Islamabad June 22 2022: Pakistan’s cash-strapped coalition government is struggling to lock in more LNG supply to end lengthy power cuts as South Asian buyers are priced out of the market by European customers looking to end dependence on Russian gas.
State-owned Pakistan LNG twice had to cancel a spot cargo for Jul. 3-4 delivery earlier this month after bids were assessed as uncompetitive. It issued a fresh tender on Jun. 16 for four spot cargoes for July delivery with a closing date of Jun. 23. It remains to be seen if prices will be acceptable this time round.
Its most expensive cargo to date was a $29.67 per million Btu spot shipment with a May 1-2 delivery window — almost double the price of term supply from Qatar. Anything above $22/MMBtu isn’t feasible for power generation, says Tahir Abbas, head of investment research at Karachi brokerage Arif Habib.
“Pakistan’s vulnerability to commodity market shocks has only been increasing in the wake of the Ukraine crisis,” Samuel Reynolds, energy finance analyst with the Institute for Energy Economics and Financial Analysis (Ieefa), said last week. “Coupled with the global economic recovery from the Covid-19 pandemic, price-sensitive countries such as Pakistan may be unable to compete with wealthier buyers in Europe and Northeast Asia.”
The country is in the midst of a balance of payments crisis. Foreign exchange reserves have almost halved over the past year to $8.9 billion in the week ended Jun. 10, barely enough to cover six weeks of imports. Imports of petroleum products and LNG cost $2.6 billion last month, with the LNG bill doubling over the year to $584 million. Prime Minister Shehbaz Sharif said this month that Pakistan does not have the money to buy oil and gas.
Gas shortages normally ease in summer, but the power crisis makes this year different, Abbas says. In addition to skyrocketing prices of gas, coal and oil, generators must grapple with cratering hydroelectric production because of the late melting of ice in northern areas. Current power demand is around 28,000 megawatts, but generation totals only 21,000 MW, producing a 25% shortfall, he says.
In addition to ordering power cuts lasting 10-12 hours per day, the government has responded by shaving one day off the working week and is mulling working-from-home on Fridays. It has reduced government officials’ fuel quota by 40% and asked municipal authorities to change street lighting. Sindh and Punjab provinces have limited the operating hours of markets, malls and restaurants for a month, triggering protests from businesses whose daytime trade has already been hit by scorching heat.
Gas accounts for 43% of Pakistan’s energy mix. Consumption averaged 3.6 billion cubic feet a day between July 2021 and March 2022, of which 863 million cubic feet per day was LNG, according to an official economic survey published earlier in June. Actual demand is nearer 6 Bcf/d.
Term deals with Qatar, Eni and trading house Gunvor meet half of LNG demand, and spot cargoes the rest. Pakistan’s problems mounted after Eni and Gunvor this year rerouted some term cargoes to Europe to benefit from spiking prices. The contracts impose cancellation penalties of 30% on shipment costs, but they still made money on the diversions.
With LNG prices expected to remain elevated, the government is seeking to defer payments to Qatar, its largest supplier, and is in talks with Doha and other producers over new 30-year term deals.
Oil-indexed contracts will be costly. Pakistan’s 2016 term deal with Qatar was signed at a 13.37% slope to Brent and another in 2021 at 10.2%. The going rate for a contract starting this year reflects 17% indexation to Brent, Wood Mackenzie analyst Simon Flowers says. Reynolds says US suppliers could offer broader price indexation that could help the country weather price spikes better.
Pakistan’s ability to buy expensive LNG is also constrained by hefty consumer subsidies. At spot prices of $30/MMBtu, the average cost of power production from LNG is 19¢ per kilowatt hour, Abbas says, compared with 4.5¢/kWh from natural gas and 5¢/kWh from local coal. Ieefa puts Pakistan’s actual power price at 7.5¢/kWh. Subsidies over the 12 months ending Jun. 30 have jumped to 1,515 billion Pakistani rupees ($8 billion) from the budgeted 682 billion rupees ($3 billion) as power sector outgoings have soared to 989 billion rupees.
The government is shifting focus to cheaper domestic coal and renewables, which will fuel most of the 11,386 MW of new generation capacity it has proposed. Islamabad will also switch 3,960 MW of capacity that now runs on imported coal to domestic coal, and is trimming subsidies to allow resumption of a $6 billion International Monetary Fund loan program. It will raise domestic gas prices by 45% in July, which should curb consumption.
Abbas expects hydro, coal and nuclear to account for 80% of power generation in the next two or three years, up from 58% now.
