Recent debates in Pakistan over imported liquefied natural gas (LNG) have remained mostly political rather than professional. Unfortunately, energy czars like Shahid Khaqan Abbasi and Nadeem Babar focused on political point-scoring instead of finding solutions.
In fact, Pakistan has operated its gas system inefficiently and burnt its scarce molecules rather recklessly for decades. Energy issues remain more basic in nature like the risk of continued shortages, lack of reliability, affordability of gas and sustainability of economic growth largely fuelled by energy. Simply put, we’ve an energy trilemma at hand: security, sustainability and affordability.
Gas has been the backbone of the energy sector. However, indigenous sources of supply have not grown proportionate to demand. The recent addition of LNG has transitioned the gas sector from an enclosed self-sufficient market to one exposed to the realities of the global market. The shift has been abrupt and will change the way we operate the gas industry for years to come.
The focus on market liberalisation is not a new one. Open access markets will be influenced by multiple stakeholders like local gas producers, gas pipeline companies, gas importers, licensed gas marketing companies and so on. The dynamics of the gas industry will change fast. The government will have to take steps now to ensure a smooth transition to a more globally influenced marketplace similar to our experiences of the oil industry.
At present, Pakistan produces around four billion cubic feet per day (bcfd) of indigenous natural gas and has an extensive gas network of over 12,971km transmission, 139,827km distribution and 37,058km services gas pipelines to cater to the requirement of more than 9.6 million consumers across the country.
Natural gas constitutes 43 per cent of the country’s energy needs, but shortages have become pronounced for almost a decade as domestic production has not kept pace with growing demand. This shortfall is brought about by a combination of depleting indigenous reserves and increasing demand. Due to rising demand from various sectors of the economy, particularly power, domestic, fertiliser, captive power and industry, the supplies are not sufficient enough. The demand-supply gap during 2018-19 was 1.44bcfd, which is expected to rise to 3.68bcfd by 2024-25 and 5.39bcfd by 2029-30.
With indigenous gas supply expected to reduce from 3.51bcfd in 2019 to 1.67bcfd in 2028, Pakistan will need to increasingly rely on imported LNG to meet the economy’s gas demands or enhance exploration and production activities and perhaps both.
The gas supply chain is overburdened owing to various inefficiencies that can be reduced by reforming current policies, operational practices and pricing mechanisms. With the start of the import of LNG in Pakistan in 2015, many of the previously hidden operational inefficiencies came to light as the Oil and Gas Regulatory Authority (Ogra) started publishing RLNG prices. Currently, these inefficiencies can add up to 50pc in the gas price delivered to the end customer e.g. LNG bought at $6.58/mmBtu reaches the customer at $9.91/mmBtu.
The price of LNG delivered on ship (DES) is topped with a series of add-ons. These include 47.77 cents per mmBtu terminal charge for Terminal-I and 41.77 cents per mmBtu for Terminal-II, which actually go up significantly on account of terminal underutilisation.
Secondly, the Port Qasim Authority (PQA) and royalty charges for LNG cargoes are among the highest in the region. PQA charges $600,000 to one million per LNG vessel received at the port compared to much lower rates in other regional ports. For example, port charges in India stand at $122,000 per vessel, $14,000 in Kuwait, $115,000 in Qatar and $70,000 at Jabel Ali, UAE. These port charges are shared by both the supplier and procurer of LNG, but their impact is borne by the gas consumer.
Third, the unaccounted-for gas (UFG) loss. The combination of leakage issue because of the infrastructure, measurement issue and theft-related issues is the biggest in Pakistan at 13pc and above. Developed countries have a UFG of 2-3pc, while countries like Bangladesh, Turkey and Russia have it around 5pc. Since the co-mingling of the higher calorific value RLNG in the transmission network, the financial impact of this loss has significantly increased for gas consumers.
Fourth and fifth are the pipeline tariff and service charges of PSO, PLL, PLTL, SSGC and SNGPL. They vary throughout the year depending on the pipeline usage and O&M costs. The pricing for customers in SNGPL and SSGCL networks can range between $1.04-1.25 per mmBtu.
The gas sector reforms, including pricing based on economic value, are to be fast-tracked through Third Party Access (TPA) implementation so that consumers are able to directly purchase LNG from the LNG terminal.
The implementation of TPA is perhaps one of the first steps towards market liberalisation. However, for the proper implementation of TPA, it is essential that the policy is implemented in a fair and transparent manner, pipeline operators are incentivised to bring operational efficiency and users are able to monitor and track their gas supplies in real time.
A proper gas banking system should be implemented and monopolisation and hoarding of capacity should be discouraged through regulation. The private sector will soon be formally importing and distributing LNG as the new merchant terminal operators come online. The LNG supply overhang provides a unique opportunity to secure LNG at prices below the cost of new discoveries.
Increased competition from the private sector will ensure greater efficiencies and further help the government move away from providing subsidies to the mature textile and manufacturing industries. These subsidies are better targeted towards new industries and value-added industries that fuel growth for innovation.
The biggest lesson recent LNG price volatilities and controversies brought home is the urgent creation of cost-effective gas storage options through underground gas storage (UGS) in the existing depleted reservoirs. Storage is especially critical for Pakistan. It is the eighth largest market in terms of LNG usage. However, it’s the 18th largest in terms of storage capacity. With the two LNG terminals having only 320,000 cubic metres of storage, it is essential that Pakistan look at alternative storage mechanisms such as UGS to ensure much-needed flexibility to the Pakistani gas supply chain. Additionally, this will help Pakistan take advantage of the seasonality in LNG spot rates and improve operations of the pipeline transmission network.
