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IEEFA: Investments in new LNG infrastructure may not be a safe bet for Pakistan

February 07, 2022
Haneea Isaad and Zofeen Ebrahim

Extreme cold across the country, a domestic gas supply gap of 1,300 million cubic feet (mcf) per day,and skyrocketing imported liquefied natural gas (LNG) prices that Pakistan cannot afford are becoming a nightmare for Pakistan’s government.

The Prime Minister’s recent directive to public gas utilities to build an LNG terminal by next winter may be rooted in the right reasons. Still, it is hard to find an economic justification, with fears it may become another stranded asset, resulting in increased electricity and gas tariffs for consumers.

The power sector consumes the largest proportion of LNG imports, followed by general industries and the fertiliser sector, which uses it both as feedstock and fuel.

Extreme LNG price volatility continued into 2021, with single cargoes selling as high as USD 56/mmbtu in October 2021

Back in 2015, when the first LNG import terminal was set up, investments in LNG infrastructure and power plants were justified with the argument of pivoting away from expensive furnace oil, which the country relied heavily on for power production. Even up to 2019, LNG import prices ranged from USD 7-10/metric million British thermal unit (mmbtu) to their lowest point ever, under USD 2/MMBtu during 2020. Compared to other liquid fuels, these low prices provided temporary relief to power producers.

Unfortunately, the trend has since reversed. The last quarter of 2020 brought with it an extremely cold winter in North Asia, causing the demand for natural gas to soar. Extreme LNG price volatility continued into 2021, with single cargoes selling as high as USD 56/mmbtu in October 2021. Countries exposed to the spot market were forced to pay these exorbitant prices or go without fuel entirely. Pakistan, which sources more than half of its LNG from spot markets, faced spot prices as high as USD 30/mmbtu and often failed to procure the fuel at such unfavourable rates.

Pakistan has four long-term contracts with LNG suppliers. However higher profit margins in international spot markets may incentivize the suppliers to default on cargo deliveries. Without sufficient legal protection to prevent this, Pakistan is forced to float emergency tenders for LNG supplies. These tenders often yield higher prices than term contracts. For example, in October 2020, when Pakistan floated tenders for six cargoes to be used in December, the bids received were in the range of 16-19% of the Brent rate (the international benchmark for crude oil pricing), much higher than the 13.37% of Brent rate offered by the long-term LNG supply contract with Qatar.

This winter, two suppliers with long-term contracts with Pakistan—ENI and Guvnor—defaulted on term deliveries. To compensate, Pakistan had to accept a cargo at the highest ever price of $30.6/mmbtu from Qatar Energy to meet its peak winter demands for December.

Methane accounts for nearly a quarter of global temperature rise leading to climate change

Extreme LNG price volatility has led to another unpalatable effect in the power markets. Unable to procure enough LNG from the government, the power producers have now turned to furnace oil to ensure adequate power supplies—the very situation LNG infrastructure was built to avoid.

A floating offshore LNG terminal may cost between USD 400500 million without factoring in operational expenses and imported fuel costs. In contrast, upfront costs for setting up solar power plants in Pakistan are USD 600,000 per megawatt (MW). This means that the installation of 1,000MW of solar capacity on an upfront cost basis could cost nearly the same as a single LNG terminal. Furthermore, exorbitant spot prices directly impact the cost of power production when LNG is used as a fuel. This winter, fuel costs alone for LNG power plants went as high as Rs.16/kilowatt hour (KWh), while the levelized cost of electricity generation from solar and wind energy stood at just Rs.6/KWh.

But in its race to keep its citizens warm and the furnaces lit, and as Pakistan scrambles to procure more of this expensive fuel, the Pakistan Tehreek-e-Insaf (PTI) government must not lose sight of the pledge it has made to have a 60% share of renewables in the energy mix by 2030, or how potent methane emissions are. One of the main constituents of natural gas, methane accounts for nearly a quarter of global temperature rise leading to climate change.

The IEA predicts that price volatility will likely continue in 2022

The International Energy Agency’s latest gas markets report predicts that price volatility will likely continue in 2022 and will hurt emerging economies the most.  As companies turn towards strategies that lead them on the path to reaching net-zero targets, there will be little room for gas, and LNG use will need to decline by 60% by 2050.

Even if we set the environmental and climate cost aside and mull over the chaotic supply conditions of LNG, it may be prudent not to invest in more LNG infrastructure, given the government’s inability to procure enough cargoes on the spot market. Without gas availability, what is the point in building terminals that may become white elephants? Getting money out of LNG and putting it in renewables instead may be a smarter move in a rapidly changing world that favors climate-friendly investments.

Haneea Isaad is a Research Associate at the Institute for Energy Economics and Financial Analysis, and Zofeen T. Ebrahim is a Karachi-based independent journalist. 

This commentary was first published in DAWN.

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Haneea Isaad

Haneea Isaad is an energy finance analyst at IEEFA. Based in Pakistan, she covers Asian energy markets with a focus on Southeast Asia and Pakistan.

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Zofeen Ebrahim

Zofeen Ebrahim is a guest contributor at IEEFA.

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