KARACHI: Pakistan has reformed its tendering process to fetch ‘better prices’ of Liquefied Natural Gas (LNG) in the international spot market and reduce the risk to suppliers, officials told Arab News on Tuesday.
The South Asian country has become an emerging buyer in the international LNG market over the last few years, with an increasing gap between demand and supply of gas.
Pakistan has long-term purchase deals in place, but regularly taps the spot market as demand continues to rise.
Pakistan LNG Limited (PLL), a state-owned entity mandated to import and procure LNG, in its recent tender floated for the import of eight LNG cargoes put in place two major reforms: a shorter bid submission timeline and a demand that suppliers bid at a fixed price rather than follow the previous practice of linking the rate with Brent crude.
“When we link to Brent, suppliers have to hedge Brent,” Nadeem Babar, special assistant to the prime minister on petroleum, told Arab News on Tuesday. “For short duration deliveries, this just creates unnecessary cost.”
“Also, when we keep a tender open for 30 days and then don’t award for another ten days, suppliers build risk premium for market moving in that period,” Babar added. “So we are changing these things”.
PLL officials say the measures are expected to yield better prices of LNG in the international market.
“We expect to receive better price offers through these reforms,” a senior PLL official told Arab News on the condition of anonymity as he was not authorized to talk to the media in an official capacity.
Most past tenders had longer submission timelines. The last tender floated on January 19, 2021 had a submission date of February 18, 2021. However, the latest tender floated on March 20, 2021 had a submission date of March 30, 2021, which is expected to lower associated risks.
“Shorter bid submission and validity timelines means suppliers will not have to hold their bids valid for around 2 weeks, rather only for 2 to 3 days, which in turn means their risk is lower,” the PLL official said.
Pakistan expects that by making offers at a fixed price, the risk to suppliers of hedging Brent crude would also be minimized.
“Fixed price is an industry norm for spot buying,” the PLL official said. “We expect that supplier’s risk in hedging Brent price and LNG price will be reduced. Hence the country would fetch better prices.”
The prime minister’s aide also said the measures would result in saving for the country but refrained from quantifying.
“They (the changes) will result in savings,” Babar said, adding: “But it is difficult to quantify how much.”
PLL said in the tender document that it would evaluate the offer based on the lowest contract price in $/MMBtu for the cargoes.
Due to longer tendering timelines, Dubai’s Emirates National Oil Company Limited (ENOC) defaulted in January this year, refusing to deliver a cargo for 23-24 February amid higher price fluctuations in the prices of LNG in the international market.
But some energy experts warn that the government’s move to bring ‘efficiency on paper’ could backfire in reality.
“The situation will remain the same as in the case of ENOC, if the suppliers would be benefiting from the deal they would supply but if the prices go up they will default because they would be calculating the price based on Brent,” Razi Raziuddin, former CEO of Khyber Pakhtunkhwa Oil and Gas Company Limited (KPOGCL), said.
“I think demanding the price in $/MMBtu is detrimental because we are not in the position to dictate like China and Korea. Even Japan, China and Korea evaluate price through a benchmark because the prices go up and down.”
“In fact we are asking them to supply at $/MMBtu and take the risk as well,” Raziuddin said, adding: “The marketing companies never take the risk.”
Experts say producers can take risks but marketing companies will offer higher prices to cover their risk: “In this case, Qatar Petroleum remains the single bidder,” Raziuddin said.
The power sector is Pakistan’s largest natural gas consumer, followed by residential consumption and the fertilizer industry.
