Or Pakistan’s Fools’ Gold
Over the last year the price of energy worldwide has been on a downward trajectory, except in Pakistan where the government recently hiked up gas prices by 35 percent. In contrast the price on the spot Amarket of Liquefied Natural Gas (LNG) declined by 33 percent. As per the index compiled by METI (Japanese Ministry of Industries) in October 2015 the price of LNG was 7.2 4 $MMBTU, in September 2016 year later it was just under $ 5.5 / MMBTU. Similarly the price of the TTF index for natural gas in Europe was down 11% from 18.35 Euro/ MWH in October 2105 to 16.43 Euro / MWH currently.
The reason for this increase in gas prices is the recent long term LNG Sale Agreements signed with Qatar earlier this year. Two contracts were signed one for 3.75 mpta and another one for 1.2 mpta, this equates to approx. 600 MMBTU/ daily. Many experts today are of the view that in the current market pursuing long term LNG contracts is a desperate measures that will cause more harm than good, it would have been better to have bought in the spot market and then opted for a more profitable medium term non LNG solution.
Based on newspaper reports these long term contracts have been signed at a price of 13.4% of Brent, plus several other charges including increased shipment costs as a fully loaded Q-flex carrier cannot navigate the inlet current channel into Port Qasim this at today’s price comes to around $ 7.0 /MMBTU. But the price of LNG on the spot market is $ 5.5 or approx. 11% of Brent, and due to expected supply glut it is predicted to slide further to 9-10% of Brent in 2017. So why is the government losing almost $ 1 million per day in this LNG deal? Due to this disadvantageous contract since February 2106 we have paid $ 250 million more that if we had the same LNG been purchased on the spot market. If as predicted the LNG price slides further as supplies from the US and Australia increase then this loss will increase further. Qatar itself sells almost a quarter of its LNG on the spot market as do many other country’s so spot is indeed a viable short term energy supply option.
The medium term option for Pakistan’s gas supplies has to be Iranian gas. Iran has the second largest gas reserves in the world after Russia and currently is constrained to sell its gas and therefore looking for a sales agreement. It has a pipeline to Turkey which is purchasing Iranian gas for approx. $4.0/ MMBTU (the price Pakistan has negotiated with Turkmenistan is even lower at $ 3 / MMBTU at the border). Iran has also built a pipe line all the way to the Pakistan border, and Pakistan has committed to building a pipeline from Gwadar to Nawabshah, so building the 50 km of connection to the Iranian border is construction our SNGPL Company is easily capable of executing. In a recent move to protect its market share, and restrict Iranian gas exports to Europe Russia has also offered to build a gas pipeline to Turkey.
As any engineer knows over a distance of less than 5,000 km overland, LNG can never compete with piped natural gas, as it costs almost $ 4 / MMBTU to liquefy the gas by cooling to -180 C, transporting it in specialised double hull containerships to specialised receiving terminals, and then re-gasifying the LNG to inject it back into the pipeline system. With the lifting of sanctions on Iran there are decreased trading restrictions, Turkey is already buying gas from Iran, similarly many traders including Pakistani private parties have been buying LPG (Liquefied Petroleum Gas) from Iran. As the US is developing its relationship with India and others based on its strategic and commercial interests, so too must Pakistan develop its ties based on what makes commercial sense and importing gas from Iran as opposed to LNG from Qatar would save the country almost $ 2.5 million per day or $ 900 million a year and that for any country – especially one as highly indebted as Pakistan is a lot of money.
The long term energy option for Pakistan has to be solar, with many parts of the country getting over 330 days of sunshine and the price of solar panels decreasing and the efficiency increasing it is expected that by 2025 solar energy will be cheaper the any fossil fuel power even of the fuel is free and with virtually no distribution or billing costs and has the potential of finally freeing us from being dependent on the government for energy.
With so many better options it is baffling as to why the government rushed in to signing 16 year long term LNG purchase agreements with Qatar priced substantially above the international market prices, hand with little long term upside potential? This deal presents more questions than answers. In the meanwhile the poor consumers have to pay for expensive energy that in the end will erode our competitiveness.