Singapore-based Guvnor backs out from 4 LNG term deliveries

ISLAMABAD: Singapore-based Guvnor has decided not to honour its contract to deliver four LNG term cargoes to Pakistan, which would force the dollar-starved country to purchase costly LNG from the spot market to fulfill its energy needs.

The cargoes were to be delivered in the remaining four months’ tenure of Guvnor’s five-year term agreement ending July 2022.

“This is a gigantic blow that will force authorities concerned with no option but to purchase costly LNG cargoes at higher prices currently oscillating in global spot market in the range of $32-38 per MMBTU instead of over $10 per MMBTU under term agreement,” a senior official in the Energy Ministry privy to the development told The News.

He said the company sold the cargo destined for Pakistan in the spot market for higher profits.

Pakistan LNG Limited (PLL) had inked a five-year contract in June 2017 under which Guvnor was bound to provide the LNG term cargoes at 11.6247 per cent of Brent.

Guvnor has defaulted three times. The company backed out from delivering a cargo on November 19, 2021, then it backed out from the delivery of cargo on January 10, 2022, and then again a delivery for March 11, 2022 never arrived.

Guvnor was to provide Pakistan four LNG cargoes each in April, May and two in June, but the trading company has informed Islamabad that that it would not be able to provide LNG cargoes in its remaining tenure of the term agreement. Cargoes were scheduled to arrive on April 15, May 14, and June 4 and 9, 2022, the official informed.

Petroleum Division spokesman and Joint Secretary Development Syed Zakria Ali Shah has confirmed the cancellations; however, PLL managing director and Guvnor have not responded to the query about the default.

A top official of the Energy Ministry said PLL has decided to procure LNG from the global spot market and to this effect for the month of April, it has issued tenders.

In 2017, PLL also inked a 15-year term agreement with Italy-based ENI, which has defaulted four times. The first default happened in January 2021, when ENI delivered half the cargo. Next it defaulted in November 2021, with the latest cargo cancellation happening in March 2022.

The official record available with The News shows that with the latest defaults, Guvnor has defaulted on seven cargoes whereas ENI defaulted on four cargoes.

Under the 15-year contract, ENI is bound to provide LNG cargo at 12.14 per cent of Brent. In the first and second year, ENI provided LNG at 11.6247 per cent of Brent. In the third and fourth year ENI provided LNG at 11.95 per cent of Brent, whereas in the fifth year and onwards the cargoes were provided at 12.14 per cent of Brent.

March cargo was also fixed at 12.14 per cent of Brent. The agreement with ENI ends in 2032.

The official said that ENI would provide its term cargo due on April 10, 2022 at 12.14 per cent price of Brent under the term agreement.

“The term agreements with ENI and Guvnor signed in 2017 are flawed and not in the interest of the country,” the official and Petroleum Division told The News. “In case LNG trading companies commit default, PLL can impose a penalty of 30 percent of the term cargo price and not more than that.”

However, he said, the PLL is bound to pay 100 percent price of the term cargo under take or pay agreement if Pakistan, for any reason, cannot absorb the cargo in its system. In the wake of the flawed agreement, LNG trading companies do not hesitate to commit default as they are ready to pay 30 percent of the term cargo which they sell in the market for windfall profits.