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The News/PannEnergy

Published Date: Mar 2, 2014

Qatar LNG import to cause losses worth $5 billion: SDPI

The government’s intending LNG imports from Qatar are likely
to cost Pakistan $5 billion, a report released by the Sustainable Development
Policy Institute (SDPI) revealed on Saturday.

The report – authored by eminent energy expert Arshad H
Abbasi and addressed to PM Nawaz Sharif– says that with the LNG price over $14
/ MMBTU, the product will lose its competitive edge on the price against oil.

Media reports and statements from the Petroleum Ministry
suggest a price $17/ MMBTU for Qatari LNG. Additional costs of re-gasification
and charges of SSGPL & SNGPL and other taxes will likely push up its price
to not less than $ 18 /MMBTU.

The most compelling argument offered by the Ministry in
favor of buying LNG has been that it is a cheaper fuel for electricity. But at
anything more than $ 14/MMBTU, LNG loses its competitive advantage against oil,
the report says.

It explains that the British thermal unit is a basic measure
of thermal (heat energy), which establishes that one rupees of Furnace Oil can
release 630 units of energy (at a spot rate $ 606.50/Metric ton). Compared to
this one rupee of LNG, that will garner 529 units of energy (at a rate of $ 18
/MMBTU); which leaves an enormous 84% energy content price gap.

Therefore, the argument that LNG will be the cheaper fuel
loses its validity. In fact, the report says, $ 5 billon can be saved annually
if Pakistan purchases LNG at a more reasonable $ 9/MMBTU instead of $ 17.

According to the Mr. Abbasi, this is entirely possible but
it requires will and technical know how to negotiate LNG at this lower price,
something he says the Ministry of Petroleum and Natural Resources (MPNR) does
not have

The report says the Ministry appears to have been
transformed into a marketing agent for Qatari LNG exporting companies. Talks on
importing natural gas have become just an excuse for a special shuttle service
between Qatar and Pakistan as the latter is not negotiating LNG pricing from a
position of strength and knowledge.

Rather than driving a hard bargain based on the facts and
trends in the global natural gas market, the MPNR seems resigned to importing
LNG at the said price.

But the SDPI report argues that Pakistan has a strategic
location near the world’s largest natural gas reserves and at the mouth of the
Persian Gulf. In the Iran-Pakistan Gas Pipeline contract, the gas was to have
been supplied from South-Pars, part of North Dome Field owned by the Qataris.

It shows that both Iran and Qatar are supplying Gas from the
same gas field, with the former routing it though IP Gas pipeline and the
latter through LNG. The report says this gives Pakistan a unique advantage to
bargain at $ 9/MMBTU.

Yet, Pakistan leadership seems unable to capitalize on this
situation. The Ministry seems to have not considered the fact that the global
LNG market will face serious competition in the future. The biggest immediate
challenge posed is shale gas that has rapidly changed the natural gas pricing
dynamics.

Japan – the biggest LNG buyer in the world – has recently
become frustrated with its high prices, and wants to reduce its post-Fukishima
dependence on natural gas.

What Pakistan should note, the report suggests, is that
there is a divorce between oil and gas prices, and the new contracts reflect
this pattern.

For example, India is going to import LNG from the US at a
very cheap $ 10.50 / MMBTU because of these changing dynamics in International
Gas sector.

The Indian state-owned company GAIL’s contract with the
United States’ Cheniere departs from oil-linked prices, and instead it is
indexed to the Henry Hub with a premium, for a landed price of $10.95/MMBTU.

In fact, India is trying to diversify its LNG supplies
geographically, and to support this ambition, it is exploring East African
suppliers for cheaper long-term LNG agreement after failure in Shale Gas
unlocking initiative. The report concludes by asking the ministry why is it
disseminating the price earlier than the bidding process, in a complete
violation of standard procedures, and why does it want to put all its eggs in
one basket when there are 23 other LNG exporting countries.