Despite opposition from the Petroleum Division, the Cabinet Committee on Energy (CCOE) decided to free liquefied natural gas (LNG)-based power plants from guaranteed 66% LNG offtake - a move that would add yearly debt of over Rs100 billion for energy companies.
Officials said the move to free power plants from guaranteed LNG offtake was aimed at privatising LNG-based power plants.
Sources told The Express Tribune that Minister for Planning, Development and Special Initiatives Asad Umar, on the demand of privatisation minister, tabled a summary for exempting LNG-based power plants from guaranteed gas offtake in a bid to save Rs45 billion per year, in case cheaper LNG contracts were secured.
“At current LNG price of $6 per mmbtu, over Rs100 billion will be added to the circular debt, which will leave energy companies and terminal operators bankrupt,” said an official.
He added that the Petroleum Division had opposed the decision, saying that the entire energy chain required back-to-back agreements to consume the current contracted 800 million cubic feet of LNG per day (mmcfd).
So far, Rs73 billion worth of debt has accumulated due to diversion of LNG to the domestic consumers.
Officials said first review of LNG price with Qatar was due in 2025. So, if the price in the international market goes up, the circular debt can reach Rs150 billion due to the freeing of power plants from guaranteed LNG offtake.
The energy supply chain has always been dependent on back-to-back offtake guarantees to avoid disruption in the system and damages on account of a “take-or-pay” clause.
The previous government of Pakistan Muslim League-Nawaz (PML-N) had managed LNG supplies for Pakistan with back-to-back agreements between distributors and suppliers. LNG import projects were initiated in a bid to replace expensive furnace oil and high-speed diesel in the power sector.
Pakistan State Oil and Pakistan LNG Limited have agreements for the import of 800 mmcfd, which included 500 mmcfd from Qatar.
These deals are based on the take-or-pay clause, which means that Pakistani companies would have to pay the gas price even if they do not take supplies due to low consumption in the domestic sector.
Some sectors like CNG, fertiliser and textile are consuming LNG but the fertiliser and textile industries are getting gas at half the actual price. Hence, only the power sector is a major LNG consumer and it will be out of the system from January 2022.
Pakistan has two LNG terminals with handling capacity of 1.2 billion cubic feet per day (bcfd). Out of the total capacity, the power sector is receiving 650 mmcfd.
Another option available with the government is that it should divert LNG to the domestic sector. However, there are problems as the government has no legal framework in place to recover the LNG price from domestic consumers.
The government had diverted LNG to the domestic sector in the past two winter seasons to overcome gas shortage. But it had not been able to recover outstanding dues of Rs73 billion due to the absence of a legal framework.
The government would have to introduce a weighted average gas price in consultation with provinces. The current government had made two attempts to persuade provinces in that regard, however, the gas-producing provinces did not agree.
According to an official statement, the energy committee decided that from January 2022, the 66% offtake condition would be removed and gas companies would be free to market and sell additional gas to other customers.
The committee meeting, chaired by Asad Umar on Friday, discussed a proposal of the Power Division for waiving the minimum 66% offtake commitment for LNG plants and finalising a firm gas commitment based on the annual production plan of the power sector.
The committee decided that the Petroleum Division would take all mitigation measures to reduce the cost impact on the gas sector and to avoid the build-up of liabilities. The government will fund any revenue shortfall in the publicly listed companies, if required.
The planning minister said the measure would bring efficiency in the energy sector, adding that sustainable and affordable supply of electricity and gas was the cornerstone of socio-economic development in the country and a number of steps were being taken in that regard.
Published in The Express Tribune, September 19th, 2020.
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