ISLAMABAD: Finally, the government on Wednesday allowed Pakistan State Oil (PSO) to sign LNG Sale Purchase Agreement (LSPA) with Qatargas for import of liquefied natural gas (LNG) of around $16 billion in 15 years at a relatively lower rate.

The decision was taken at a meeting of the Economic Coordination Committee (ECC) of the Cabinet presided over by Finance Minister Ishaq Dar which also allowed export of 600,000 tonnes of wheat at about Rs3.5bn subsidy.

The ECC had been dragging feet to approve the LSPA with Qatar because of difference of opinion over its legalities and higher prices offered by Qatar. On Wednesday, the ECC gave a go-ahead when it was informed that Qatargas had agreed to reduce LNG price to 13.37 per cent of Brent to match a bid received from Russian firm Gunvor for five years.

ECC approves export of 600,000 tonnes of wheat with Rs3.5bn subsidy

PSO and the petroleum ministry had previously initialled an LNG rate of 13.9pc of Brent which was considered on the higher side by majority of the energy sector experts. The sources said PSO also signed an agreement with Gunvor on Wednesday in Karachi for five years at 13.37pc of Brent.

Some critical liabilities of Qatargas would, however, now rest with the local companies and consumers. In its summary to the ECC, the petroleum ministry had requested the government to sign the agreement on the basis of ‘take or pay’ liability on Pakistan and 20pc liability on LNG supplier for its failure or off-specification supplies.

Also, the ministry stated that under the original sales and purchase agreement (SPA), the Qatar Liquefied Gas Company Limited 3 (QG3) was to pay port charges at a minimum of $320,000.

These charges were approved by Oil and Gas Regulatory Authority (Ogra) in its regasified-LNG (RLNG) price early last month at $8.64 per million British Thermal Units (mmBtu).

However, the Qatar authorities now wanted LNG supplies through Qatar Liquefied Gas Company 2 (QG2) whose port charges would be on the higher side. PSO and the petroleum ministry requested the ECC to direct the regulator to allow port charges beyond $320,000 to become part of RLNG.

The summary also reported the LNG supply contract with QG would be on a government-to-government basis for 15 years. It said that “the price of LNG is pegged with oil prices and is priced as a direct percentage of Brent and under current rates the value of potential LNG supply under the SPA is about $16bn”.

Moreover, “the SPA is a take or pay contract and as such PSO will be liable to pay for all the quantities as per the contract” although some mitigating provisions were also part of the agreement.

Conversely, “the seller liabilities under the contract are capped at 20pc in case of non-delivery of LNG or where off-specification LNG is delivered and is accepted by PSO, subject to the fact that the costs are reasonable and incurred by PSO or billed by the gas companies”, the ministry reported.

In case off-spec LNG is delivered where neither PSO nor seller was aware that LNG was outside specification, then subject to the conditions the cap on liabilities is 25pc for the seller.

Moreover, port charges in excess of $320,000 (being the maximum payable by QG2 under the SPA) will be paid by PSO and will form part of price of RLNG or swapped gas as determined by Ogra and notified by PSO. Port charges for QG2 are estimated at about $700,000.

“Ogra be directed to in this regard (to include this new element in price) and to approve the terms of SPA,” the petroleum ministry pleaded.

The petroleum ministry had also proposed that “PSO should be exempted from any arrangement under which they have to get the LNG re-gasified and that they shall have no responsibility for blending or dilution” even though it is required under the LNG Policy 2011.

On top of that, an executive order has been demanded to be issued to nullify existing laws by clarifying that “sale of LNG/RLNG by PSO (as LNG buyer) to the gas companies or third parties is not inconsistent with the LNG policy”.

Moreover, the ECC was also requested to declare that since Sui Southern Gas Company (SSGCL) had already entered into a LNG Services Agreement for receiving, storage and regasification of LNG with Engro Elengy Terminal, PSO should not be required to enter into such arrangement or agreement. “Accordingly, PSO may be allowed to sell the LNG/RLNG to the gas utility companies or third party consumers,” the ministry pleaded.

The ministry has also sought approval of the ECC to allow PSO as buyer to execute the Sale and Purchase Agreement along with Side Letter with QG2 (instead of QG3) as seller pursuant to government-to-government agreement and also to approve Master Sales and Purchase Agreement (MSPA) on Freight On Board (FOB) or Delivery Ex-Ship (DES) with Qatargas Operating Company Ltd.

Under the agreement, QG2 is expected to supply a minimum of 1.5 million tonnes of LNG per annum (MPTA) in the first two years (2016-17), which will increase to three million tonnes for third year onward (2018-30). In the first year, a minimum of 200 mmcfd RLNG will be inducted into gas system which will increase to 400 mmcfd in the second year.

WHEAT EXPORT: The ECC also allowed, despite opposition from Punjab government and the ministries of commerce and food security, export of 600,000 tonnes of wheat. The opponents were of the view that subsidised export would end up in the local market despite budgetary injections.

The Pakistan Floor Mills Association and the Sindh government had, however, strongly requested wheat export with subsidy. Sindh was of the view that unless export was allowed the provincial government would not be in a position to procure substantial quantity of wheat from the next crop.

The ECC, therefore, allowed export of 200,000 tonnes from Sindh at $45 per tonne subsidy and 400,000 tonnes from Punjab at $55 per tonne subsidy. The export scheme will be implemented with immediate effect and will continue till March 15, 2016.

It also approved a proposal of the commerce ministry on federal share of cash support on export of sugar and decided that cash support will be allowed only to those sugar mills which purchase sugarcane at minimum price of Rs180 per 40 kg from the farmers. The committee emphasised that such millers who do not pay the full price to the farmers should not benefit from the government support for exports.

Published in Dawn, January 14th, 2016