LNG deal: good or bad?

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A presentation by Pakistan State Oil (PSO), a signatory to the Liquefied Natural Gas (LNG) deal with Qatargas on 8 February 2016, to the Senate Standing Committee on Petroleum and Natural Resources on 31 August 2018 projects a 610 million dollar saving for ten years (2016-2026) after negotiating a reduction in the offer made by Qatargas from 13.90 percent of Brent to 13.37 percent of Brent at an average Brent price of 60 dollars a barrel. This was supported by a global news agency and used by PML-N leadership to vindicate allegations of wrongdoing in the deal.

Two observations: first the price of crude Brent was over 70 dollars since January 2018 as per Nasdaq which implies lower savings than claimed by PSO and surprisingly not mentioned in the Bloomberg report; and second, a facetious comment, as to why PSO did not show higher profits by taking an even earlier Qatargas offer of 14.3 percent of Brent that was made on 30 January 2015 according to the PSO presentation.

The question is why did the local media miss out on the purported savings contained in the PSO presentation when Bloomberg clearly was provided a copy? A Business Recorder staff reporter revealed that an in-camera session was held on 8 August 2018 during which copies of the actual contract, without any redactions, were shared with the committee members and then collected at the end of the meeting. On 31 August the prepared PSO presentation could not be displayed on the screen as the quality was poor. The PSO officials then distributed copies of the presentation only to members of the committee (and not to the media). As the PSO officials began their presentation by giving a brief history of the contract negotiations the committee members demanded to know why the entire contract was never made public (the PSO website contains a copy of the contract with redactions). The PSO officials cited the confidentiality clause of the contract that stipulated that “under no circumstances shall a party disclose confidential information to a shareholder or an affiliate if such a shareholder or affiliate: (a) is a direct competitor of the seller or buyer as the case maybe in the LNG or natural gas markets; and (b) may use the confidential information to obtain a commercial advantage.” The PSO presentation claimed that the commercial clauses redacted and shared with the subcommittee are mainly provisions that have facilitated the import of LNG. The chair of the Committee then asked whether any other government to government contracts have the confidentiality clause which was met with silence.

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Also Read: Petroleum Division finds something fishy in Qatar LNG deal: Sarwar

The redacted portions of the contract could not be shared with the country’s parliamentarians and the media/public but that global news agency claims it was “allowed access to redacted portions of the contract” that included: (i) contract price of LNG per mmbtu equivalent to 13.37 percent of the average price of Brent oil futures preceding three months; (ii) Pakistan can increase or decrease the size of the contract by 5 cargoes a year, equivalent to about 8 percent; (iii) parties cannot negotiate the price for ten years; (iv) Pakistan can sell cargoes to other buyers and divert to other terminals; and (v) port charges to unload cargoes for sellers cannot exceed 320,000 dollars. This access led Fauziah Mazuki, an LNG analyst at Bloomberg, to conclude that “these details cover normal contract terms that are generally considered in the industry to be commercially sensitive….the price and other terms of the contract were in line with other deals reached around the same time.” It is imperative to determine who gave Bloomberg access to the redacted portions as it may be an attempt to influence the ongoing investigation by National Accountability Bureau (NAB) and Federal Investigation Agency (FIA).

Can Mazuki’s assessment be supported? The price of 13.37 percent of Brent was negotiated, so claimed a joint audit special study conducted by the Auditor General of Pakistan (reported in February this year during the tenure of the PML-N administration), was on the basis of a short-term contract (five years) signed by PSO with Gunvor, Russia, for 60 LNG shipments. The report added that “had open competition been allowed and other LNG producing countries permitted to submit bids for consideration of the Economic Coordination Committee (ECC), the government would have been able to procure LNG at lower rates,” though actual market rates at the time were not explored by the audit. The presentation only referred to the spot rate on offer by Gunvor and Eni, and eight other entities, with Eni’s bid claimed to be technically not compliant, and therefore the offer not applicable. However, Business Recorder reported at the time that Eni had made an offer of 12.29 percent of Brent for 15 years, which was never denied by the government; and that 2016 was a buyer’s market and there is a plethora of reports on the web that indicate that in February 2016 LNG rates had plummeted that led several countries, including India, to renegotiate terms of existing long-term contracts.

The PSO presentation also makes a comparison with LNG rates at which India and Bangladesh procure LNG; the table shows that the price payable by Pakistan under Qatargas deal would be lower than the price payable by India and Bangladesh only till Brent is below 90 dollars per barrel. Additionally, data provided for India is clearly not complete given that India purchases LNG from several suppliers including Rasgas, (Qatar’s second largest LNG producer) and Australia and the price at which India purchases LNG as contained in the presentation fails to identify which LNG supply source has been used. The PSO presentation further notes that India pays a price of 12.66 percent of Brent and Bangladesh 12.65 percent of Brent, clearly lower than the 13.37 percent of Brent payable by Pakistan, but then adds 0.6 and 0.5 for the two countries, respectively, without any explanation. India it may be recalled has not only successfully renegotiated the price with Rasgas after the Qatargas deal with PSO but also successfully negotiated Rasgas would forego the payment for under lifting, as domestic demand declined. With respect to Australia India negotiated that the seller would pay port charges. Pakistan-Qatar contract specifies charges for under lifting in the event that domestic demand declines and the buyer would be contractually obliged to pay port charges.

Could India have got better rates because it is a much larger buyer? Possible but then one would accuse Pakistan’s negotiators, particularly Saifur Rehman with reportedly extremely close ties to the Qatari royal family, for failing to get a more competitive price for Pakistan.

On 31 August the Chair of the Senate Committee Mohsin Aziz recommended that the LNG contract be investigated by NAB and FIA as PSO was concealing details of the agreement; and added that the committee did not have the capacity to check the technical details of the contract. He was informed by PSO officials that the matter is already under investigation on the instructions of the Petroleum Minister, and the committee’s recommendations would be forwarded to the two investigating entities. This implies that the then Prime Minister Abbasi’s move, considered astute at the time, to clear the deal with NAB when NAB was headed by a PML-N loyalist did not yield the result he had desired.

To conclude, there is much to investigate in the LNG contract as well as the agreement with the two LNG terminals (documented in Business Recorder on 25/9/2017, 25/09/17 and 12/10/17) as well as the way it has been handled domestically.

(This news/article originally appeared in Business Recorder on September 17th, 2018)

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