Liquefied natural gas: Qatar agrees to supply 200 mmcfd from next year

Pakistan dismisses demand for $200m penalty for contract termination.

ISLAMABAD:

Qatar has given a firm commitment to Pakistan that it will start exporting 200 million cubic feet of liquefied natural gas per day (mmcfd) next year – a promise that will end years of efforts to bring vital gas supplies to ease energy shortages, officials say.

This comes as the government takes a giant leap forward to prepare for receiving LNG imports.

Interstate Gas Systems (ISGS) – a state-run company formed to handle energy import projects – has wrapped up the process of awarding the LNG terminal services contract to Elengy Terminal Pakistan Limited, a subsidiary of Engro Corporation.

ISGS has already signed Iran-Pakistan and Turkmenistan-Afghanistan-Pakistan-India gas pipeline deals. It has also completed the task of awarding the LNG terminal contract in less than six months.

The government is keeping three options open for LNG import including a supply agreement with Qatar on a state-to-state basis, floating tenders for import through competitive bidding and spot purchases after the successful bidder completes construction of a terminal in Karachi.

A Qatari team, which was in Pakistan, held a meeting with officials of Pakistan State Oil, Sui Southern Gas Company and ISGS on May 13 in Karachi to discuss the proposed Heads of Agreement – a non-binding document outlining the main issues relevant to a partnership agreement, sources told The Express Tribune.

“Qatar gave a firm commitment to export 200 mmcfd of LNG, which will be later enhanced to 400 mmcfd,” a source familiar with the development said.

According to officials, the two sides discussed different clauses of the Heads of Agreement such as volume of LNG, specification of gas, guarantees and timeframe for first supplies to Pakistan. However, the price did not come up for discussion.

A senior official said the price was the last point that would be taken up after the two sides signed the Heads of Agreement. They had not finalised the agreement, therefore, the price was not quoted, he said.

Officials pointed out that Qatar sought to include a clause that would allow it to slap a $200 million penalty if Pakistan terminated the supply contract. However, Islamabad fiercely opposed the proposal and did not accept it.

“Now, the two sides will meet again next month to try and finalise the Heads of Agreement,” the official said.

In the agreement, Qatar insists that the LNG supply contract should be for 15 years extendable for another five years with no “price reopener”. It wants LNG price should be fixed as a percentage of Brent crude oil.

Earlier, during negotiations with the previous PPP-led government, Doha had offered LNG export at a price equivalent to 14.7% of Brent crude oil when it was hovering around $110 per barrel in the international market.

Later, it pushed the price down to $17.437 per million British thermal units (mmbtu), a 0.5% discount over the previous rate of $18.002 for the 20-year lifetime of the project.

The price did not cover capital cost of the LNG terminal and its charges, import expenses, re-gasification, wastage and shipping costs. The additional costs will add about $2.084 per mmbtu to the quoted price.

According to an assessment of the Ministry of Petroleum, gas production will drop from the current 4.47 billion cubic feet per day (bcfd) to 2.53 bcfd in 2019-20 if additional supplies were not brought.

Gas shortfall stood at 1.88 bcfd in 2013-14, which would jump to 4.79 bcfd in 2019-20.

The ministry plans to import 200 mmcfd to 2 bcfd of LNG, 750 mmcfd of natural gas from Iran and 1.365 bcfd from Turkmenistan to bridge the shortfall. It also wants to enhance supplies from domestic sources to meet energy needs in future.

Published in The Express Tribune, May 20^th, 2014.

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