KARACHI: The Competition Commission of Pakistan (CCP) has said that lack of transparency is making the long-term G2G Agreement between Pakistan State Oil (PSO) and Qatar Gas for Liquefied Natural Gas (LNG) import an expensive deal for Pakistan.
In 2016, when the long-term G2G agreement was signed, the price of crude oil was low in the international market, however, since 2017, oil prices are on the rebound. The CCP said that India had renegotiated its long-term LNG agreement with Qatar in 2016, and the LNG price was set at 12.66 % of Brent Crude.
The CCP, in its study on the LNG sector in Pakistan, stated that lack of transparency in long-term LNG contract created mistrust among the LNG end consumers who are paying for the expensive RLNG. “Consumers consequently cannot make informed decisions. In the face of rising price of brent in the international market the price of RLNG will continue to rise”, it warned.
PSO and Qatar Gas have signed a long term LNG Sale Purchase Agreement (SPA) for 15 years in 2016 as a result of which LNG will be imported till 2031 at the contract price of 13.36% of Brent price. However, according to the CCP, there is lack of transparency in the long term G2G agreement between PSO and Qatar Gas regarding the terms of the contract renegotiation, price review clause (an integral part of a long term contract between a seller and a buyer), and renegotiation of pricing.
The CCP recommends that in the face of global oil market volatility, some of the features of the standard SPAs like “Take or Pay” and “Contract Price Review” need to be revisited.
Also, the competition assessment of the LNG sector shows various barriers to competition at all levels of the LNG value chain: In the upstream market due to the LNG contract price negotiated and the pricing model adopted by PSO and PLL.
In the midstream, due to the regasification at the Engro Elengy Terminal Limited (EETL) and Pakistan Gasport Consortium Limited (PGPC) terminal at the high tolling tariff of $0.479/mmbtu and $0.4177/mmbtu, respectively (approx. $250,000/per day), the Port Qasim charges of $600,000/per vessel, and the handling of RLNG by SSGC resulting in higher network losses of SSGC.
In the downstream, due to the difference in cost structure i.e natural gas versus RLNG price (ring fenced pricing) resulting in higher cost of production for the end consumers of RLNG, as against the natural gas, hence pushing the end consumers of RLNG at a competitive disadvantage.
Additionally, the competition assessment of the regulatory framework highlights the vagueness created around the classification of LNG and RLNG by the Federal Government according to which RLNG is included in the list of petroleum products whereas the status of LNG is unclear, resulting in the non-exemption of LNG from Sindh Infrastructure Cess (SIC) as against its exemption on petroleum products resulting in higher price of RLNG.
The study proposes recommendations which may lead to a more competitive, well-functioning, and efficient LNG market resulting in a better price paid by the end consumer but also relieve the federal government from the ever mounting balance of payment deficit.
Published in Daily Times, November 16th 2018.
