Government defers ‘seller-favouring’ LNG contract

Officials say govt will review sale-purchase agreement

ISLAMABAD:

The government on Wednesday deferred a decision on signing a $16 billion deal with Qatar for import of liquefied natural gas (LNG), as fresh details of the proposed contract show that Islamabad will have to pay for the gas even if it does not receive consignments.

The Economic Coordination Committee of the Cabinet did not sanction the closely watched 15-year (2015-2030) government-to-government deal and formed a committee to further review the proposed sale purchase agreement, said an official of the finance ministry. The committee will submit its findings to the ECC on Friday, as the government wants to execute the deal at the earliest.



Pakistan has been trying to sign an LNG import deal for the past few years. The incumbent government re-initiated the process after coming to power but has made the matter unnecessarily controversial by hiding details of the proposed contract.

According to the proposed SPA, in the first year Qatar will supply a minimum 1.5 million tons per annum (mtpa) of LNG which can be increased up to 3 mpta at Pakistan State Oil’s (PSO) request in the first two years. From January 2018 until December 2030, the volume will be 3 mpta and Pakistan will have to buy the entire quantity or pay the full price.

The finance ministry official said Pakistan was facing a 15 mpta gas shortfall and the country will be able to buy the full gas quantity. He said mechanisms have also been devised to avoid circular debt in LNG – a claim yet to be tested.



The Ministry of Petroleum and Natural Resources had requested the ECC to approve the LNG import price and allow the PSO as buyer to execute the SPA with Qatar Liquefied Gas Company-2 (QG2), according to the summary of the ECC.  The ECC was also requested to allow the PSO to pay port charges in excess of $320,000, although the government claims the entire transportation cost is built into the price.

However, the ECC allowed setting up Pakistan Energy Limited as a subsidiary of a government-owned company to import the LNG and establish second LNG terminal in the country.



The government did not officially disclose the contract price but a senior official said it was above 13.6% of the Brent crude oil price but below 14%. On $49 per barrel crude oil, under the proposed formula, the price was $6.64 per mmbtu – a rate that will significantly increase once crude oil prices return to normalcy.

“The price of LNG is pegged with oil prices and is priced as a direct percentage of Brent and under current prices the value of potential LNG supply under the SPA is about $16 billion,” according to the ECC summary.



“The contract price in US dollars/mmbtu will be a percentage of the average Brent crude oil price as quoted by the Intercontinental Exchange (ICE) of the first line ICE Brent Future’s Contract (BRICE) for the relevant three months preceding the month of loading of the relevant cargo as already advised to the price negotiation committee,” the proposed SPA documents showed.

The documents showed that the proposed SPA fully protects the rights of the seller, the Qatari government, at the expense of the buyer. “The SPA is a take or pay contract and as such the PSO will be liable to pay for all the quantities as per the contract.”

The official said that in case Pakistan remains unable to procure the LNG, it will still have to pay 100% gas price. However, the seller’s liabilities under the contract are capped at 20% in case of non-delivery of LNG.

Under the proposed SPA, the price cannot be reviewed before 10 years of the implementation of the contract. The contract price may only be negotiated once in supply period of 15 years and it cannot be done before 2025.



The documents showed that the SPA agreement can be terminated due to either party’s insolvency, and due to material breach of the agreement. In case the PSO fails to pay the due amount or fails to replenish the Standby Letter of Credit or the bank issuing the letter falls below the required credit rating, the Qatar government can cancel the deal.

In case of dispute, the English law will be applicable. Any dispute that is not technical will be finally settled by three arbitrators in accordance with UNCITRAL Rules of Arbitration in London, UK. If the parties fail to appoint the arbitrators, the Court of Arbitration of the International Chamber will appoint the arbitrators.

The LNG supplies will be delivered ex-ship by Qatargas on partially laden Qflex vessels. However, in view of certain port constraints, until the parties agree otherwise, smaller conventional vessels will be used, showed the proposed agreement. In the meantime, the parties are to make efforts to resolve the issue by March 2016.



In order to facilitate LNG imports for power generation, the ECC also approved setting up five subsidiaries of Government Holding Private Limited at Sukkur, Faisalabad, Multan, Shahdra and Mardan.

The ECC also allowed to setting subsidiaries of holding company for catering future investment and infrastructure needs. However, the Ministry of Finance opposed the decision on grounds that the company’s job was limited only to oil and gas exploration.


Published in The Express Tribune, November 26^th, 2015.