Pakistan LNG contract is a government-to-government contract for the supply of LNG for a period of 15 years with an annual average supply of LNG of 3.75 million tons, valued at 1.3 billion USD per year at current prices. The contract was negotiated after a considerable negotiation process. Qatar has been a dominant and up to a certain time a kind of a sole supplier for many countries. Competition in LNG sector has emerged over the recent years. American Shale gas has come into the export market. LNG prices have come down along with a drastic reduction in oil prices. Before oil price reduction, LNG prices were around 14-16 USD per MMBtu which now have come to 5-7 USD per MMBtu. Unlike oil, LNG prices are still regional and there is no standard and uniform reference price for LNG unlike Brent crude oil index prices. Lowest LNG prices are in the U.S. based on cheap Shale gas and in Europe LNG prices are also quite lower due to cheap exports from the US and competition of LNG with piped gas.
The Pakistan-Qatar contract was finalised sometimes in 2015 which was in earlier part of the emanating competition. The contract price formula was agreed at 13.37 percent (Coefficient technically) of the Brent Crude oil price which translates into around 6.68 USD per MMBtu, assuming current typical oil price of 50 USD per barrel. For those who may not be initiated in Oil and gas pricing, they must understand that LNG prices are not 13.37 percent of Oil prices. In fact these are around 75-80% of oil prices. The figure of 13.37 is a multiplier for convenience sake. When one multiplies the crude oil price (which is in USD per barrel) with the coefficient of say 13.37, one gets the resultant LNG prices in USD per MMBtu.
After entering into a contract with Qatar, MP&NR invited tenders, as a result of which Eni, an Italian company, offered the minimum bid prices of 12.26 percent which were further negotiated down to 11.9 percent of Brent crude. There is a considerable difference between Eni prices and those of Qatar of the order of about 11 percent. Eni could offer this kind of low price through combining many sources cheap and not so cheap. Qatar prices are higher comparatively with other company prices because, firstly, these are negotiated prices and are not tender prices; secondly, Qatar thinks that it offers a more secure and lesser-risked contracts in terms of the security of supply.
However, Pakistan-Qatar LNG prices, if compared with the contract prices of Qatar with India and Bangladesh, appear to be almost the same or even higher. Let us examine the data as provided in the table. Although the coefficient-multipliers of India and Bangladesh are lower than the Pakistan-Qatar contract's; there is an additive number in the contracts of the two countries. This number when added makes their effective prices higher than that of Pakistan. Thus Indian and Bangladeshi prices are perhaps a more appropriate and relevant reference than Japan's or Europe's.
It has been mentioned earlier that LNG prices are regional and vary among the regions and also depend on the market power and volumes of orders. Japan's low prices of 5.8 USD per MMBtu can be seen in that perspective. European prices are even lower at 5.28 USD. And that of the US still lower. Thus, it would be inappropriate to compare the LNG prices with international terms as we do in case of oil.
Additionally, spot prices are not comparable with a 15-year long-term contract. Spot prices vary under supply and demand and also vary seasonally and may be affected by temporary or occasional events. Under spot prices, a supplier has almost no price risks; he supplies at prevailing prices. Under a long-term contract, although there is a link with crude oil prices, there may be price variations beyond that are covered under the formula. Longer the term of the contract higher the price risk and higher the prices. We have another example of Guvnor prices offered to Pakistan for a period of five years which were still lower than Eni prices, which proves our point.
The real winner is Pakistan. Eni contract at a price of 5.95 USD is quite closer to that of Japan. Ironically and interestingly, both Eni and Qatar contracts have been done by the same agency. The difference is that one is negotiated and the other is the result of comparative bid. We have always argued in favour of competitive bidding as we have been doing in the case of solar and wind power prices of which have been coming down under competitive bidding. However, LNG is more complicated.
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Table :Comparative LNG Import Prices in Countries
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Brent Constant LNG price* Effective
Coefficient USD/MMBtu Coeff
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Pakistan -Qatar Gov to Gov 13.37 0 6.685 13.37
Pakistan ENI 11.9 0 5.95 11.9
India-Petronet-RasGas-Qatar 12.66 0.6 6.93 13.86
Bangladesh-Qatar 12.65 0.5 6.825 13.65
Japan METI-August 2017 SPOT 5.8 11.6
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--based on 50 USD Brent crude oil price
Source: 1) DNA India; 2) Daily Star Bangladesh; 3) METI-Japan; 4) MPNR-Pakistan
Finally, why should there be a secrecy on contract? However, the relevant people would be foolish enough to bring in such questionable confidentiality, if there is some hanky-panky. In that case, what is the plausible reason? The contract prices are declared now and communicated both to Ogra and PSO. Qatar government might have insisted on keeping the contract or/and price secret so that it does not complicate the price negotiations with other parties. We have seen that Pakistani prices are slightly lower than offered to India and Bangladesh. We are not sure how advisable it was for Pakistan in these circumstances to go with the secrecy provisions. In any case, it is no secret anymore.
Concluding, the Pakistan-Qatar contract prices are comparable with those in comparable and relevant countries in South Asia. LNG prices are a complicated issue and not as simple and standard as Crude oil prices. There is no standard and uniform reference price as is there in Brent crude accepted widely. LNG market is evolving and prices may come down. However, we would be bound by our long-term agreements. Long-term agreements have their pros and cons as everything else has. If price differences increase, there may always be a possibility of renegotiations within or outside the contract at political level. The foregoing still does not prove that somebody may or may not have made money in LNG deal. Third party facilitators having long-term service or sales contract may always be able to earn some money. That money, however, comes out of the sellers pockets. Sellers normally do not give a benefit of non-involvement of a facilitator to the buyer.
(The write is a former Member Energy, Planning Commission)
Copyright Business Recorder, 2017