The LNG debate: a comparison of apples and oranges
LNG trade has higher infrastructural and logistical requirements than oil trade
A quick examination of the international LNG market reveals that the LNG supply chain is an infrastructure-intensive undertaking relative to the oil supply chain. PHOTO: FILE
ISLAMABAD:
Now that Shahid Khaqan Abbassi is prime minister, the import of liquefied natural gas (LNG) from Qatar is once again a subject of controversy. Political commentators seem to be baffled by the complex agreement and vehemently question merits of the same, especially on two counts: the price of LNG and length of the contract.
This confusion can be partly attributed to the general lack of understanding on part of the critics, given the novelty of the whole LNG import business, and partly to the freewheeling bias against all things PML-N.
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However, the whole affair becomes increasingly vivid once we start asking the right questions. The first question that comes to mind is: did we really buy LNG at a higher price than what was available in the market?
Before answering this question, let us first examine what the detractors contend. They argue that buying LNG at about $5/mmbtu when it is available for about 20% less in the spot market is ill-advised and smells of kickbacks. Why pay more for something that is available for less?
But first things first, is it a good idea to compare long-term contract prices with spot market prices to begin with? To answer this question, one must understand how the international LNG trade is conducted.
An initial cause of confusion is the constant comparison between LNG trade and oil trade as naturally, the energy experts argue, both are a form of fuel. If Pakistan buys oil by inviting bids for individual cargoes then why enter into an uncompetitive 15-year government to government contract worth over $15 billion for LNG?
A deeper analysis of the respective trade of oil and LNG reveals that comparing the two is a classic case of comparing apples and oranges.
A quick examination of the international LNG market reveals that the LNG supply chain is an infrastructure intensive undertaking relative to the oil supply chain, and for that reason, is stacked up in a very specific manner.
From the huge liquefaction trains that purify natural gas to levels of up to 99% purity and chill it to an unbelievable -163 Celsius, to the giant LNG carriers that carry the super chilled LNG across oceans and then to regasification facilities, all legs of the LNG supply chain are considerably investment-intensive as compared to the oil supply chain.
Plus the age of the industry is about 50 odd years as compared to the 160 plus years of the oil industry and as such most of the capacity at the various legs of the LNG supply chain is committed in firm contracts, with only minuscule excess capacities available, and that too are built to ensure that contracted supplies can be produced and delivered in case of unforeseen shutdowns.
To put it simply, there is essentially a line of sight from the gas well to the gas consumer; meaning thereby that volumes contracted at gas source have to correspond to liquefaction capacity, regasification capacity and so on to the volume sold to the end buyer.
In the Pakistani context this means that before committing to invest in a regasification terminal Engro had to ensure that all legs of the transaction, be it the 15 year LNG supply from Qatar or purchase of the same by PSO, evolved into firm contracts.
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Moreover the oil supply market has matured to a level where the various oil products have become homogenous and therefore the only variable left is price. Hence it makes sense to focus just on price in the oil trade as the rest of the variables are largely standardised.
This doesn’t hold for the LNG supply market. Supply of a single cargo is hugely different from supplying 5 cargoes per month for 15 consecutive years. That is 900 cargoes in total, all scheduled weekly for 15 years, like clockwork.
Coming back to the LNG spot-trade, it is the excess capacities that are built into every leg of the LNG supply chain that form the basis of the spot market. Currently the spot market accounts for about 28% of the total LNG trade.
The spot prices are extremely sensitive to the prevailing demand and supply situation. Historical data shows that spot prices have been trading at less than the long-term contract prices for roughly half of the time and trading higher the other half.
In 2011, spot prices fell from over $20/mmbtu to around $2/ mmbtu when the US, the biggest importer of LNG thus far, stopped import due to a surge in supply of shale gas. The opposite occurred when Fukushima disaster befell and the power sector’s demand in Japan skyrocketed.
What has eluded the so-called energy experts is the fact that only when there is a long-term LNG supply contract in place can the investment for a regasification terminal be underpinned.
The investment for the Engro regasification terminal is to be recovered in 15 years and therefore the whole business of procuring, transporting and selling LNG to extent of the contracted period of 15 years and capacity of 4.5 MTPA, has to convert into binding contracts. In the absence thereof, no financial institution would back such a project.
As of now, there is a supply glut in the LNG supply market and consequently the spot market is trading at an attractively low price. Pakistan is all set to take advantage of this low price as more regasification terminals are being put up. This influx of cheap LNG would certainly do wonders for the gas starved industries in the country.
What is criminally overlooked is the economic impact of addition of LNG into the gas-starved national grid on the lives of the people who are associated with industries which were suffering shutdowns and curtailment for last 4/5 years.
Unfortunately this impact is very hard to measure with any mathematical exactitude but infinitely important at the same time. About 2300 CNG stations and hundreds of industries across Punjab faced imminent closure had there been no influx of LNG. Needless to say each of these units provides sustenance to more than a dozen families and the combined number would run into the thousands.
Cheap local $3/ mmbtu gas is better than $5/ mmbtu LNG but LNG is still better than no gas at all. The fact of the matter is that for many of the industries that are consuming LNG, there was no gas available. Hence the trade-off between no gas and expensive LNG is a no-brainer.
