Mega Projects and Mega Risks

A series of unfortunate events

The Punjab government might also wish to share how many billions have been lost due to poor decision making by its cousin the federal government. A noted example would be the contract signed with Qatar in February 2016 to import 3.75 mtpa (million tons per annum) of LNG for the next 15 years. The commodity is priced at 13.6 percent of Brent price plus $400,000 per consignment for shipping and port facilities. At current oil price of $48.5 per barrel this comes to approx. $ 6.65/ MMBTU (million British thermal units).

But the current price for LNG in the international market as quoted by the Platts-JKM index is $4.52 / MMBTU or approx. 47% lower than what Pakistan is paying for this exactly the same commodity. To date Pakistan has lost approx. $ 100 million on this deal, and if current price projections prevail then this figure may well increase to approx. $400 million (Rs 40bn) by February next year, and all because the government never really understood how to structure the LNG deal.

Forty billion rupees per year is a lot of money, it is enough to keep two million families (ten million individuals) out of poverty for a whole year, it is five times more than what the city of Karachi receives from the provincial government, it is more than the entire spend (not allocation) for health for the entire country this year. Note that Punjab government only spent 23% of its allocation on health with the remaining diverted to other projects. Sadly had industry experts been consulted most of them could have foreseen that the LNG prices would fall and the country would have saved $ 400m per year.

The LNG industry changed dramatically in 2015 when the US Energy Agency gave permission for US based producers to export oil and gas from the US – an embargo that had been in place since the oil crisis in 1973. This not only increased supply into the global marketplace but affected price and structuring of long term LNG contracts, by decoupling the price from Brent prices only to less riskier options.

US suppliers now typically ask for a 15 percent premium over the US gas bench mark price (Henry Hub) plus as terminal fees – normally $ 2.5-3/ MMBTU – currently this comes to approx. $ 5.0 / MMBTU. Others in Australia are also linking their prices as a premium to Singapore based Platts JKM benchmark or a hybrid arrangement. The consultancy Woods Mackenzie estimates that today less than forty percent of LNG contracts are linked solely to the price of crude. Unfortunately Pakistan’s oil ministry went ahead and signed a disadvantageous contract linked to price of oil. The price of LNG ship charter also dropped significantly.

It is expected that supply of LNG shall increase by 75% by 2020 from the current 260 mpta to over 400 mpta – with approximately 45 mpta due to come on stream in 2016 alone. (In oil terms this would be akin to increasing global oil production from 80m barrels per day to over 125m bpd in the next four years). Of this increase 50 mpta of LNG is expected from the US with three giant LNG terminals already under construction in Louisiana and Texas, 30 mpta from the north coast of Australia, 30 mpta from Iran as post sanctions she seeks to exploit its giant South Pars gas field potential, while 20 mpta from Africa and others.

Demand for LNG in Japan and Korea two major markets has in 2016 seen a drop of five percent, as they restarted their nuclear power plants after refurbishments post Fukashima earthquake. Although demand from China has increased, the increase is not at the same level as previous years due to the attraction of renewable energy and low prices for coal and High Sulphur Furnace Oil, the normal energy alternates to LNG.

Technology for construction of LNG have also improved, due to standardizing design and construction as well as improvements in the learning curve construction firms now believes that onshore LNG trains can now be constructed for $500m per mpta down from $1.5 billion per mpta ten years ago. Now there are also a number of technology license holders for the process design.

The success or otherwise of large multibillion projects dollar infrastructure projects depends on how well the owner can anticipate and mitigate project risks. These may not necessarily be just what is written in the contract but are also dependent on external drivers and events. Based on evidence to-date, if the present government continues to run this country as a family enterprise largely depending on a handful of loyal civil servants and a coterie of trusted lieutenants, then – as is apparent in the LNG case – these mega projects are going to end in tears for the country with limited accrual of net benefits.

The government must hand these mega projects over to experienced professionals and step away, while focusing its attention only on strategic issues. The current policy of administering mega projects by a combination of politicos and civil servants may have catastrophic consequences, as subject matter specialist knowledge is required to help identify and mitigate any underlying risks. Pakistan is a poor country and can ill afford an influx of amateurism and politicization in delivery of strategic infrastructure projects. In infrastructure you hope for the best, but plan for the worst, something we may need to learn to do very fast.