Rumours are swirling in the media about a looming gas crisis in Pakistan, as the country may face a shortfall of liquefied natural gas (LNG) from the State Oil Company of the Republic of Azerbaijan (SOCAR) in January. Media reports suggest that SOCAR is wavering in its commitment to Pakistan, lured by the prospect of fetching higher prices from the European markets, where demand is skyrocketing.
The absence of the expected cargo could compel the government to slash the gas supply to the domestic sector from eight hours to a meagre six hours. Moreover, the media claims that Pakistan LNG Limited (PLL) is contemplating seeking exemptions from the Public Procurement Regulatory Authority (PPRA) guidelines, in order to expedite the procurement of cargoes from the spot market and fill the gap.
The missing January cargo translates into a deficit of approximately 100 million cubic feet per day (MMCFD) — the equivalent of one LNG cargo. We contacted PLL for their comments on the issue, but they remained unavailable
So, what’s going and why?
The issue at hand
Let us get straight to the point. The lack of cargo is a serious problem. There is no denying that. “The non-availability of LNG from SOCAR worsens an already dire energy situation in Pakistan, with potential implications for both the domestic population and the economy,” says Jawad Majeed, General Manager at Tabeer Energy.
Moreover, the case of a tender for the spot market is also problematic. “In your approach to market, if you float a tender for 30 days with bids having a validity for 90 days then you’re unlikely to get a cargo in time. It was different in the case of Vitol, because Vitol coincidentally had a cargo at the time,” explains Shahid Karim, CEO of LNGFlex and former CEO of Daewoo Gas.
However, this might be precisely what PLL is banking on. Vitol secured a PPRA exemption for their cargo. PPRA regulations stipulate that a tender must remain valid for 30 days, and a waiting period of 15 days is required before awarding the tender. The Vitol cargo had a fleeting tender life of approximately one week, with the tender validity itself barely extending beyond 10-12 hours post-bid. The December cargo, procured as part of the tender, was accepted on October 4, and with it still being mid-November, there is a sliver of time left — albeit, not much. Consequently, this cargo is likely to come with a hefty price tag. We will be buying in peak season.
On the topic of time, SOCAR can offer Pakistan a cargo 30 days prior to the cargo’s arrival. Despite the swirling speculations, the crisis is poised to intensify only if no agreement is reached by the time December rolls around. The crucial point to underscore here is that PLL is cognizant of the looming problem, primarily due to the nature of the SOCAR contract itself.
What is SOCAR, and what is the contract at hand?
SOCAR is a fully state-owned national oil and gas company headquartered in Baku, Azerbaijan. The company produces oil and natural gas from onshore and offshore fields in the Azerbaijani segment of the Caspian Sea.
Earlier this year, in June, Pakistan signed an agreement with Azerbaijan. According to the agreement, Azerbaijan would offer 12 distressed cargoes of LNG monthly to Pakistan on flexible terms for a span of one year. The agreement is also extendable to another one year. The contract itself is confidential, but we have it on good authority that the rumoured 45-day delivery window is 30 days and upwards till 60 days.
There is no obligation for either of the parties in this contract. SOCAR may offer, and Pakistan may accept. This uncertainty is baked into the agreement. As to why the contract might be acting up, the thing is it was always going to be problematic. Let us start with the term distressed cargo.
Simply put, cargo is categorised as distressed when the buyer abandons the goods. This occurs when the buyer is no longer willing to honour the original contract agreed upon due to unfavourable or unexpected circumstances.
“I am not aware of any distressed LNG cargoes. The only thing that points in that direction is that equity LNG is not available to anyone till the end of 2026, which means that you cannot do long-term contracts. Short-term trading is taking place and at times cargos come up for availability, but it is not appropriate or accurate to call them or term them distressed cargo,” explains Karim.
“The deal is not a priced deal, it is a frame agreement,” adds Karim. Consequently, its implementation was always dubious. There is no malice in agreements such as these. Just not agreeing on the terms between the parties.
“There is lack of transparency on what was ordered by PLL and at what rates the tender of one cargo was matched at how many cents below the bid price by SOCAR. Secondly, SOCAR is to offer one cargo per month, it is up to both parties to accept or not accept,” explains Sheikh Imranul Haque, former Managing Director and CEO of Pakistan State Oil and former CEO of EngroVopak.
Will we escape a cold January if we get the cargo? Not really. There will be a crisis. All of this is in terms of Pakistan’s imported gas needs. We were already expected to only have 8 hours of gas outages, and that will remain irrespective of the cargo. “The gas crisis in winter is already there as local gas production has also declined by 1.1% YoY during 1QFY24,” asserts Rao Aamir Ali, Vice President of Research at Arif Habib. The matter at hand is now how bad we want the crisis to be. As it stands, LNG is not going to plug the crisis, it is merely going to dampen it.