Situationer: Are More LNG Terminals Necessary If No One Is Selling?
07.11.2022 - NEWS

July 11, 2022 [DAWN] – Here’s a thought: fuel shortages wouldn’t be as severe as they are today had bureaucrats not thrown a spanner in the works of two long-delayed LNG terminals.

 

One may be tempted to cite the recent defaults by LNG suppliers under long-term contracts alongside record-high prices on the spot market to declare that the need for more LNG terminals has become moot.

But before leaping to conclusions, consider the following: it’s not sovereign-backed Qatar Energy that’s been defaulting on long-term contracts; rather the international trading houses — Eni and Gunvor — that have defaulted on promised cargoes and messed up the country’s power sector.

One of the two planned terminals is backed mainly by Qatar and has three local industrial groups as minority shareholders. After six years of navigating the regulatory rigmarole, the terminal is still a distant dream. Had the terminal received the promised pipeline capacity from Sui companies in time, it would’ve been importing Qatari gas under long-term contracts already, for onwards sale to the local industry, without the need for any sovereign guarantees.

The other planned terminal is wholly owned by Mitsubishi Corporation, one of the most influential players in the global energy market. No LNG trader in the world would’ve defaulted on its cargoes because the Japanese player is responsible for more than half the LNG imported every year by Japan, one of the biggest gas importers worldwide.

Impact of Ukraine war

Pakistan began importing LNG in 2015 as domestic gas reserves started depleting at a faster pace. The country has already installed two terminals on Port Qasim. Pakistan State Oil Company Ltd uses the Engro Elengy Terminal to import gas under long-term contracts, while Pakistan LNG Ltd brings spot purchases through the GasPort LNG Terminal.

Less than 50 per cent of annual LNG imports are through the spot market, where prices skyrocketed after the Russian invasion of Ukraine on Feb 24. Little wonder that no bidder responded to the latest tenders by Pakistan LNG Ltd for 10 cargoes. Before that, the state-owned company made three unsuccessful attempts to buy LNG in July.

As for the four long-term contracts meant to bring more than half of the country’s total LNG imports at substantially lower than spot rates, there have been constant defaults by global suppliers. Since the beginning of 2021, Eni has defaulted on at least four cargoes while Gunvor has defaulted on at least seven, according to data compiled by the Institute of Energy Economics and Financial Analysis.

Force majeure or not?

Pakistan reserves the right to impose a penalty on defaulting suppliers equalling 30pc of the cargo cost. Suppliers invoke force majeure — unforeseeable circumstances preventing them from fulfilling the contract — to avoid paying the penalty.

“Long-term contracts must always require the supplier to disclose the fuel source and the vessel’s name. Otherwise, what’s stopping it from selling the cargo on the spot market whenever the rate is high enough to justify a default on long-term deliveries?” said an energy expert with many years of LNG procurement experience for European employers.

It’s difficult to invoke force majeure on a false pretext if the long-term buyer knows the source of LNG and the vessel that’s supposed to deliver it.

The developers of both upcoming terminals have repeatedly asked the government to allocate at least 300 million cubic feet per day (mmcfd) of pipeline capacity each before they take the final investment decision (FID), however, there has been little tangible progress from the state-owned gas utility companies on the allocation of pipeline during the past few years.

Qatar-backed Energas LNG and Mitsubishi-backed Tabeer LNG have capacities of 750-1,000mmcfd each. Given the capacities of the already-operational Engro Elengy (690mmcfd) and GasPort LNG (750mmcfd), the addition of the two “merchant” terminals can more than double the country’s re-gasification capacity. They will also increase the country’s LNG storage capacity, which currently stands at 320,000 cubic metres.

Pakistan is one of the top seven LNG importers globally, yet it ranks as low as 18th in terms of storage capacity. As a matter of fact, the country uses the existing Floating Storage and Re-gasification Units (FSRUs) of the existing two terminals merely as re-gasification units. This means the system relies heavily on the gas line-pack, which is the volume that can be stored in a pipeline for scheduling purposes.

According to a July 4 report by Reuters, Germany has leased as many as four FSRUs in a bid to quickly diversify away from Russian energy. “But here, foreign investors have been running from pillar to post for years just to get the promised pipeline capacity,” said the energy expert.

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