16 minute read
Is a third LNG terminal just a pipe dream?
Here is what happened. Nearly 50 days ago the government decided that the private sector was failing to come through on their promise of building a new processing terminal for Liquified Natural Gas (LNG) in the country. So what did the government do about it? They decided to commandeer the project and construct the terminal themselves. At first glance, the move comes across very much as a government being tired of private sector inefficiencies and rolling up their sleeves to take matters into their own hands. However, as with most things, it is all a little more complicated than that. Pakistan currently has more demand and capacity to transport LNG throughout the country than it is able to process. Essentially, we want LNG for domestic and industrial use, but do not have enough terminals to process it. This is part of what leads to gas shortages and has in these past few months of winter resulted in massive domestic gas load-shedding. The plans to build a third LNG terminal have been in the works for years. In fact, when the incumbent government first came to power they had made tall claims of building five new terminals which would be operational within a few years. Those claims have been far from realised. The government is currently pointing fingers at the backers of the two private sector companies who have been blamed for moving slowly on the project of LNG terminals. The private sector companies, in response, have said that they have been unable to get the project rolling in the first place precisely because they have been tangled up in the government’s bureaucratic red-tape. And according to sources in Tabeer energy, the government has made next to no progress in the nearly two months that have passed since it strong-armed control of the project out of private sector hands. With ever growing demand and industrial requirements, the government is in a rush to make this happen. In a recent statement, energy minister Hammad Azhar has claimed that the LNG terminal would be operational by 2023. “The government is looking into setting up its own import facility by converting a portion of a state-owned liquefied petroleum gas terminal,” he said in an interview with Bloomberg.
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But statements like this have been made in the past and to no end. How we got here has been a long and complicated road that is as important to understand as anything else to make head or foot of the entire fiasco. To understand exactly what is happening, it is important to know why Pakistan needs this much LNG, what the position and function of the two existing LNG terminals is, and why there have been so many delays that have resulted in construction of the third terminal not even starting.
Some context
The crux of it is that Pakistan needs LNG, and if you know what that is and why that is then feel free to skip this section. But to those uninitiated in the murky world of Pakistan’s energy sector, read on. To put a very long story short, somewhere in the middle of the last decade, Pakistan decided to stop importing furnace oil and allow the private sector to instead set up LNG import terminals. That meant that the thermal power plants that could no longer run on domestic gas could now run on imported gas rather than imported oil. Now, the term LNG itself stands for “liquified natural gas.” Essentially, as the name suggests, natural gas is converted into liquid form to make it easier to transport since transporting a gas across vast distances is virtually impossible. However, when natural gas is in liquid ‘LNG’ form, it is quite useless. It can only be used as fuel in gaseous form. This means that when LNG is transported to a country, it then needs to be ‘regasified’ in a controlled environment so that no natural gas is wasted.
This process is undertaken at large import terminals, called regasification terminals, where LNG carriers which are basically tanker ships discharge their LNG cargo. The LNG is transferred to these terminals where it is stored in tanks and then regasified prior to being transferred through pipelines in the form of natural gas.
These terminals (or the lack thereof) are at the centre of the current debate surrounding LNG. There are essentially two kinds of LNG terminals. The first kind are fixed and on-shore terminals that are built on a certain area as one would expect. The other kind is the Floating Storage Regasification Unit (FSRU). You can read all about how they work and the trouble they have caused in Profit’s story from back in June 2021, but in essence these are large, stationary, floating ships that have the capacity to “regasify” natural gas and transport it from their stationary position in the sea to shore.
At present, two LNG terminals with a total capacity of 1.3 billion cubic feet per day (bcfd) are operational in Pakistan - both of them are FSRUs. The first is the state-owned Pakistan LNG Ltd’s terminal, which was built by PGP Consortium Ltd and has the capacity for 750 mmcfd (Metric Million Cubic Feet per Day). The other is the Engro Elengy FSRU with a capacity of 690 mmcfd. Both of these terminals use FSRU ships to regasify the natural gas, and Hammad Azhar in recent interviews has hinted that the new terminal will also be another FSRU (more on the merits and demerits of FSRUs later).
Chain of events
In March 2019, the government authorised the creation of a third LNG processing terminal on a fast-track basis to address the exceeding demand – for completion by next winter (that was supposed to be in 2020), and authorised Rs1.63 billion in supplemental funding for security and paramilitary force facilities. Of the five companies that showed interest in the project, only two - Energas and Tabeer Energy (Mitsubishi) - submitted applications, seeking Letter of Intent (LOI) from the Port Qasim Authority (PQA) for building the third LNG terminal. Tabeer Energy is a wholly owned subsidiary of Mitsubishi Corporation
Kosuke Makino, CEO of Tabeer Energy
Japan, whereas Energas is a consortium, of three local business groups (Lucky, Sapphire and Halmore)
The PQA issued a provisional Letter of Intent (LoI) to Energas and Tabeer for the establishment of a LNG terminal at Port Qasim in September of 2019. Duly afterwards both companies further pursued jumping through hoops to get the required approvals and NOC’s from the relevant government authorities.
