Mian Anjum says greater reliance on LNG a risk to energy security
Karachi, June 30, 2022: The Federation of Pakistan Chambers of Commerce and Industry’s Businessmen Panel (BMP) Chairman Mian Anjum Nisar has warned of massive power outages during next month of July and scarcity of gas in the coming winters, as the government has failed to complete an LNG tender for July.
The FPCCI former president observed that this is the third time that the government has been unable to purchase fuel, which is a threat to exacerbate electricity shortages, leading to more power shutdowns in the country in coming months.
Expensive fuel imports are starting to hit consumers, as Pakistan continues to increase domestic prices to meet a key condition to secure a crucial bailout from the International Monetary Fund.
Greater reliance on imported LNG would only reinforce credit risks for investors in the country’s LNG-to-power value chain. Planned pipeline projects and terminals may also take time to materialize as geopolitical conflicts and unviable economics exacerbate stranded asset risks for LNG infrastructure.
Anjum Nisar says that the government needs at least $40 billion in the next 10 months to tide over the economic crisis. Pakistan is not the only cash-strapped emerging nation struggling to secure LNG in a tight global market.
The Businessmen Panel Chairman said that Pakistan, which is facing rapidly declining domestic reserves of natural gas, is relying more heavily on imported liquefied natural gas as a replacement fuel, which is a flawed policy. But rather than simply replacing one form of gas with another -the shift to imported LNG- undermines the country’s energy security and financial stability.
Referring to the statistics, he estimated that Pakistan’s LNG imports could rise to more than $30 billion by FY30, up from present rate of almost $3 billion in FY2021, as LNG sourced from global markets has become six times more expensive than domestically produced gas in Pakistan.
LNG has also been unreliable. LNG suppliers under long-term contracts with Pakistan have defaulted on at least 10 cargoes since 2021, contributing to fuel and power shortages. Extreme LNG price volatility continues to stymie energy sector planning and exposes the government to massive subsidy burdens. Pakistan’s vulnerability to commodity market shocks has only been increasing in the wake of the Ukraine crisis. Coupled with the global economic recovery from the COVID-19 pandemic, price-sensitive countries such as Pakistan may be unable to compete with wealthier buyers in Europe and Northeast Asia.”
Pakistan imported 7.4 million tons of LNG in 2020, and the government expects LNG demand to grow rapidly over the next decade. There are currently at least four major LNG import terminal projects at various stages of development. However, the high cost of LNG has shed new light on many of the pre-existing issues with the country’s gas system. These problems include final tariffs that are not reflective of gas costs, inefficient cross-subsidization of gas tariffs, and high volumes of unaccounted for gas (UFG) that are lost in transportation through the network.
As more LNG is injected to this faulty network, financial issues in Pakistan’s gas sector are likely to worsen significantly, he said, and added that the circular debt, chronic cash flow shortages that have historically plagued Pakistan’s power sector, is now rampant in the gas sector.
He said that two years ago, LNG was available in the market at a cheaper price of $4, but the government wasted the opportunity and did not make a long-term agreement and now it’s not even available at $40. He went on to say that the whole world is facing a gas shortage due to the Ukraine-Russia war as European countries have bought even a single molecule of gas.
In Pakistan’s textile sector, power generation costs can amount to roughly 35 percent of the production costs. Since the textile industry depends on gas-based power generation, rising LNG prices can grossly reduce profit margins. The fertilizer sector also has an entrenched dependence on natural gas as a fuel and feedstock, but the sector pays among the lowest gas prices despite high costs. Fertilizer industry accounts for 15 percent of national gas consumption, but only 3 percent of revenues of state-owned gas transmission companies. Instead of rapidly ramping up LNG imports, Pakistan’s near-term focus can be on using existing LNG supply more efficiently by changing regulatory incentives, rationalizing tariff structures, and implementing energy efficiency programs, among other measures.
The focus should be on the demand side of the equation, and less so on expanding supply, as the promotion of energy efficiency equipment and more cost-reflective tariff structures can incentivize more efficient use of gas to reduce import needs.
We should adopt an alternate strategy and divert supplies to high priority sectors like power generators in emergency situations, besides attempting to boost energy conservation and cutting working hours for public servants, he suggested.