was running on diesel for 14 years.
As of now, Pakistan has seven long term contracts of LNG including five with Qatar, one with Italy and one from a trader. Pakistan has a capacity of 12 cargoes per month so the rest of the five cargoes are procured from the LNG spot market to meet the demand.
The government has recently made the most expensive purchase since the onset of LNG import in 2015. Pakistan LNG Ltd (PLL) has accepted bids for four spot LNG cargoes in September ranging between $15.2 per MMBtu and $15.5 per MMBtu. In the meanwhile, eight bids for September and October were already scrapped by PLL with bids in the range of $13.79-$13.99 per MMBtu from Qatar followed by certain bids close to $16 per MMBtu with one bid which came for PSO at $20 per MMBtu.
On the other hand, last year three-year long-term contracts were available for $4 per MMBtu as a private company named ‘Trafigura’ sent a written offer to the government of Pakistan, offering LNG cargoes for $4 per MMBtu; it was also willing to convert five Qatar LNG long-term contracts to $4 per MMBtu under a practice called arbitrage. It is important to note that the fossil fuel market crashed last year due to Covid-19 and associated lockdowns hence unprecedented price drops were observed.
Pakistan is currently paying $10 per MMBtu for its Qatar LNG today and we had a written offer to convert it to $4 per MMBtu which would have saved $100 million per month or $1.2 billion per year or $3.6 billion in three years which is more than what we are getting from the IMF.
While the national exchequer would be paying $25-30 million extra per cargo for this expensive purchase, the effect wouldn’t just be limited to the upstream; electricity generation would also be adversely affected by it. Per unit electricity produced from it would cost around 12-13 cents as compared to 7-8 cents per unit cost of electricity generated from LNG procured through long-term contracts from Qatar (the cost depends on the efficiency, nature of plant and how the plant is operated).
It is important to note that Pakistan guarantees $6 per MMBtu to companies exploring natural gas in the country, so last year a rational decision would have been to put a hold on purchase of natural gas from local companies and instead import it from the international market to exploit the price differential. This was not done.
Globally, countries opt for long-term contracts for procurement of LNG to ensure stability in price and continuity of supply, but this government has repeatedly tried to play the market – and has failed. In Pakistan, initially the present regime has criticized the entire rationale behind diversifying the energy mix of the country, specifically the shift to LNG from day one (although they later conceded). Further, it was claimed that huge kickbacks were received against deals with Qatar and opposition leaders were arrested where nothing substantial has come out of it yet – much like the rest of Naya Pakistan. Then, it was said that, instead of installing LNG-based power plants the PML-N government could have opted for renewable generation as the cost of it has reduced.
Although the installation cost and generation cost of electricity from renewable sources has drastically decreased over the decades, it is important to note that renewable energy is an intermittent source of energy and does not offer base load. In cases where renewable plants can provide base load, the per unit cost of electricity is unimaginably high. Also, natural gas plants lay the groundwork for renewables in the system and provide much-needed flexibility, other than meeting peak load requirements in the system.
Questions were also raised by the ruling party about the capacity additions; this was termed as straight away corruption done by the previous government, not realizing that power systems are designed keeping in mind the peak demand of the country not the average demand. On top of peak demand, a reserve margin is maintained to increase the reliability of the overall system.
All the mismanagement and incompetence in the energy sector – and even otherwise that is going on in the country – unless addressed, is a heavy price that will need to be paid by the people of Pakistan. It is the price of good looks.
The writer is a political activist and a research analyst.
Email: beingkamil@yahoo.com
Twitter: @beingkamil
