In a last-ditch effort, the government sought two emergency LNG shipments for the current month on Tuesday (3rd November) to overcome an unanticipated supply disruption created by two defaulting foreign corporations.
Bids for two replacement cargoes against earlier long-term committed windows of November 19-20 and November 26-27 are due no later than November 5th, according to a tender released by state-run Pakistan LNG Limited (PLL) on Friday. This is PLL’s shortest bid response time (less than three days) and maybe the most pressing delivery timetable.
Two LNG providers necessitated the emergency tender:
- Gunvor
- ENI
They refused to fulfill their contractual responsibilities to supply one cargo apiece in November, shocking officials who were already straining to meet demand due to lower-than-expected cargos during peak winter — 9 instead of 12-13.
The tenders called for typical cargoes of 140,000 cubic meters (about 100 million cubic feet per day).
Additional furnace oil tenders for 160,000-170,000 tons were already issued by Pakistan State Oil to supplement current furnace oil stockpiles of roughly 350,000 tons, which would be enough to meet power sector demand for 15 to 20 days.
On top of already high monthly fuel cost adjustments of Rs1.95 per unit in October and Rs2.51 per unit in November, electricity consumers will have to pay for even higher fuel expenses.
On Monday, an official from the Ministry of Energy said diplomatic channels had been opened to encourage LNG suppliers to honor their contractual duties, with the intention of salvaging one of the two cargoes.
ENI of Italy appeared to be willing to address its default and produce committed amounts, albeit with some timetable revisions for technical reasons, whereas Gunvor was merely a commodity dealer and unlikely to avoid deliberate default.
The pricing differentials between Gunvor and ENI term contracts and current global market rates are enticing from $13 and $35 per million British Thermal Unit (mmBtu) and appear to be a motivation for the suppliers to default.
The penalty for breach of contract, on the other hand, is around $3 per unit (30pc of the contract price). Traders elected to pay the default penalty rather than risk a bigger profit in the spot market. PLL has a 15-year contract with ENI worth 11.95 percent of Brent, while Gunvor has a five-year deal at 11.63 percent of Brent. Spot rates have now surpassed 35% of Brent.
In November, Pakistan was slated to receive 11 LNG shipments, including:
- Seven from Long-Term Agreement with Qatar.
- One each from the long-term contracts with ENI and Gunvor.
- Two cargoes from Spot purchases.
The number of cargoes has been decreased to nine following the default of ENI and Gunvor.
PLL’s tender for eight cargo deliveries during peak winter, four each in December and January, received no bids last month, resulting in a monthly shortage of around 400 million cubic feet as worldwide LNG prices surged.
This has left the government in a difficult position in terms of ensuring adequate energy supplies in the face of enormous cost increase.