Both private enterprises requested an extension in the acceptance date of the final LoI, which PQA issued in May 2020 along with a draft Implementation Agreement (IA). In light of Covid-19, new extensions were granted due to challenges with site NOCs and pipeline capacity allotment.
A few months down the road in September 2020, the companies were still bogged down by NOC’s and getting approvals. Upon realising that “winter is coming”, the Federal Cabinet issued directives to the Petroleum and Defence ministries to clear all the “hurdles” within 30 days.
The Petroleum Division directed to undertake and commit to the new terminal operators for RLNG allocation in the existing systems of the Sui companies. This was to be done on a first-come, first-served basis. Additionally capacity provisions to both terminal operators in the new planned gas pipeline [PSGP] were to be made.
The two companies also got their marketing licence from Ogra in January 2021 despite the protests from PLL and other LNG importers. The licences allowed the two companies to engage in regulated activity of selling natural gas/RLNG to consumers.
With immense pressure on the government from residential and commercial users alike following the winters, the LNG issue is on the top of the agenda for the government. In April of the same year Ogra granted construction permits to both companies.
The construction licences were a must for the two companies to make final investment decisions (FID) on LNG terminal construction. Tabeer terminal was supposed to be at Chara Chan Waddo, Jhari Creek, and the Energas terminal to be at Chara Creek.
This essentially meant that the developers could build terminals, buy LNG, re-gasify it at approved terminals, sell RLNG to the domestic market, and even supply to associated companies.
The last remaining issue was the allocation of pipeline capacity, despite persistent efforts to get capacity. The CCoE had granted pipeline capacity on a firm basis in February 2021 and urged the Sui firms to facilitate this allocation. As a result of the CCoE ruling, Ogra asked gas providers to allocate 250-300 mmcfd by September of this year.
These directives however fell on deaf
Hammad Azhar, Minister for Energy
ears, and the government itself was incapable of implementing it. Lack of government oversight, and sheer disregard for the directions coming from the top are key culprits causing delays.
It was pretty obvious that the Sui gas companies were “reluctant to allocate pipeline capacity”. A summary from the CCoE meeting held in early October was very critical of the two Sui companies. It criticised the two Sui companies for causing delays in allocating pipeline capacity until the new pipeline was built. Hurdles were also raised in land allocation for tie-in points.
In the same month it was also reported that the companies had written a harsh letter to the government expressing their frustration. The letter read that both companies remained in limbo, “despite three years having passed and despite the CCoE as well as Ogra directing SSGC/SNGPL to allocate pipeline capacity”.
“Sponsors are not receiving any clear direction from the departments concerned for the allocation of pipeline capacity. Moreover, decisions of both the federal cabinet and Cabinet Committee on Energy (CCoE) are not implemented and regularly delayed”, alleged Tabeer Chief Executive Officer Kosuke Makino in a letter to the Prime Minister that was reported by Dawn.
Despite back and forth over the exact allocation of the pipeline capacity, the current Sui infrastructure does not have the ability to enable a feasible solution. To further complicate the whole situation the allocation was based on a three month rolling period rather than a firm basis added more ambiguity. The sheer scale and longevity of the project requires the companies to have long term assurances.
In short the government has done very little in terms of addressing the growing LNG debacle. As the time tested adage goes “if you want something done right, do it yourself”, the government too is now pursuing its own plans to develop the LNG terminals. Will the government be able to complete the projects in the designated timeline by next yet, only time will tell.
What is the government doing now?
This is the latest update. When the decision came by the government in late December 2021 to take over things, an order issued by Ministry of Energy Petroleum Division (MEPD) stated that, “against the backdrop of slow progress in the development of new LNG terminals by the private sector (Tabeer Energy and Energas), a consortium comprising state entities (port authorities, Sui companies and PSO) will work together for speedy development of a new LNG terminal in the public sector, preferably FSRU (floating storage and regasification unit) based, to bring new LNG by next winter (2022-23)”.
Not so surprisingly, the private-sector investors had been protesting at every forum about the appropriate government entities’ for not working with them, which had hampered their final investment decision.
The government has been trying for the past three years to build two new terminals to increase supply. In a recent statement by Hammad Azhar, he said that “The government is looking into setting up its own import facility by converting a portion of a state-owned liquefied petroleum gas terminal.” This has been the only update on any progress since the government has taken over, and indications show that the intention is for the government to get another FSRU.
The question that is raised here is why it is taking so long with no visible progress, and secondly why the government did not simply keep larger FSRU ships when they had the opportunity. All of this does not bode well for the government’s claims. After all, as this week’s editorial has also pointed out, making claims is very easy but actually coming out of the bluster and doing something about it is difficult.
Meanwhile, sources at Tabeer energy have claimed that the government has made absolutely no solid progress so far. Meetings and discussions are ongoing within the government ranks.
