This has been specified in the draft sector study on LNG released for public comments by the CCP here Thursday. "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. These features are seen to be "restrictive" and potentially "divergent" from market forces of demand and supply. If the price review period could be negotiated to a lower term, this disparity between contract and competitive prices could be lessened as it would be closer to prevalent market prices," the CCP said in its detailed study on the LNG sector in Pakistan from the lens of competition.
The CCP has strongly recommended alternate pricing arrangements of the LNG, renegotiating contract price review period and revisiting of some of the features of the standard SPA like "Take or Pay" and "Contract Price Review" having 15 years long term SPA between Pakistan and Qatar.
The CCP has recommended that the PSO and Qatargas have a 15 years long term SPA under the G2G agreement between Pakistan and Qatar. The PLL and Eni also have a long-term SPA for 15 years. In both the SPAs, the contract price review is after 10 years. However where the long-term LNG agreements ensure supply security, at the same time the global LNG market (natural gas trade) has seen a supply glut therefore meaning falling natural gas prices in the trading hubs. Contrary to the globally traded natural gas prices, Pakistan's LNG SPAs are indexed to Brent price which has been on the rebound of late meaning higher LNG DES Price to be paid by the LNG importer. 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. These features are seen to be "restrictive" and potentially "divergent" from market forces of demand and supply. If the price review period could be negotiated to a lower term then this disparity between contract and competitive prices could be lessened as it would be closer to prevalent market prices.
The CCP has also recommended that Pakistan's long-term SPA and the medium-term contracts (term tender) have a constant slope and a linear pricing model. However due to rising crude oil prices, LNG price will also rise therefore alternate pricing arrangements need to be considered. One of them is known as the "traditional" S-Curve model. One of the variations of the S-Curve model basically consists of three sections. Moving along the X-axis, (Lower to higher Brent/crude prices) the first section consists of a line with a given gradient which protects the seller against very low Brent prices. This line is connected to a linear section with a steeper gradient, at a "kink" point. Finally this linear section is connected at another "kink" point to a line with a relatively flatter slope/gradient. This final line segment protects the buyer against extremely high Brent prices.
The commission has recommended that based on the international best practices in the sector, it is recommended to improve the pricing models adopted in the Sales and Purchase Agreements (SPA) through alternate pricing arrangements - the S-Curve Model, introduction of price ceiling and floor in the contract price which will safeguard the interest of both the seller and the procurer of LNG.
Introducing spot market and natural gas hubs in the pricing model, and to renegotiate contract price review period as in both the long-term SPA, the price review is after 10 years. This will result in a more competitive and affordable price of LNG secured in the upstream LNG market.
In the midstream LNG/RLNG market, competitive tolling tariff and port charges will result in a lower price of RLNG. The study also urges the gas transmission and distribution companies, SSGCL and SNGPL for improvement in their network for efficient RLNG handling. In the wake of depleting indigenous gas resources and the continuously rising energy import bill, the study also recommends greater focus of the government on renewable energy resources to meet the growing energy demand and energy sustainability.
The CCP has recommended competitive pricing through the introduction of LNG spot market and natural gas hubs in long-term contract pricing. Over time, the LNG market has started to evolve towards competitive regimes. The emergence of spots as well as established hubs like the Henry Hub and NBP has thrown the spanner in the works. The JKM, although not a hub, does represent a potential option as far as pricing is concerned vis-à-vis Asian LNG spot market contracts. Falling Asian spot market prices strengthen the case for indices like the JKM. Therefore, within long-term contracts there can be greater "flexibility" even if a move to alternative pricing is not possible. One facet of the KOGAS-Northwest Shelf arbitration centres around the buyer demanding greater "flexibility" in the contract. "Through greater flexibility we could move to more competitive outcomes. Given the greater market fluidity, flexibility is the need of the hour." Due to declining spot market prices and rising buyer power, global LNG agreements are changing. The recent agreement between Jera and Total is an example of this shift. The Japanese Company Jera agreed to buy six LNG cargoes. Four of them were priced according to a traditional oil indexed pricing formula, whereas two were based on spot prices.
For consumers to make informed decisions, transparency in the market is a prerequisite. Even though confidentiality is important, at the same time it should not come in the way of effective transparency. One of the competition issues highlighted in the study is lack of transparency in the LNG SPA especially (but not limited to) in the case of PSO and Qatargas deal. Important information such as the 'contract price review', whether the slope is rising or constant and if there are any price ceilings or caps on the contract price negotiated. Such information may be publicly available such that the end consumers of RLNG make better choices and buying decisions, it recommended.
In the sector study, the CCP has further recommended that higher port charges result in higher price of LNG and therefore higher price of RLNG is ultimately paid by the end consumer. It is, therefore, recommended that the port charges should be competitive and comparable to other regional players procuring LNG.
It is, therefore, recommended that OGRA may make certain amendments to the OGRA Ordinance such that there is no ambiguity on the status of LNG and RLNG and to redefine 'natural gas' in addition to 'petroleum' definition.
The CCP has recommended that the Sindh provincial government under the Sindh Development and Maintenance of Infrastructure Cess Act, 2017 levies cess on goods entering and exiting the province. The cess is exempted on petroleum products; however, it is not exempted of LNG. Where RLNG is included in the petroleum products, LNG is not. It must be mentioned that with the requested amendments made to the OGRA Ordinance (petroleum definition) the status of LNG will be elucidated. In addition to this, it is discriminatory to exempt petroleum products from Sindh cess but to levy it on LNG since the intended use of some of these petroleum products is the same as that of LNG after re-gasification. The provincial government therefore may make exemption of LNG from Sindh Infrastructure Cess.
Keeping in view the energy issues faced by the economy, depleting indigenous gas resources and the continuous increase in the gas demand, it is recommended that the federal government may revise the indigenous gas prices on annual basis as a gradual price revision on annual basis will be less hurtful to consumers in comparison to a sharp increase after several years, the CCP recommended.
The CCP has further recommended that new infrastructure development and upgrading of the existing pipeline infrastructure is significant to make the LNG sector more competitive. Only a competitive LNG market will give signals for investment and ensure gas supply security in the future.
To secure energy needs, it is recommended that the government may focus on the renewable energy sources and tap the renewable energy potential, the CCP sector study added.