The writer is the Senior Vice President of the All Pakistan CNG Owners’ Association (APCOA)
Published in The Express Tribune, September 11th, 2017.
Now that Shahid Khaqan Abbassi is prime minister, the import of liquefied natural gas (LNG) from Qatar is once again a subject of controversy. Political commentators seem to be baffled by the complex agreement and vehemently question merits of the same, especially on two counts: the price of LNG and length of the contract.
This confusion can be partly attributed to the general lack of understanding on part of the critics, given the novelty of the whole LNG import business, and partly to the freewheeling bias against all things PML-N.
LNG scandal: Attempt to discredit Abbasi?
However, the whole affair becomes increasingly vivid once we start asking the right questions. The first question that comes to mind is: did we really buy LNG at a higher price than what was available in the market?
Before answering this question, let us first examine what the detractors contend. They argue that buying LNG at about $5/mmbtu when it is available for about 20% less in the spot market is ill-advised and smells of kickbacks. Why pay more for something that is available for less?
But first things first, is it a good idea to compare long-term contract prices with spot market prices to begin with? To answer this question, one must understand how the international LNG trade is conducted.
An initial cause of confusion is the constant comparison between LNG trade and oil trade as naturally, the energy experts argue, both are a form of fuel. If Pakistan buys oil by inviting bids for individual cargoes then why enter into an uncompetitive 15-year government to government contract worth over $15 billion for LNG?
A deeper analysis of the respective trade of oil and LNG reveals that comparing the two is a classic case of comparing apples and oranges.
A quick examination of the international LNG market reveals that the LNG supply chain is an infrastructure intensive undertaking relative to the oil supply chain, and for that reason, is stacked up in a very specific manner.
From the huge liquefaction trains that purify natural gas to levels of up to 99% purity and chill it to an unbelievable -163 Celsius, to the giant LNG carriers that carry the super chilled LNG across oceans and then to regasification facilities, all legs of the LNG supply chain are considerably investment-intensive as compared to the oil supply chain.
Plus the age of the industry is about 50 odd years as compared to the 160 plus years of the oil industry and as such most of the capacity at the various legs of the LNG supply chain is committed in firm contracts, with only minuscule excess capacities available, and that too are built to ensure that contracted supplies can be produced and delivered in case of unforeseen shutdowns.
To put it simply, there is essentially a line of sight from the gas well to the gas consumer; meaning thereby that volumes contracted at gas source have to correspond to liquefaction capacity, regasification capacity and so on to the volume sold to the end buyer.
In the Pakistani context this means that before committing to invest in a regasification terminal Engro had to ensure that all legs of the transaction, be it the 15 year LNG supply from Qatar or purchase of the same by PSO, evolved into firm contracts.
Abbasi’s nomination as interim PM challenged
Moreover the oil supply market has matured to a level where the various oil products have become homogenous and therefore the only variable left is price. Hence it makes sense to focus just on price in the oil trade as the rest of the variables are largely standardised.
This doesn’t hold for the LNG supply market. Supply of a single cargo is hugely different from supplying 5 cargoes per month for 15 consecutive years. That is 900 cargoes in total, all scheduled weekly for 15 years, like clockwork.
Coming back to the LNG spot-trade, it is the excess capacities that are built into every leg of the LNG supply chain that form the basis of the spot market. Currently the spot market accounts for about 28% of the total LNG trade.
The spot prices are extremely sensitive to the prevailing demand and supply situation. Historical data shows that spot prices have been trading at less than the long-term contract prices for roughly half of the time and trading higher the other half.
In 2011, spot prices fell from over $20/mmbtu to around $2/ mmbtu when the US, the biggest importer of LNG thus far, stopped import due to a surge in supply of shale gas. The opposite occurred when Fukushima disaster befell and the power sector’s demand in Japan skyrocketed.
What has eluded the so-called energy experts is the fact that only when there is a long-term LNG supply contract in place can the investment for a regasification terminal be underpinned.
The investment for the Engro regasification terminal is to be recovered in 15 years and therefore the whole business of procuring, transporting and selling LNG to extent of the contracted period of 15 years and capacity of 4.5 MTPA, has to convert into binding contracts. In the absence thereof, no financial institution would back such a project.
As of now, there is a supply glut in the LNG supply market and consequently the spot market is trading at an attractively low price. Pakistan is all set to take advantage of this low price as more regasification terminals are being put up. This influx of cheap LNG would certainly do wonders for the gas starved industries in the country.
What is criminally overlooked is the economic impact of addition of LNG into the gas-starved national grid on the lives of the people who are associated with industries which were suffering shutdowns and curtailment for last 4/5 years.
Unfortunately this impact is very hard to measure with any mathematical exactitude but infinitely important at the same time. About 2300 CNG stations and hundreds of industries across Punjab faced imminent closure had there been no influx of LNG. Needless to say each of these units provides sustenance to more than a dozen families and the combined number would run into the thousands.
Cheap local $3/ mmbtu gas is better than $5/ mmbtu LNG but LNG is still better than no gas at all. The fact of the matter is that for many of the industries that are consuming LNG, there was no gas available. Hence the trade-off between no gas and expensive LNG is a no-brainer.
The writer is the Senior Vice President of the All Pakistan CNG Owners’ Association (APCOA)
Published in The Express Tribune, September 11th, 2017.