The long and short of LNG contracts
With the media abuzz, it looks like the government is bustling with bringing LNG to the shore. Recent reports suggest that the government is all set to strike a deal for the import of Liquefied Natural Gas (LNG), with a delegation from Qatar arriving in the first week of January 2015.
This impending agreement will be a ten-year long-term contract with Qatar for the import of 400mmcfd of LNG at a terminal being constructed at Port Qasim Karachi. What is noteworthy here is the tenure of the contract in the light of the current global price scenario. Asian LNG prices are pegged to the international crude oil prices and with oil prices on a slippery slope for the last five months, pains from low oil prices are rippling through other markets, including the global LNG trade.
Moreover, LNG prices are linked to the cost of crude oil with a three to four month lag and with many LNG projects coming online in 2015 leading to oversupply, LNG prices are in for a further decline. Asian spot LNG prices have more than halved since the start of 2014 to below $10 per mmbtu with Brent crude oil prices slipping below $90 a barrel in October 2014, and below $80 a barrel in November 2014.
Earlier in July 2014, Brent crude oil averaged at $106 with LNG prices around $15.95 per mmbtu in October, keeping in mind the lag in the contracts. Global markets are eyeing LNG price to fall below $10 per mmbtu with any further plummeting of oil prices.
Under such circumstances and when Pakistan is ready to import LNG, entering into a long-term import contract can be less beneficial when a country can benefit from the falling LNG spot prices. Earlier Qatar was seeking a 15-year contract. It might have now come down to a 10 years agreement, but even a consultant of the US Agency for International Development (USAID) has been suggesting that the country should enter into a short-term LNG contract for two years because of declining prices globally.
Some are of the view that the government should at least follow a mixed approach of long-term and short-term/spot market to reap the benefits of the ample global supply, shrinking global demand and sliding oil process.
While the price at which this potential contract with Qatar is still to be made known, the last reported FOB prices by some officials was $15 per mmbtu, and when priced for consumers, stood at Rs136 per kg – which is at 92 percent parity to petrol prices when GST and GIDC is included. However, it is expected that the price decided would be less than those reported earlier this year. This column would update you as and when more details are available.