LNG contracts

THE LNG spot prices have spiked to a multi-year high in recent weeks over the fuel’s rising demand in Asia as winter temperatures in Japan, China and Korea drop to below average levels. The surge in demand for the super-chilled fuel has also led to shortages of LNG cargo vessels, interrupting the supply chain and pushing freight rates to new highs.

The unprecedented price volatility in the global LNG market is leading many traders to bail on their earlier supply contracts, and forcing countries to start rationing gas owing to supply gaps. In Pakistan’s case, the two LNG suppliers, who had won contracts to provide one cargo each in February, have ‘regretted’ their inability to fulfil their commitment (owing to the massive gap between current spot rates and the price agreed under the deals), forfeiting their bid bonds.

“This bid default of the suppliers is associated with the recent supply shortages leading to high price volatility in the spot market coupled with extra buying in North Asia. There is news in the market about numerous global companies defaulting on their bids, or even contracts in some cases, given the supply shortages and extreme price volatility,” the state-owned Pakistan LNG Ltd, which had ordered the import of gas, explained.

The rapid spot price variations in the global LNG market and consequent defaults by suppliers are a wake-up call for the PTI government, which has never been short of invectives to heap on its predecessor for striking a long-term deal with Qatar to procure the fuel. Why are long-term deals important for LNG-importing countries?

Such contracts ensure price stability in times when increasing demand or other factors drive up global markets. Besides, these guarantee security of supply. Hence, most LNG-importing countries prefer a blend of spot purchases and long-term deals to ensure supply at a lower average price in the winter. Indeed, the argument is valid that the previous government could have struck a better deal with Qatar. But the LNG prices catching up with the crude market underscores that the Qatari deal at 13 pc of Brent wasn’t that bad either. Thus, the government must consider more long-term supply contracts as the demand for imported gas is expected to surge in the winters ahead.

That is not all, though. It is also time for the government to develop a long-term integrated energy policy to rid consumers of periodic shortages of electricity, gas and oil, and promote efficient use of different fuels. The reported government decision to stop the supply of gas to the most inefficient captive power plants run by the textile industry and others for electricity generation in view of the cargos’ cancellation is a step in the right direction. In view of surplus generation, it is important for industry to reconnect with the national grid and for gas to be allocated for more efficient uses.

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