Gas companies face many risks

Will suffer loss if power plants stop 66% guaranteed LNG offtake

ISLAMABAD:

The Petroleum Division has warned that gas companies will face several risks after power plants stop 66% guaranteed offtake of liquefied natural gas (LNG).

In a letter addressed to Power Division secretary, the Petroleum Division pointed out that the government would have to give subsidy to cover price differential to keep energy companies from going bankrupt on account of breaking of contracts by power companies.

The energy companies facing risks include Pakistan State Oil (PSO), Pakistan LNG Limited (PLL), Sui Southern Gas Company (SSGC), Pakistan LNG Terminals Limited (PLTL) and Sui Northern Gas Pipelines Limited (SNGPL). The letter came in response to a recent meeting of the Cabinet Committee on Energy (CCOE), which exempted three LNG-based power plants from 66% guaranteed offtake of LNG.

Earlier, in a meeting held in November 2019, the Economic Coordination Committee (ECC) had decided that the three power plants would continue buying 66% LNG until the review of an LNG supply agreement between Pakistan and Qatar in 2025. In the letter, the Petroleum Division pointed out that the matter had already been discussed threadbare and decided by the ECC while considering the privatisation of two LNG power plants.

It accused the Power Division of completely ignoring financial implications for the entire LNG supply chain because of the back-to-back agreements attached with the transaction.

As per ECC’s approval, according to the Petroleum Division, all the existing arrangements for LNG power plants will remain intact until the date when the price review clause under the LNG sale-purchase agreement takes effect in 2026 - the 10h anniversary of first LNG supply by Qatargas in 2016.

The clause specifically covers price revision at that point in time and in case of disagreement among parties, the termination process will commence. The Petroleum Division said following government directives, PSO and PLL signed contracts for import of 800 million cubic feet of LNG per day (mmcfd) including 500 mmcfd from Qatargas. All contracts in LNG trade are on 100% “take-or-pay” basis, even spot cargoes, once ordered, turn into take or pay. These agreements were signed to complete the supply chain for four LNG power projects - each having maximum need of 185 mmcfd at full capacity.

After approval of a summary by the CCOE that exempted three LNG power plants from 66% guaranteed offtake, the entire exposure was shifted to PSO and PLL, said the Petroleum Division.

“From the governance point of view, the shifting of this loss to PSO or SNGPL through a government decision is not legally tenable,” it said.

In addition to that, SSGC has inked LNG Operations and Services Agreement with Engro Elengy Terminal Limited, which covers receipt, storage and regasification of 4.5 million tons (600 mmcfd) of LNG per annum for a period of 15 years till March 28, 2030 with fixed capacity charges. Earlier termination option is available only after the completion of contract year ie 2024 which carries damages payable to Engro Elengy by SSGC.

Separately, PLTL has struck LNG Operations and Services Agreement with Pakistan GasPort Limited, which covers receipt, storage and regasification of 4.5 million tons of LNG for a firm period of 15 years ie until 2033 with fixed capacity charges per annum.

Earlier termination option is available only after completion of contract year ie 2027, which carries damages payable to Pakistan GasPort by PLTL.

“If the Power Division does not take this LNG, the utilisation level will go down and this will result in extra capacity payments to terminals by SSGC and PLTL, which is non-recoverable,” the Petroleum Division said.

Financially it was not sustainable for SNGPL, and hence PSO and PLL, to supply LNG to these power plants, without a reciprocal take-or-pay deal for the long term, it said.

“In this situation, PSO and PLL will not do any spot buying and simply offload the 800 mmcfd they are bound to purchase. When this is done, LNG will not be available to the four power plants.

“It is, therefore, highly likely that after one or two years, these plants will not be able to obtain LNG when they want it. In essence, there will be no assurance of LNG supply and power consumers will be paying big capacity payments to these plants.”

Published in The Express Tribune, September 27^th, 2020.

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