LNG import and terminal - controversy rumbles on

Terminal operator Engro insists it will earn only $150m over 15 years

Zafar Bhutta July 31, 2019
Terminal operator Engro insists it will earn only $150m over 15 years. PHOTO: REUTERS

ISLAMABAD: The National Accountability Bureau (NAB) has arrested the man behind starting liquefied natural gas (LNG) imports and setting up the country's first LNG terminal.

It was the pilot project for Pakistan and was apparently implemented in haste keeping in view the worsening gas and power shortages in the country. Officials are of the view there might be some procedural flaws but the intention was not bad at all.

Then petroleum minister Shahid Khaqan Abbasi, who was overseeing all the process, wrote a letter to NAB chairman at that time, asking him not to harass the officials concerned.

Abbasi, who is associated with the Pakistan Muslim League-Nawaz (PML-N), told the NAB chief that he was engaged in the entire process and would be responsible for everything. Now, he is facing trial after change of government as the Pakistan Tehreek-e-Insaf (PTI) has taken power.

Engro built the first LNG floating terminal with an investment of $130 million. The company is said to have collected $272,000 per day on account of capacity charges when the government was importing 400 million cubic feet of LNG per day (mmcfd).

Now, the capacity payments have come down to $228,000 per day with enhanced LNG imports of 600 mmcfd. With an investment of millions of dollars, the question arises how much money Engro will earn over the 15-year period for which an agreement has been signed with Qatar for LNG imports.

Overall revenue for Engro from this project has been estimated at $1.5 billion. The company argues it will pay back around one-third ($0.45 billion) of the revenue to the government - state-owned Port Qasim Authority (PQA) and the federal govt - in the form of taxes and port and shipping royalties.

The lease of floating storage and re-gasification unit (FSRU) is about $0.75 billion and the shore side facility costs $0.13 billion over the 15-year period. Engro insists it will earn only $150 million over the said 15 years.

Are there any procedural flaws?

An Engro spokesperson pointed out that in 2013 when the energy crisis worsened, the government, via Inter State Gas Systems (ISGS), issued an open and competitive tender for the setting up of an LNG terminal.

Engro Elengy Terminal Pakistan Limited (EETPL) participated in the single-step, two-envelope bidding process. An independent, professional and international firm - QED - evaluated all the technical bids. Of the two bidders, EETPL won the bid strictly in accordance with the Public Procurement Regulatory Authority (PPRA) Rules 2004, said the spokesperson.

The LNG Services Agreement (LSA) was approved by the Economic Coordination Committee (ECC) and Sui Southern Gas Company (SSGC) board as well as by the cabinet in an auditable and transparent manner.


Economic benefit

The spokesperson said accelerated work allowed Engro to make the LNG terminal operational from March 28, 2015, in only 335 days and within the committed time frame. Since then, the terminal has imported over 8 million tons of LNG, reducing Pakistan's gas deficit by an estimated 20-25%.

According to the spokesperson, Pakistan has saved approximately $5 billion since the start of the LNG project, replacing the import of more expensive furnace oil with LNG. The project has also revived the fertiliser sector, compressed natural gas (CNG) filling stations and more than 500 industrial units by ensuring consistent gas supply via LNG imports.

Parts of Punjab could have potentially shut down if there was no LNG, the spokesperson added.


Capacity charges

Capacity payments are a norm in the energy industry for projects of such nature and are designed for the recovery of investment and operating costs including the lease of FSRU for large and complex projects.

It is also important to note that fixed capacity or 'take or pay' mechanism is binding on both the parties ie if Engro fails to deliver gas as per quality or is offline for any reason, it will pay a penalty of $342,000 per day and also lose the capacity fee of $228,000 per day for that particular day.

Such a mechanism is not new for the LNG industry and most LNG re-gasification terminals and liquefaction chains operate on the same take or pay model.



A similar take or pay model has also been applied in the case of independent power producers under which power generating units of up to 4,200 megawatts have been installed and operated since the mid-1990s.

For a 600MW IPP, the levelised upfront tariff approved by the National Electric Power Regulatory Authority (Nepra) is 1.83 cents per kilowatt hour (kWh), which means the IPP will receive approximately $242,000 a day as fixed cost of the power plant.

This does not mean that the IPP will make profit of $2 billion over its life of 25 years as it needs to recover hefty capital expenditure and operating costs, insurance, etc through such a mechanism.

Fixed daily charges - called capacity payments in the industry - were part of the contract issued by ISGS and all bidders were provided with an equal opportunity.


Tolling fee comparison

ETPL's tolling rate is one of the most competitive in the world. Its tolling fee was $0.66 per million British thermal units (mmbtu) when imports were 400 mmcfd, but it has come down to $0.44 following increase in imports to 600 mmcfd.

In Indonesia, Arun LNG charges $2.58 per mmbtu, other terminals in Indonesia receive $1.5-1.8 per mmbtu, China LNG Terminals $1.5-2 per mmbtu, India's Kochi $1+ per mmbtu, Italy's Adriatic LNG $1.47 per mmbtu, Italy's offshore LNG Toscana $1.2 per mmbtu, Korea & Japan LNG terminals $0.8-1 per mmbtu, Lithuania's Klaipedos Nadta $0.88 per mmbtu and Pakistan's SSGC retrofit project (scrapped) $0.8 per mmbtu.


Controversy over cost escalation

There has been controversy that initial cost of the project was $40 million, which later escalated to $150 million. However, Engro and government officials say $40 million and $150 million were two different projects, which had different technical specifications.

The $150-million project was a totally new and Greenfield project where extensive dredging was undertaken to create a new berth. The $40-million project had been proposed to use the existing operating berth at Engro Vopak Terminal Limited (EVTL) where no dredging or offshore construction work was required.

Additionally, under the revised project, a 24-kilometre pipeline network was also laid a new jetty was constructed, which was capital-intensive in nature, the Engro spokesperson said.


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