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LNG: ‘cheapest’ turns costlier

The decision making on the pricing and supply chain of liquefied natural gas (LNG) continues to remain cloudy even though the product has been in the system for more than a year now.

When LNG import was originally taken in hand, it was approved by the federal cabinet as a cheaper replacement in power generation to expensive furnace oil. Then ministers were on record saying LNG, without being 15-20pc cheaper than furnace oil, import would be useless.

As things progressed, this was not the case to be as the government structured price factors. The two regulators — Oil and Gas Regulatory Authority (Ogra) and National Electric Power Regulatory Authority (Nepra) — have repeatedly held opinions against cost buildups to the end price of regasified-LNG (RLNG) to consumers.

As things stand now, RLNG-based power generation cost is significantly higher than furnace oil based power production. Although Nepra had to approve these costs to the monthly consumer tariffs as fait accompli, it has publicly criticised the government and its power companies for doing a disservice to poor consumers.

As if that was not enough, Petroleum Minister Shahid Khaqan Abbasi boasted before a gathering of foreign diplomats, businessmen, anchors and analysts that Pakistan had secured the lowest LNG price in the world. Perhaps, his advisors had taken him for granted as he finalised plans to increase current LNG flows from around 400m cubic feet per day (MMCFD) to 2,000 mmcfd (2 BCFD) by mid-2018.

His cabinet colleague Khwaja Mohammad Asif, the minister for water and power, could not explain why if LNG was the cheapest, Nepra was criticising its power generation for being costlier than furnace oil. “I cannot speak for Nepra”, was his reply.

The fact of the matter is that High Sulphur Furnace Oil (HSFO) does not need any processing before it is dispatched for consumption at a power plant. LNG, on the other hand, after import and discharge from the tanker is to be re-gasified at a cost of $0.66 per MMBtu.


Recent data shows the price of high sulphur furnace oil has been lower than the price of LNG


For example, the C&F price of HSFO in March was $4.41 per MMBtu. The DES (delivery ex-ship) price of LNG for the month of March 2016 as reported by PSO was $4.85 per MMBtu, after adding $0.66 it comes to $5.53 per MMBtu which is 24.71pc more than the price of HSFO.

Recent data shows the price of HSFO has been lower than the price of LNG. On ground, therefore, it seems that we are replacing a cheaper imported fuel (HSFO) with a more expensive imported fuel (LNG). This means that electricity prices are not going to come down if the HSFO is replaced by RLNG in the power stations. If we were to replace High Speed Diesel with RLNG in the combined cycles gas turbine stations (like Saif, Sapphire, Orient and Halmore power plants) only then would it make economic sense.

Here is a comparison of the prices of LNG imports for January to April by various Asian counties as reported by the US Federal Energy Regulatory Commission, along with LNG prices paid by Pakistan based on price circular issued by PSO. (See table)

Pakistan’s rates are the highest in all the four months of this year. The end price of RLNG for April notified reached $6.74 per MMBtu after inclusion of taxes and cost factors, $6.69 for March, $9.48 for February and $10.45 per MMBtu in January this year.

As if these cost buildups were not enough, the ECC last week went beyond its jurisdiction to add another $1.2bn per MMBtu cost to RLNG. For example, it ordered Ogra to charge actual unaccounted for gas (UFG) losses (about 11-12pc at present) to the RLNG price and $0.025 per MMBtu commission to SSGC.

This is despite the fact that determination of both UFG and margins are outside the purview of the ECC or even the cabinet; for being the original jurisdiction of Ogra under the Ogra Act.

Mainly because of this original jurisdiction of Ogra and various court decisions, the UFG for natural gas consumers continues to be 4.5pc in consumer tariff despite past ECC directives to jack them up, to turn gas utilities net losses into profit. An attempt to increase the UFG to 7pc had led to Rs82bn accountability cases currently being faced by a former Ogra chairman and former PPP prime minister Yousaf Raza Gilani.

Also, the ECC decision to allow $1.45 per MMBtu processing charges to Engro Terminal instead of the 66 cents per MMBtu allowed by Ogra, and as approved by the federal cabinet, is beyond its legal powers unless approved by the federal cabinet once again. The cost jack up is also a question mark when a subsequent LNG terminal has attracted 44 cents per MMBtu processing charges; which too is contested by another disqualified bidder who is reported to have offered a much lower price.

The levelised processing charges could be increased but only by the federal cabinet because the original decision rates were approved by the cabinet. Nevertheless, these costs buildups will only add to the input costs of electricity, fertiliser, industry and the general consumers.

At a public hearing on May 26 led by Nepra’s Vice-Chairman Himayatullah Khan, the Central Power Purchase Agency (CPPA) had put on record that furnace oil based power generation continued to be cheaper than gas based generation because of imported regasified liquefied natural gas (RLNG) factor.

The furnace oil-based generation had dropped by 13pc in April against 10pc increase in RLNG based power production. Mr Himayatullah was displeased that consumers were denied a relief of Rs4bn in April by not utilising furnace oil based plants and instead were producing energy from RLNG.

The CPPA reported that furnace oil based power generation cost stood at Rs5.38 per unit in April compared to gas based costs of Rs5.73 per unit where local gas based generation was less than Rs4 per unit.

On March 30 this year, Nepra chairman Brig (retd) Tariq Sadozai and Nepra’s member tariff Khwaja Mohammad Naeem expressed serious concern over utilisation of expensive power plants on re-gasified liquefied gas (RLNG) despite availability of cheaper plants. “This is a financial crime,” said Khwaja Naeem. He had said the power plants producing energy at Rs4.50 per unit were partially run to ensure that RLNG-based plants having a Rs8.30 per unit fuel cost and high-speed diesel based plants involving Rs11.78 per unit cost could be accommodated. “This is a serious injustice with the consumers who were compelled to bear billions of rupees worth of additional burden, which cannot be tolerated,” he went on to add.