It is not surprising for a nation seen exploring the option to diversify its energy mix to include liquefied natural gas. Earlier, Japan and Korea, and now China, diversified their energy portfolio to include LNG for environmental reasons.

Pakistan, however, does not face similar environmental drivers, as domestic natural gas already occupies a significant part of its energy mix, and in fact, it is the over-reliance on gas that has culminated in its widespread supply shortages. It is, therefore, hard to make a case for LNG purely on an environmental basis, especially when it comes at a hefty cost premium.

LNG projects have a significant lead time between planning and execution, spread over many years. Because they are very costly, typically involving billions of dollars of investment, enormous financing arrangements need to be in place.

To minimise project risk and improve project economics, the buyer of LNG picks up some equity in the project. As large sums are involved, the LNG price reflects the investments made by associating it with the benchmark price of crude oil.

The largest LNG importing nations in the Far East like Japan and Korea typically buy it at or close to crude oil parity, at roughly $16-$18/mmbtu. They, however, manage supply and price risk by becoming joint venture partners in LNG projects.

Surely, Pakistan does not intend to do all that; its involvement would perhaps be limited to building the local LNG receiving terminal, required infrastructure and the ability to connect it into the domestic grid.

While this means less financial exposure, it equally means limited or no leverage in terms of pricing negotiations when signing up for LNG purchases.

The liquefied natural gas is simply refrigerated natural gas. The advantage is that its volume shrinks down, enabling large quantities to be moved to faraway places. However, the gas first has to be liquefied at source, which needs special plants.

Then it needs to be hauled over long distances, typically by special LNG ships. And finally when it arrives at its destination, special facilities are required to convert it back to gaseous form. All these steps in transformation and transportation raise the commodity’s price.

Coming back to the merit of LNG imports, the main issue is that of price.

The situation is, however, different for locally available natural gas, which has a long history of being under-priced due to cheap and abundant supply since the discovery of the giant Sui gas field.

With rapid depletion and now dwindling reserves after more than four decades of boom, producer gas prices paid by the government to secure new supplies have more or less caught up with the international prices of roughly $3.5-$4/mmbtu.

But it is a different story on the utilisation side. Domestic prices, especially for the mass market, are substantially lower than these prices, indicating huge subsidy to consumers. The astronomical rise of CNG as a transport fuel in the country, mainly on the back of subsidised domestic gas, is a clear illustration that the current gas demand is at an unsustainably high level.

The LNG solution looks quite odd in the backdrop of artificially low domestic gas prices at $3-$4/mmbtu and imported gas at $16-$18/mmbtu With domestic demand heavily subsidised, the arrival of imported LNG will simply multiply the cost vs price gap by another 400pc plus, resulting in more than a fourfold increase in subsidies required to maintain existing consumer prices.

Even if the use of LNG is quarantined for the local transport sector — which will be very hard to manage — the $16-$18/mmbtu imported LNG will at best be priced at par with current gasoline/diesel prices. So, where is the financial incentive?

Some reports indicate that Pakistan is counting on a discount of some sort when negotiating LNG supplies with Qatar. However, Qatar is already one of the largest LNG exporting countries, with most of its output contracted out to buyers in the Far East, Europe etc.

It may have some spot quantities available to sell, for which there is already an established market. That it would choose to forego its established market or profits to sell at a discount to a new market with little or no current infrastructure seems a bit optimistic.

And even if Qatar chooses to sell at a discount, what are we expecting? Will it price its LNG against our domestic gas? Surely not. This means that discount or no discount, the price of imported LNG is only going to further deteriorate Pakistan’s balance of payments position.

The potential import of LNG also carries other direct and indirect risks, such as inflating domestic producer prices as local oil companies try to offer any new gas at or close to landed LNG prices. New LNG will also discourage or displace domestic gas, especially if a long-term contract is signed, which is a prerequisite in these arrangements.

So, if LNG is a viable and sensible option for Pakistan, what are the alternatives? There are some very large world class gas reserves right next door. The gas import option from Iran and/or Central Asia is the one which should be given utmost priority.

Skilled negotiations should get Pakistan a good deal for what is otherwise a largely stranded resource, with little or no market elsewhere. The future can see Pakistan becoming a regional gas hub, with international pipelines connecting it with Iran and Central Asia.

Source: http://www.dawn.com/news/1095129/lng-import-viability