LNG: There is nothing unique about Pakistan's deals
Politicizing LNG deals will only do harm to Pakistan's long-term energy security and worsen the investment climate.
Every few months, like clockwork, there is a hue and cry raised about the long-term LNG deals that Pakistan has signed with Qatar.
This all started with the PTI’s opposition to LNG import deals signed by the PML-N government with Qatar over seven years ago.
Motivated by its electoral promise to end energy shortages in the country, the PML-N pushed ahead, signing a multi-billion dollar deal with Qatar to secure LNG supply.
Since then the allegations have ranged from kickbacks to astronomical profits and everything in between.
After the PML-N lost the elections, the National Accountability Bureau decided that it had to investigate this scam and arrested former Finance Minister Miftah Ismail and former Prime Minister Shahid Khaqan Abbasi in cases related to these deals.
So far, nothing has come out of these investigations.
And after much ado about nothing, then-Petroleum Minister and current Aviation Minister Ghulam Sarwar Khan said that the PTI would uphold the deal signed with the Qataris.
In fact, it was decided to not even reveal the secret clauses of these deals.
Not disclosing details about deals is common practice.
Pakistan is not the only country that keeps clauses of its LNG deals secret. Indian Oil Minister Dharmendra Pradhan renegotiated his country’s deals but refrained from disclosing specifics.
And when Pakistan tried to disclose these clauses, the Qataris put their foot down:
The Qatar authorities have conveyed the message to the government of Pakistan at the highest level in polite words saying that it would be unfair on part of Pakistan if it makes the deal public as many negotiations on LNG agreements between Qatar and other countries and trading companies are underway all the time and Pakistan will face the consequences if it unilaterally unveils the agreement.
Pakistan’s deals were also competitively priced.
Bangladesh signed its deals when prices had declined significantly, but its pricing is comparable to Pakistan’s price of 13.37% of the three-month average price of a Brent barrel:
The purchase price for LNG from Oman Trading has been set at around 11.9% of the three-month average of Brent crude prices plus 40 cents/MMBtu, Faizullah said.
What about all the capacity payments?
Another point raised by critics of the deals is that Pakistan is paying through the nose for capacity payments.
Again, there is nothing unique about this, as countries like Bangladesh also make capacity payments:
Petrobangla is counting 'capacity payment' for non-completion of a re-gasified LNG evacuation pipeline as it has failed to fully utilise the country's maiden floating LNG terminal.
The daily payment the Petrobangla owes to Excelerate Energy is around US$ 232,000 (Tk 19.72 million), no matter it re-gasifies less or the entire capacity of the FSRU, according to the deal.
What about spot prices?
Given that charges of corruption and illicit motives have not stuck, the new rhetoric that has been deployed is that signing long-term contracts was foolish.
Given the sustained decline in oil prices - LNG prices are linked to oil - the argument is that Pakistan is paying much, much more than what it would have to pay had it been able to meet its demand by buying from the spot market.
The below tweet sums up my reaction to seeing the spot price being mentioned on social media last week.
It is also worth mentioning that this is an old argument that is being revived to score political points:
We will discuss why long-term contracts had to be signed by Pakistan, but first, it is important to mention that about “70-75% of the LNG market” is under long-term contracts.
These deals have been signed by countries like Japan, India, and Bangladesh.
And most Asian countries, including Pakistan, are struggling to benefit from the decline in spot prices, according to Reuters:
It’s worth noting that the market for short-term cargoes is dwarfed by the far greater volumes procured under long-term, mainly crude oil-linked contracts.
This means that for many consumers of LNG, especially in the top- and third-ranked buyers Japan and South Korea, the decline in spot prices is largely irrelevant.
Long-term deals are necessary for building the LNG value chain.
Before it can start consuming LNG, a country needs significant infrastructure investments. This includes re-gasification terminals, storage units, pipelines, power plants, and a whole lot more, all of which costs billions of dollars.
There is a special category of financing, called project finance, for these types of infrastructure projects. I have studied this topic in graduate school, looking at everything from oil pipelines in Cameroon to how Airbus financed the A380 project.
When a country or a company tries to finance these massive infrastructure investments, financial institutions want certain guarantees that the projects will be operational on time and run at full capacity.
This means that the key input - LNG in this case - must be secured for a long period of time. Without that guarantee, the financiers of the projects will not be sure about the operational feasibility of the projects that store (re-gasification terminal), transport (pipelines), and consume (power plants) the input.
If there is no gas coming in, then there is no gas flowing to the power plants. And if there is no gas for the power plants, then no power is being produced. And if there is no power being produced, then no revenue is being earned by selling power.
All of which means that without LNG, the projects aren’t operational.
When that happens, the payments owed to those investing and financing these projects will be in jeopardy.
And if the financiers believe that the projects are risky, then the projects will be considered unfeasible and will not be financed.
Politicizing these deals has its costs
Raising a hue and cry about non-issues to score political points has cost Pakistan’s economy dearly. From the Steel Mills privatization to the Reko Diq case, private investments that would have yielded economic benefits have turned into liabilities that are suffocating the economy.
The ongoing push to renegotiate IPP contracts is the latest example of how politicizing issues dissuades investors from participating in deals:
The consortia also said they were unable to secure commitments from international lenders for long-term financing for the projects because of the ongoing talks, according to multiple participants of the meeting that Dawn spoke with.
It is important to also state that the privatization of these assets would not have been possible had it not been for the long-term LNG deals that were signed by Pakistan.
Without securing long-term LNG supply, the entire value chain of the LNG sector would never have been financed. And without this value chain, the country would have remained energy insecure.
PS - if you are interested in Pakistan’s energy sector, listen to my discussion with Ammar Khan.
Very well explained and summarized. Please write a follow up now in 2024 and provide an estimate of the losses that pakistan has already experienced by breaking that deal!!