Pakistan Grapples With Natural Gas Shortage

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Pakistan is facing a shortage of natural gas that has triggered street protests and is forcing power plants to burn fuel oil to keep the lights on.

The crisis has been triggered by suppliers failing to deliver several cargoes of imported LNG as well as a dip in Pakistan's own gas production.

"Homes have no gas to cook or heat water and factories are shut because of no gas," Miftah Ismail — who served a brief term as the country's finance minister in 2018 — said in a Twitter post.

Pakistan is highly dependent on natural gas, which meets about 43% of its primary energy demand.

According to local media reports, suppliers have failed to deliver two LNG cargoes that were scheduled under term supply deals.

That comes after Pakistan's October tender for eight LNG cargoes — four for delivery in December and four in January — did not attract a single bid.

Force Majeure Declared

Local media reports said Gunvor and Eni both defaulted on LNG cargoes scheduled for delivery in November.

Gunvor also told the government that it will also be unable to deliver a cargo due in January, they added.

Meanwhile, Karachi-based brokerage Arif Habib Ltd. estimates that Pakistan's domestic gas production has declined 4% to 3.4 billion cubic feet a day over the last six months.

Energy Minister Hammad Azhar said over the weekend that the LNG suppliers in question invoked force majeure clauses in their contracts.

Pakistan LNG and Pakistan State Oil are looking into whether those claims are valid, he added.

Penalties Applicable

Pakistan has a term LNG contract with Eni for delivery of 750,000 tons per year and a term contract with Gunvor for 780,000 tons/yr.

The price formula for the Eni contract has a "slope" equal to 11.95% of the price of Brent crude oil. The Gunvor contract has a Brent slope of 11.625%.

Azhar said that in the case of a default, the suppliers must pay a penalty equal to 30% of the price of the cargo, adding that they have indicated they are willing to pay the penalty.

With spot LNG prices recently shooting up to levels around $40 per million Btu in Asia, it has become prohibitively expensive to find replacement spot cargoes to bridge the supply gap, the minister added.

Switch to Fuel Oil

Pakistan has responded to the gas shortage by making greater use of fuel oil for power generation and asking people to cook with electric stoves. It is also cutting gas supplies to industry to meet demand from households.

Consumption of fuel oil, which had been running at around 6,000 tons per day, is likely to reach 14,000 tons per day soon, Azhar said.

The government has imported 200,000 tons of fuel oil and is well stocked to meet demand if there are more defaults on LNG cargoes, he added.

Azhar said Pakistan's gas woes are likely to worsen in the coming years as its gas reserves are falling at an annual rate of 9%, equal to eight to ten years of supply at recent rates of consumption.

However, economic growth has been boosting demand for gas, which means the gap between supply and demand is set to widen.

This means the government will have to shift the country to alternative source of energy such as liquefied petroleum gas or renewable power, because dependence on imported LNG is not sustainable, Azhar added.

LNG Demand, LNG Contracts
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