Tread carefully on LNG imports

Long-term planning is crucial for a successful energy policy, as energy infrastructure, once built, lasts for decades.

On several fronts, the federal government appears to be moving much faster than its predecessors. It successfully conducted the auction of 3G and 4G spectrum. And now it appears to have awarded the contract for building a liquefied natural gas (LNG) import terminal to Engro Corporation, in a manner that seems far more transparent than the contract awarded under the previous government. However, in their haste to prove that they can do things quickly, the government may be rushing into agreements that it will regret. Building a terminal to import LNG at Karachi makes sense. Pakistan’s gas reserves will rapidly start depleting this year, creating a massive shortfall in supply that needs to be met through imports. What does not make sense is entering a two-decade long contract with the Qatari state-owned supplier of LNG that is clearly interested in engaging in price gouging. The contract with Qatar would bind Pakistan to a price of LNG close to a high price at a time when global prices of natural gas are expected to continue on a secular downward trend. The Qataris also appear to have chosen the most expensive benchmark of global oil prices to peg the gas price — Brent. A more relevant benchmark — incorporating the much lower extraction costs of the Gulf Arab states — would be the Arabian Light. If the government agrees to Qatar’s terms, the country would be bound not just to the price, but also to buy a significant volume of gas. It is clear that the Qataris are not negotiating in good faith.

Thankfully, the Qatar contract is only one of several options the government is considering for the import of natural gas. We are partial to the idea of buying LNG off the spot markets. LNG prices are high now, but will likely collapse dramatically once the US starts exporting in the next couple of years. The lack of a fixed contract would allow Pakistan to take advantage of those lower prices. Energy infrastructure, once built, lasts for decades. Long-term planning is crucial for a successful energy policy.

Published in The Express Tribune, June 5^th, 2014.

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