Low gas output forces govt to book pricey LNG as winter nears

ISLAMABAD: After a gap of almost one year, Pakistan on Wednesday received three bids for two additional liquefied natural gas (LNG) cargoes needed for the peak winter demand at a significantly higher premium over the prevailing spot market.

Petroleum Minister Muhammad Ali later announced in the evening that the government had accepted two lowest evaluated bids to minimise winter gas shortage following a decline in domestic gas production so as to maintain load management at around the same level experienced during winter last year.

In an international tender in September, the state-run Pakistan LNG Limited (PLL) had sought bids for procurement of two LNG cargoes for delivery in the second and third week of December with the bidding deadline set at Wednesday noon. In response, two traders submitted three bids.

LNG trader Trafigura Pte Ltd came up with two bids against Dec 7-8 and Dec 13-14 windows at $18.39 per million British thermal unit (mmBtu) and $19.39 per mmBtu, respectively. On the other hand, Vitol Bahrain offered a bid price of $15.97 per mmBtu for Dec 7-8 delivery window.

Lowest accepted bid stands at $15.97 per mmBtu, almost double Qatar Gas’ second contract price

The bid committee has, therefore, declared Vitol’s $15.97 per mmBtu bid for Dec 7-8 and Trafigura’s single bid of $19.39 per mmBtu for Dec 13-14 as the lowest evaluated bids.

For a reference, the Oil and Gas Regulatory Authority (Ogra) has set basket RLNG transmission stage price for the current month at $11.86 per mmBtu for SNGPL and $11.47 for SSGCL on the basis of $9.76 per mmBtu average LNG price delivered ex-ship (DES) for nine cargoes.

While Trafigura’s bids are quite expensive, even the Vitol’s lowest evaluated bid of $15.97 per mmBtu is almost double the Qatar Gas’s second long-term contract price and over 60pc higher than average basket price of the existing nine LNG cargoes supplying 900 million cubic feet per day (mmcfd).

Qatar Gas is supplying about five cargoes per month at 13.37 per cent of Brent ($10.7 per mmBtu in September) and three cargoes at 10.2pc of Brent ($8.17 per mmBtu), while ENI is supplying one cargo at 12.14pc of Brent ($9.72 per mmBtu).

An official said Vitol’s had bid at a premium of more than $2 per mmBtu or almost 13pc higher that the prevailing spot rates in the international market, apparently because of the country’s credit rating and risk factor.

The bids are, nevertheless, a revival of traders’ interest in Pakistan market after a gap of about 12 months who had shied away because of Pakistan’s low credit rating and foreign exchange challenges. In July this year, PLL’s bid to test international spot market for additional LNG supplies in peak winter had gone futile when only one bidder turned up with offers at a significant premium, making the price unviable for local consumers.

It was said at the time that tender had given a price discovery that would help secure some distressed cargoes from Azerbaijan’s Socar under G2G agreement, but no such offer came either. In response to PLL’s tender in June for two cargoes in January and one in February 2024, Trafigura Pte Ltd had come up with two bids — $23.47 per mmBtu for Jan 3-4 delivery window and $22.47 per mmBtu for Feb 23-24. Both bids were about 26-29pc higher than the prevailing prices in the LNG spot market at the time.

LNG supplies in the spot market eased in recent months with significant price drops to pre-Ukraine war level that prompted PLL to test waters for its winter energy gas shortage. However, Pakistan’s adverse credit rating amid foreign exchange limitations and Europe’s winter energy requirements provide LNG traders an opportunity to offer cargoes at significantly higher premium.

PLL used to import up to three cargoes a month through spot tendering to meet seasonal demands but had been facing serious difficulties in securing even a single cargo since June 2022 when its repeated tenders failed to attract any bidder and earlier bids were simply unaffordable and beyond paying capacity of the country’s foreign exchange resources. Instead, the government had to resort to increased electricity loadshedding, besides rationing gas supplies and withdrawing subsidies to export sector industries.

Pakistan currently relies on 7-8 LNG cargoes per month from Qatar through Pakistan State Oil under two contracts of 10 and 15 years and one per month through PLL’s 15-year contract with Eni of Italy which has also defaulted in supplies on a few occasions.

The average re-gasified LNG basket prices at distribution stage have almost halved to $12mmBtu when compared to $23-24mmBtu in May last year when the PDM government secured a string of spot cargoes procured in the first month in office to meet energy shortages. But electricity costs had compelled the government not to repeat those prices.

Since then, repeated efforts to import more gas through spot tenders have remained futile owing to tight supply conditions and record prices in the international market following the Russia-Ukraine war. As such, all the 8-10 cargoes per month are available to Pakistan under long-term contracts, mostly with Qatar, except one from another supplier.