FROM energy shortages to the risk of penalties, the government seems to be facing ever-growing challenges as it resorts to fire-fighting, finding precious little time to take right decisions at the right time.

As of January 23, the government has not finalised any agreement with independent power producers for amending their power purchase agreements (PPAs) or sign new gas sales deals for the use of LNG.

The basic objective behind importing LNG was to replace the usage of expensive furnace oil by the power sector. The PPP, caretaker and the PML-N governments had also pledged that imported LNG would not be included in the weighted average cost of gas for domestic consumers and others protected under existing long-term policies.

Under agreements with the government, Engro Corporation is in the final stages of completing its terminal at Port Qasim for regasification and supply of gas to the national transmission system, operated from the port by SSGCL. The same agreement required the government to ensure LNG imports latest by March 31 to enable utilisation of Engro’s LNG terminal. In case of delay, the government and its entities are liable for $250,000 in penalties per day.

As of now, the government has not been able to finalise import arrangements or its pricing. The government needs to finalise arrangements with IPPs first, to be able to translate the implications of import agreements into local supply deals, which are not going to be acceptable to IPPs. “Putting the cart before the horse” is not going to work, according to a senior official.

Taking advantages of these weaknesses, some in the omnipresent oil business have already raised the ante by circulating stories of bad LNG pricing even before the prices were discussed — a repeat of the 2010 LNG arrangements that were finally annulled with the intervention of the Supreme Court.

As of now, the government has not been able to finalise import arrangements or its pricing

The government had held a series of meetings with IPPs like Saif, Saphhire, Orient, Halmore, Rousch, Fauji Kabirwala and Kapco etc, but none were willing to take additional risks for upcoming complications beyond their existing obligations under power purchase and fuel supply agreements. In official jargon, these back-to-back agreements are not materialising.

The looming complication is that the government is in talks with Qatar for an LNG Sales Purchase Agreement (LNGSPA) that would need to be introduced back home through reverse engineering.

Consequently, adverse conditions in sales purchase or gas sales agreements would require re-opening of past PPAs involving a host of public sector companies — Wapda, WPPO, PPIB, NTDC etc — and local and international lenders, provided the IPPs agree on gas purchases. The entire process requires 6-12 months, while LNG imports are just round the corner.

So far, all the above mentioned IPPs have declined to accept the conditions for LNG. They are currently entitled to capacity payments even if NTDC fails to procure their electricity or if the fuel supplier (PSO or a gas company) defaults on the fuel supply.

On the other hand, the LNG agreement seeks the IPPs to be responsible for 100pc take-or-pay because a ship at port has to be offloaded even if the power purchaser is not ready to buy the electricity for any reason. The IPPs are not ready to scrap a guaranteed straight jacket agreement and take additional liabilities for no gains — the fuel price is directly passed through in the consumer tariff.

The end-outcome of this scenario is that the entire imported LNG has either to be dedicated to the CNG sector or the national grid, and thus be made part of domestic and fertiliser tariffs. In both cases, domestic consumers would suffer because of the impact on the weighted average cost of gas. This is because almost all CNG stations are on distribution gas lines involving up to 15pc system losses and not on main transmission lines.

The government’s reluctance to pass on minor gas tariff increases approved by the gas regulator to domestic consumers suggest it would be difficult for it to absorb the difference between the imported LNG’s cost of $10-14 per MMBTU and the domestic existing price of $3-4 per MMBTU.

The Sindh government and SSGCL have already declined to have a part in LNG because of its higher cost when compared with their sufficient local supplies. Sindh produces about 70pc of the country’s existing gas supply and utilises less than 40pc of national consumption.

The exponential growth in the gas price over the next couple of years could be ascertained from the fact that LNG flows of 250MMCFD has to begin on April 1 under the agreement, before gradually going up to 400MMCFD by October. On top of that, another 1,200MMCFD in LNG imports are to be delivered by 2017, followed by a further 1,200MMCFD by 2019.

With a total of 2,500MMCFD of LNG imports averaging at $12-14 price and with domestic prices at less than $4, average gas prices could not be politically viable for domestic consumers. Domestic gas supplies, meanwhile, remain stagnant at 4,000MMCFD.

As if that was not enough, the petroleum ministry has empowered a skeleton company — Interstate Gas Company (ISGC), set up for facilitating gas imports — for laying a 700km gas pipeline from Gwadar to Karachi, setting up another LNG terminal and constructing an1,100km Karachi- Lahore gas pipeline to transport LNG (both involving $1.5-2bn) by bypassing SSGCL and SNGPL, which have experience of constructing over 100,000km of gas pipelines.

Published in Dawn, Economic & Business, January 26th , 2015

On a mobile phone? Get the Dawn Mobile App: Apple Store | Google Play