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Pakistan Struggles to Sustain LNG Demand as Economy Falters

Pakistan likely to curtail LNG imports in the short-term but efforts are underway to maintain foreign direct investment in the local energy sector by opening up domestic gas distribution channels.

Since 2015, Pakistan has become one of the fastest growing LNG markets as the country has pushed to ramp up its LNG import capacity to alleviate chronic energy shortages that have led to a decade of electricity blackouts. Regulatory challenges did not deter investors and the country now boasts two LNG import terminals (FSRUs) near Karachi.

Slower economic growth and structual market impediments weigh on LNG demand

However, slowing economic growth and structual market impediments are placing Pakistan’s LNG economy under considerable strain. Delays in the formulation of domestic gas regulations to allow third party access to gas infrastructure, limited domestic pipeline capacity as well as effectively reserving LNG for exporters and fertiliser producers through subsidies leave a substantial gap between imported and local gas prices whilst domestic gas reserves are dwindling. Estimates by the Asian Development Bank peg the country’s GDP growth at just 3.3% this year and 2.8% in 2020, compared to 5.5% in 2018.

Pakistan forced to reduce expensive LNG imports

Consequently, Pakistan has been trying hard to reduce its LNG imports. Our LNG Market Tracker shows the coutnry’s LNG offtakes on a protracted downards trend since March this year, with November’s imports at their lowest since 2016.

Major LNG supply tender cancelled

In October, state-owned Pakistan LNG cancelled a tender for 240 cargoes intended over a 10-year period (roughly equivalent to 14.5mmt) it had issued earlier in June, for which Qatar was rumoured to be the frontrunner, and instead opted to turn to the spot market when required.

Country hooked on relatively expensive Qatari LNG

Pakistan is already receiving the lion share (3.75mmt) of its LNG imports under a 15-year ‘take or pay’ supply contract with QatarGas II, constituting more than 63% of Pakistan’s LNG imports in 2019 to date. Under the terms of the deal, LNG arriving in any particular month will fetch 13.37% of the preceding three-month average price of a barrel of Brent. At the time, LNG spot prices in Asia were reported as low as $5.75/mmBtu whilst the Qatar deal equivalent would supply gas at around $7/mmBtu F.O.B.

Beyond this contract, Qatar has been supplying roughly 0.38, 0.83 and 1.4mmt under short-term contracts (and at presumably higher prices) in 2017, 2018 and 2019, respectively, our LNG Market Tracker shows. Pakistan’s remaining LNG imports derive from a wide roster of sources, ranging from Equatorial Guinea and Nigeria to portfolio trades out of the United States and European re-exports.

Recent spot tender closed 3pp below Qatar’s long-term prices

Pakistan LNG currently has only one open tender for one cargo of c. 140,00m3  D.E.S. with a delivery window of 16-17 February 2020. A recent Pakistan LNG tender for 5 cargoes closed last week, with Gunvor and DXT Commodities emerging as winners to supply roughly 1.5mmt in total at around $6/mmBtu ex ship (depending on Brent price developments in December).

Qatar unwilling to discuss discounts as part of current 15-year contract

Pakistani media have been reporting Qatar refused Pakistan’s requests for price adjustments earlier this year to prevent other offtakers to do the same. LNG imports are covering almost 25% of Pakistan’s gas demand, so that a protracted curtailment of imports raises the spectre of crippling electricity and gas shortages in 2020.

Pakistan keen to achieve turnaround by opening up domestic gas market

This forced Pakistan to quickly adjust legislation to explore other avenues to offset the costs of relatively expensive Qatari LNG at times of slower economic growth. As such, ExxonMobil signed a gas-for-transport agreement with with Pakistan’s Universal Gas Distribution Company (UGDC) to become the first importer of LNG that is not subject to control by state-owned assets.  Singapore-based commodity trader Trafigura also signed an agreement with UGDC to use surplus LNG capacity at the country’s second chartered FSRU (the BW Integrity) to supply the domestic transport sector. The companies aim to convert a share of Pakistan’s petrol market into a compressed natural gas market, arguing that they would be able to provide cost savings of up to 30% to private motorists if they convert their vehicles.