Last week, the supply defaults of liquefied natural gas (LNG) by two international state-owned firms, Enoc and SOCAR, came to Pakistan as a veiled blessing as two urgent replacement tenders for February fetched around 16-18 percent cheaper prices as the global market plummeted.
For the second half of next month, the urgent tender floated by state-run Pakistan LNG Limited (PLL) attracted the lowest offer of $9.58 per million British thermal unit (MMBTU) or 19.5pc of Brent for Vitol Trading’s Feb 21-22 window and $8 per MMBTU or 16.3pc of Brent for the Feb 25-26 window from Qatar LNG.
In contrast, for almost the same span, the lowest bids from defaulting parties were $11.48 per MMBTU or 23.41pc of Brent by SOCAR of Azerbaijan for Feb 15-16, and $10.22 per MMBTU or 20.09pc of Brent by Enoc of UAE for Feb 23-24.
Informed sources in the PLL said that not only did SOCAR default on its February offer, but also tried to blackmail the PLL without bidding to commit about 11 shipments between February and September at higher market rates under the government-to-government (G2G) arrangement. Dawn’s records indicate that PLL and SOCAR remained engaged in negotiations until the last moment, but the cabinet approval condition for the G2G agreement ended the process.
Fortunately, by the time the PLL floated urgent tenders, rates had already fallen in the market.
The LNG market crash led to two major factors. This included Japan’s energy regulator intervening to exit the spot market in an effort to ensure that power prices do not increase higher in the midst of warmer weather conditions. Likewise, for February, South Koreans have decided against securing extra gas.
As a result, there was no place for LNG traders hoarding the commodity to offload their cargoes, hence a decline in the spot market. At present, around $7.5 and $8.2 per MMBTU are being paid by European and Far Eastern importers, respectively. Market analysts now expect LNG prices to drop further to around $5-6 per MMBTU or 10-12pc of Brent in April until next October.
The oil division, which seldom reports the results of the PLL bid, immediately took credit for the lower prices. In a statement, the PLL said “through an urgent tender, it has arranged one more LNG cargo at a lower price for the month of February 2021.” The price is around 22pc lower than the price of the bidder who previously withdrew his offer for the same cargo.
The petroleum division said that this also put the point to rest that “ordering very early necessarily ensures a better price.” It claimed that the time period between the date of submission of the offer and the date of delivery of the cargo for the urgent tender was 35 days, compared to 49 days for the previous tender in the same delivery window.
The episode also showed that traders do not own cargoes, do not care about reputational harm, and therefore choose to default on Pakistani tender as they made $15-20 million per cargo profit against a mixed $300,000 security bond loss. In the process, however, as compared to two lost shipments, Pakistan is estimated to have a saving of $7m-$10m per cargo.
This suggests that the government should step away from traders and promote the involvement of producers in tenders. In a bullish market, it is also necessary to prepare and acquire in advance when buyers have a better option in the bearish market. This is also helped by Indian advance bidding that has culminated in the delivery of $5-6 per MMBTU now.
Interestingly, for the delivery window of March 2-23, the PLL received bids at a rate between $17 and $23.75 per cargo. All spot shipments produce approximately 140,000 cubic meters of LNG, or 3.2 million MMBTUs.
Despite his efforts, PLL CEO Masood Nabi could not be contacted for comment, but his close aides said the procurement rules hindered Pakistan’s competitive prices because bidders were allowed to travel to greener pastures for 10 days between bid opening and contract award.
PLL sources said that under G2G agreements between Pakistan and Azerbaijan, SOCAR initially offered six cargoes for the current year and when it emerged as the lowest assessed bidder for the February tender, the company increased its offer to 11 cargoes at a cost nearly $1 higher than the Japan-Korea market. This was subject to the condition that the PLL did not award the offer for the February load of 23.43pc of Brent SOCAR. After consultant Wood Mackenzie voted against the deal for being uncompetitive in South Asia, the talks fell apart.