ISLAMABAD: Amid legal and operational hiccups, the Pakistan State Oil (PSO) officially conceded on Tuesday its inability to ensure smooth supply of 300 million cubic feet of liquefied natural gas (LNG) until October, raising fears of a continued gas shortage in winter.

It also informed the federal government in writing that the cost of LNG supplies offered by some private parties would be higher than that of high sulphur furnace oil (HSFO) and low sulphur furnace oil (LSFO).

As a consequence, the basic premise for LNG import – fuel cost savings – had been lost, an executive of the state-run PSO told Dawn. He said the LNG import was basically considered as a replacement of furnace for being 20-25 per cent cheaper.

This comes at a time when a team of the Qatar Gas management, which visited Islamabad on Monday, declined to enter into a long-term agreement with the PSO because of at least five major shortcomings on part of the government.

The PSO said Qatar Gas had also turned down its request to extend validity of offer for LNG supply from four ships a month to two and further reduction in price by 20 cents per MMBTU.

The shortcomings include non-finalisation of a tripartite agreement among three state-run companies – SSGCL, SNGPL and PSO –, absence of a standby letter of credit (SBLC) to be provided by the PSO, shortfall in dredging at the port to enable Qflex ships and absence of commercial agreements with independent power producers for payment mechanism. On top of that, the Oil and Gas Regulatory Authority (Ogra) has not yet finalised an LNG sale price. A sale-purchase agreement between Qatar Gas and PSO has also not been finalised.

The PSO reported that there was a lack of interest on part of LNG suppliers and bids for its supplies in September attracted only a single party. It offered LNG prices at 15.56pc and 16.45pc of Brent.

“As per the pricing formula, the rate per MMBTU appears to be on the higher side, compared to the current prices of HSFO and LSFO being imported by the PSO. Moreover, these are the highest rates we have received so far since the LNG import was started in April this year,” wrote PSO’s pointman for LNG, Babar Hameed Chaudhry, to the Ministry of Finance.

Expressing its inability to extend any help in the given situation, the PSO said the only option available to it was to scrap the tender and ask SSGCL to maintain the lowest gas flow of 100-150MMCFD to avail of the services of terminal up to Sept 23.

It reported that since the regasified LNG price had not yet been finalised by Ogra, low supplies and no fresh cargo would be the most appropriate option to minimise the financial exposure.

At the rate offered for LNG supply, an official of the petroleum ministry said, the government would also have to make a mandatory payment of $272,000 per day to Engro Terminal. As a consequence, LNG terminal charges would go beyond $2.45 per MMBTU – almost four times the average bid rate of 66 cents per unit.

“This means Interstate Gas Company Limited, which originally prepared the LNG transaction, and PSO, which was responsible for importing the commodity, have failed to deliver on one of the most important energy supply projects,” the official said.

He said the country had been facing a shortage of over 1.6BCFD of gas during winter and part of this shortfall was planned to be partly bridged through injection of 400MMCFD LNG, which has now become uncertain. “It is ironic that neither a transaction structure could be finalised nor smooth supplies could be ensured in more than six months,” the official regretted.

He said the two gas companies were still not willing to sign a tripartite agreement in the absence of a side agreement the PSO was required to sign under a previous decision.

Under the leadership of PSO’s former acting chief Shahid Islam, the organisation had agreed to take responsibility through a side agreement for its failure to ensure committed LNG supply.

Mr Islam is no more in the driving seat following inquiries started by the National Accountability Bureau (NAB) and the gas companies are not ready to take those risks on behalf of the PSO.

And given the fact that the entire top hierarchy of PSO, including all deputy managing directors and members of the board of management, were removed early this year, the third tier executives were in no position in legal terms to take a major decision.

Published in Dawn, August 26th, 2015

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