As far as government statements are concerned, they have kept their cards close to their chest so as to not attract unwanted media attention.
As far as the pipeline is concerned, nothing much to show for on that front either. We’ve been at a literal standstill in our ability to cater to the growing industrial and residential demands of gas. Whether the government will be able to manage this is yet to be determined. The two questions that will be pertinent going forward, however, are whether we have the capacity to pull this off in terms of pipelines and whether or not going for another FSRU is a good idea or not.
Do we have the capacity?
Naturally with such a large-scale increase in supply planned, the government would need to have pipeline capacity to move that gas from the ports in Sindh to other locations all over Pakistan. The existing pipeline capacity is insufficient to cater demand. To explain it in layman terms, SNGPL and SSGC own the gas infrastructure in their respective zones. There is an intricate system of pipelines that carry RLNG from the terminals to homes and factories. The current pipeline system that transports the gas from the SSGC system to the SNGPL is at max capacity, therefore it is essential to create more pipeline capacity. It is not possible to increase the capacity of the current system, hence new infrastructure has to be built. So, the government back in 2015 decided to collaborate with Russia to develop the North-South Gas Pipeline. It has since been rebranded to Pakistan Stream Gas Pipeline (PSGP). Pakistan neither has the skills or the appropriate technology to carry out such a project. In theory the government was on the right track since it had plans in motion to establish the new pipeline with support from Russian investors. This would’ve worked hand in glove with the development of the LNG terminals and be completed more or less side by side. Russian investors would have contributed $2 billion to the project, with the first phase slated to be completed by December 2017 and fully commissioned by the second quarter of 2020. The 1,100-kilometre pipeline would’ve connected Karachi’s LNG terminals with the pipeline infrastructure in Punjab, with an approximate capacity of 1.2 billion cubic feet per year. It Was anticipated to take three and half years to be built. Here is where international geopolitics come in, with the US and Russia on opposing sides of the iron curtain. RT Global Resources, the original Russian company tasked with the project, facing US sanctions was prevented from making any headway into Pakistan.
It is reported that some progress has been made on the PSGP. The Inter-Governmental Agreement (IGA) with Russia has been revised, and approval is currently pending. The geographical survey and finalisation of the route are also underway. The Defence ministry is yet to issue an approval for the project. Land acquisition collectors have also been alerted in accordance with Land Acquisition laws.
Everyone has been hearing about PSGP since 2015, any ground work is yet to be seen. It is interesting to note that PM Imran Khan is scheduled to be in Moscow by the end of this month.
How exactly the government plans to get around the sanctions is anyone’s guess at this point. With tensions between Russia and NATO at an all time high since the cold war, it is unlikely that the PM would
Another FSRU?
With the support of private-sector investors, the government planned to build two new liquefied natural gas (LNG) facilities at Port Qasim, with an accumulative handling and processing capacity of 1.6 billion cubic feet per day (bcfd). The government currently uses Engro Elengy’s terminal facility With ever increasing domestic demand both on the commercial side and residential side new LNG terminals are long overdue. A key decision is whether to get an FSRU or an onshore terminal facility.
An FSRU has a relatively lower capital investment requirement and can be made operational much faster than a traditional onshore terminal. However it is prudent to consider the long term strategy as well. Factoring in the high demand an onshore facility would be able to cater to future expansion based on demand and has a much longer operational lifespan.
On the other hand a land based terminal facility would have a much higher capital expense, however it compensates for it in lower operating costs. Storage facilities can also come in useful in creating buffers catering to the volatility in prices and supply chain challenges.
As an FSRU is essentially a special ship, it is a transitory storage facility with limited built in storage capacity. As a result, it is theoretically preferable to construct an onshore gas storage facility. That is, not only should a strategic storage be built, but it should also be possible to buy off-peak season gas for peak days, saving money on expensive gas during peak season.
This is beneficial to energy security. Furthermore, a greater number of cargos might be handled to meet peak demand and lessen the danger to the system from any cargo delay.
You might think the answer to this whole conundrum is right under everyone’s nose, expand the existing terminals? Well the primary concern of the Petroleum Division is to encourage investment by preventing a monopoly of the existing players. That hasn’t worked out for them quite so well, considering the fact the government is going to build or procure the facility itself.
Conclusion
At the end of this long, winding, complicated road what we have is a government making promises and having nothing to show for in terms of what they have done to achieve them. Remember, a few years ago the promise was that we would have five LNG terminals up and running by now. Yet we are currently at a point where work on the first one of those five has not even begun.
The government and the private sector have both fumbled the ball badly, and while the private sector has had its role to play, the responsibility is with the federal government at the end of the day. Their decision to take matters into their own hands should not have been needed in the first place. But now that they have made this proactive decision, it is imperative that they come through on it.. Otherwise next year, when the winter months hit again, we will once again be faced with shortages and industries scrambling to get preference. And no one wants that. n
