Qatar wins again

First the bustards, now this

The physicist Steven Hawkings said that “The greatest enemy of knowledge is not ignorance but it is the illusion of knowledge”. This is what the PML-N government excels at, creating the aura of knowledge and everything being under control, whereas in fact the country is being ground down under massive borrowings and disadvantageous long term deals.

Let me pick an example from this week, namely the latest LNG supply deal by Gunvor. Based on news reports this company has successfully submitted a bid to supply LNG for the next five years at 11.6% of last months’ Brent price. Almost eight months ago, Pakistan had signed a similar $ 15 billion deal with Qatar’s RasGas (now subsumed into the mother company Qatar Gas) to supply 3.75mtpa over a fifteen year period except for a higher price of 13.3% of Brent – an almost 15% higher price. In dollar terms, this amounts to us paying almost $ 2.25 billion more for the same commodity.

As I have written several times, piped gas is substantially cheaper than LNG as it does not require expensive cooling and transportation currently Brent is trading at approx. $55 / barrel, so the Qatar LNG after adding in all the transport and terminal charges would cost approx. $ 9/ mmbtu. Iran sells its gas to Turkey for half this price. Currently textile mills in Punjab are being offered LNG at $10 /mmbtu, as opposed to Sindh factories that are being offered piped gas at 40% less price. So why did the government of Pakistan enter into such expensive long term contracts when at most all that was needed were five year contracts until such time as the Iran pipeline could be built?

Even if you take LNG on its own, anyone with a little knowledge of LNG (unless he or she was hiding in a secluded cave somewhere) could have told you (more so last year) that the price of LNG are headed south, due to extra capacity under construction that will come on stream in 2016-20. Australia is scheduled to overtake Qatar as the largest LNG producer in the world and the current global capacity of approx. 265mtpa is to be augmented by an additional 110 mtpa or an increase of over forty percent over the next three years or so. At the same time whereas demand is catching up, as always is the case there is a slight lag.

The other major change is the shift of the bench mark at which LNG is priced from Brent to Henry Hub. In 2015 the United States started exporting LNG from its Louisiana terminal, this LNG is priced as a markup of Henry Hub not Brent, increasingly now the spot prices and indeed contracts are being negotiated in the less volatile Henry Hub index. Spot prices are also now priced on the Platts markers (yet another index).

The decision last year to enter into long term purchase agreement with Qatar at what was then (as shown now) very high prices and that too benchmarked with Brent price, is inexplicable and defies logical explanation. We have been made aware that the Sharif’s have had long term relationship with the ruling family of Qatar that may be so, but this friendship has cost the country between $ 2 billion for fair priced LNG or $7 billion as compared with Iranian gas over a 15 year period. Money that is borrowed and is much needed for health, education and other infrastructure.

The Secretary of Water and Power, Yousuf Dhaga, tried to argue in a recent article in  favour of the wisdom of current government power policy, yet all his arguments merely supported Mr Hawkins earlier quote about “illusion of knowledge”. The primary cause for pernicious load shedding in 2007-13, and subsequent circular debt, was unaffordable power due to the IPP reliance on expensive imported oil, well instead we have reliance on even more expensive oil linked imported LNG. (or worst respiratory impairing imported coal).The price of oil has appreciated almost forty percent over the last year, all that is needed is for the Rupee to depreciate and you are exactly in the same hole as the PPP government was, except with a higher debt and long term purchase agreements and you have the Illusion that the government knows what it is doing.

Maybe the government is very clever and can fool everyone into believing that it has solved the energy crisis, to get re-elected well before people start asking about the price of their electricity bill as external price factors start kicking in. But in the long term this approach is fatal for the county.