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My Qatar LNG Bargain is Better than Yours

The incumbent government’s LNG deal with Qatar is nominally cheaper but there are other things to consider.

Late last month, Pakistan signed another long-term Liquefied Natural Gas (LNG) supply contract with Qatar for additional 200 million cubic feet per day (MMCFD) at around 31 percent lower rate than 2015 contract for 500 MMCFD.

Soon after the signing of initial agree- ment at the Prime Minister Office, Nadeem Babar, the Special Assistant to the Prime Minister on Petroleum, said that new agreement envisaged “the lowest ever publicly disclosed price under a long-term contract in the world” as of signing of the agreement and was achieved through the joint efforts of the political and military leaderships.

This reminds similar pronouncements by then petroleum minister Shahid Khaqan Abbasi who spearheaded the realization of LNG import into Pakistan through setting up of first LNG regasification and storage unit (FSRU) in the public sector but through the private sector and finalized long-term LNG import deals with Qatar and LNG trader Gunvor.

Taking credit for “game changer” LNG imports deal, Abbasi had also repeatedly claimed all those years that he had done the best deal of the time by securing the lowest long-term price and no major LNG purchasers – including much bigger players than Pakistan like Japan and India had secured such a bargain until then. “This agreement is being acknowledged globally as most cost effective deal for LNG. Pakistan will continue to import LNG from Qatar till 2032”, Mr Abbasi had said after signing the agreement with Qatar by calling it the “best available option,” that he had claimed would save the country USD 1 billion every year for 15 years.

The two deals are no apple to apple comparison since the two have taken place with a gap of about 5-6 years under different global economic conditions, variables in the international oil and gas markets and gradual maturing Pakistani market.

For a reasonable comparison, it has also to be kept in mind that at least two governments had tried and failed to put in place LNG import arrangements and supply infrastructure and mechanism in multiple attempts over the preceding 11 years despite the ever increasing gas shortages.

The first steps is always the most difficult that becomes the basis of a long successful walk. Unfortunately, we have the habit of politicizing even the most crucial economic decisions that affect the lives of the people instead of taking advantage of the best of the collective wisdom.

The Pakistan Tehreek-e-Insaf (PTI) had been critical of the Qatar deal from the outset. Soon after coming to power, PTI government tried to renegotiate the long-term contracts with Qatar signed by the PML-N government in 2015-16 as oil and gas prices eased with additional LNG production facilities coming on line in various parts of the world including Austra- lia and the United States.

Qatar had plainly declined even to discuss the existing contract saying it had over two dozen similar long-term contracts with other countries and did not want to set a precedent for contract openers but had offered to provide 20-25 percent price discounts on up to 200 MMCFD of additional LNG supplies given the close friendly relations between the two countries.

The offer did not materialize as Pakistan did not have the capacity beyond 100 MMCFD of additional quantities at the time and also because of disagreement within the cabinet members on political reasons.

Meanwhile, demand surged, gas network expanded and winter shortages started to reappear. Hence the feasibility for another long-term contract based on lessons learnt from expensive spot purchases in winter amid global supply disruptions.

The new Qatar deal would replace the two existing and expiring long-term deals. The fresh supplies, beginning January 2022, would replace an existing long-term contract of commodity trade with Gunvor that expired last December and another due to come to an end in 14 months from now. As such, the two new cheaper ships will replace two expensive ships of the past.

The new 10-year agreement, beginning January next year (2022), will deliver initially two ships per month (about 200 million cubic feet per day) and then go up to four ships per month (400 MMCFD) at the rate of 10.2 percent of Brent. In comparison, the first Pak-Qatar LNG contract was for 15 years, beginning 100 MMCFD (one ship per month) and going up to 500 MMCFD (five ships a month) at a rate of 13.37 percent of Brent. In crude absolute numbers, the PMLN deal is therefore expensive.

The new contract has a price renegotiation option after 4 years against after 10-years in the existing old contract. Interestingly, however, the timing of both contract openers for price renegotiations happens to be almost the same and may be taken up for discussions at or around the same time in 2026. So that does not make much of a difference. Also, both agreements would effectively come to an end at almost the same time after 10 years unless extended with mutual understanding of both parties.

Also, the total spot purchases as of December 2020 averaged at 11.90 percent of Brent compared to 13.37 percent of Brent in the three initial long-term contracts signed about five years ago. The new Qatar price at 10.2 percent of Brent is also 15-16 percent lower than average spot purchases of 11.90 percent of Brent and would ensure price stability and affordability along with supply security.

Based on the volume of new contract, Nadeem Babar said, the cost to Pakistan would lower by USD 316 million compared with the same volume under the existing long-term contract. “In 10 years, this works out to be USD 3 billion”, he said. “Pakistan is providing USD 170 million letter of credit (LCs) under the past contract compared to USD 84 million under the new contract, which is also almost half”, he said but then skipped the point that committed quantities for supplies are also half of the past supplies.

Total supplies under the fresh contract could touch about 3 million tonnes compared to about 3.75 million tonnes of contracted quantities.

The Pakistan State Oil (PSO) would contin- ue additional imports from Qatar under the new deal to replace its two term contracts already expired or about to expire with Gunvor to maintain its overall portfolio of about 6-7 ships per month.

Interestingly, even though Imran Khan the opposition politician had criticized the then government for keeping the contract under the wraps, Imran Khan the Prime Minister has himself not disclosed the additional contract either.

What materially changed the situation to Pakistan’s favour this time is the fact that Qatar is spending about USD 30 billion on its North field development to expand its export capacity by almost 50 million tonnes per annum (up over 60 percent) in about a decade as demand in the African region is anticipated to decline with major developments in Nigeria. Before Pakistan, Qatar also signed another long-term contract with Bangladesh that is reportedly well above 10.2 percent of Brent secured by Pakistan but is lower than 11 percent of Brent, which shows an aggressive marketing campaign by Doha to dent competing Australia and the US.

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