December 3, 2020 (MLN): The Petroleum Division on Thursday, termed media reports being circulated, alleging mismanagement of spot buying of LNG resulting in "alleged" burden of billions of rupees on national exchequer, as incorrect and based on false assumptions & incomplete facts.
In a Press release issued yesterday, the Petroleum Division responded to the questions being asked for clarity of facts and general understanding of LNG Procurement.
First question pertains to LNG procurement to run both terminals in full capacity & import of six cargoes in December. Responding to this, Petroleum Division said it must be understood that the two terminals together have operated on 65% or less capacity in 9 months out of last 27 months. Another factor which must not be ignored is that the previous government signed long term contracts for 800mmcfd for supply of LNG. Unless this is sold first, buying more is not possible, even if it is available cheap. It also signed 1200mmcfd of terminal capacity on a Take or Pay basis which results in $527,000 per day payment, regardless of the level of use of these terminals. Whereas current government purchased 41 spot LNG cargoes on much less average for the whole year than term slope of 13.37% Brent, which enabled us to save USD 237millions in last 27 months. Also, once you award a cargo, which has a fixed delivery date, it is near impossible to move it, especially in winter peak. Hence, if you do partial ordering of spot cargoes, you may not be able to slot more cargoes later, because that results in change of delivery date of all cargoes.
Secondly, it is being asked why GoP invited tenders for December in November. This is factually incorrect. Pakistan LNG Ltd. placed tender notice for 6 LNG Spot cargoes for use of December on October 2, 2020, Division said.
Third question related to forward purchasing in summer for winter delivery when global market prices were down due to less demand in summer. On this, the Division said that it must be understood that spot cargoes are generally for ready delivery (ie within 30-60 days). While you can do forward buying (ie order today for delivery many months later), the pricing for such purchases is done on a forward curve for Brent and Swap Spreads for slope. So, if spot cargoes were available in July for 10% of Brent, resulting in say $4/mmbtu delivered price, an order placed in July for delivery in December does not get priced at $4/mmbtu. The sellers will use forward projections of Brent in December and Swaps Spreads for slope in December, resulting in a much higher price for delivery in December. An expectation that we can get ready price of summer for delayed delivery in winter, assumes that the sellers are so naïve, and we as buyers are so smart, that we can take advantage of them. This simply shows lack of understanding of how forward market works. As an example, the JKM swaps on Oct 2, 2020 for December delivery were usd 5.5/mmbtu. The same JKM swaps for December delivery in mid-August were $5.4/mmbtu, a bare 10 cent difference. So even if the December tender were issued in mid-August, the price would have been effectively the same.
Fourth question was based on comparison between India and Pakistan on spot purchasing of LNG claiming that India saved billions of rupees by placing orders for November three weeks before Pakistan. Again, this is factually incorrect, Petroleum Division said. Pakistan placed tender for November delivery on Sep 9 and Sep 15 with the PPRA compliant mandatory 30 days. India placed a one-day tender on Sep 29 and awarded on Sep 30. The price of this one cargo was $ 0.98/mmbtu less, as reported by Bloomberg than the November average of Pakistan. Many major suppliers like Vitol and Trafigura have bought December cargoes at prices higher than Pakistan as reported by Bloomberg. Are they all incompetent? Single cargoes cannot be compared because they depend on the day of award and conditions of tender. For example, PLL requires 21 days credit period & 10% of performance guarantee on LNG supplies. Also, our port cargoes are 400 percent higher. India does not have these conditions. An example of the reverse situation was PLL spot cargo of July 27, 2020 at price of USD 2.2 but Reliance, India awarded a cargo only 3 days later July 30, at 2.7 usd, a full 20 percent higher, Division added.
Finally, it is being claimed by some media persons that the spot buying this year has caused 122billion loss to the exchequer. Division responded to this claim by stating that the total of all cargos bought in 2020 on spot was usd 353 million, or Rs 57 billion, with an average just below 12 percent. So, it is illogical to say that when money spent is Rs 57 billion, somehow a loss of 122 billion has been created. This is nothing more than cheap sensationalization. Compared to contract deliveries, the spot purchases, including higher December numbers, is still cheaper. The public discourse needs to move to planning and implementation on legal reforms to declare LNG as gas, from the deliberate distortion created in the last govt by declaring it petrol, Division said.
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