Pakistan gets EETL notice to give up sovereign right to take over its ship

In what appears to be increasing mess in liquefied natural gas (LNG) business, Pakistan on Thursday got one-day notice from Engro Elengy Terminal Limited (EETL) to give up its sovereign right to take over its ship and commit full “take or pay” for larger capacity as the government received more expensive bids for five LNG cargos in October and November.

On top of that, the country would be facing about 300 to 600 million cubic feet of gas shortage in coming winter. In case the government decides to retain Engro’s regasification terminal currently in use and has greater capacity, the shortage would be about 300 mmcfd. However, in case the original contracted terminal resumes operations, the shortfall would be for four days during replacement later this month and up to 600mmcfd in winter months.

However, in the first case the state-run Sui Southern Gas Company (SSGC) will have to surrender its sovereign rights to take over the terminal in case of any possible default on the part of the terminal and commit higher capacity on “take or pay” commitment at a time the government is inducting new terminals without any take or pay obligation.

On Thursday, Pakistan LNG Limited (PLL) received 12 bids for five cargos against its urgent negotiated tendering and generally got higher than previous rates for which the state-run entity had gone for re-tendering. Out of five, four lowest evaluated bids came from commodity trader Trafigura and one from PetroChina Intl.

For October 8-9 and 23-24 delivery windows, Trafigura’s lowest bids on Thursday stood at $19.8477 per Million British Thermal Unit (mmbtu) and $20.2877 per mmbtu, respectively. In the last round, Vitol had offered $22.5866 per mmbtu and $20.9466 per mmbtu for two cargos for almost same dates, respectively. The fresh bids were better than earlier ones.

For October 28-29 delivery, Trafigura on Thursday quoted $20.7777 per mmbtu when compared to Votol’s $18.9966 per mmbtu in the previous round. Also, for November 6-7 window, PetroChina offered $20.3888 per mmbtu when compared to $19.6966 per mmbtu from Vitol for November 11-12 in the previous round, while Trafigura offered the lowest bid of $20.9677 per mmbtu for November 12-13 when compared to $20.9266 from Vitol for November 26-27. In all these three cases, the new bids were expensive when compared to the previous ones.

On August 24, PLL had got bids for seven cargos and decided to go for urgent re-tender for five cargos because of expensive rates. Total was rated lowest evaluated bidder for its two bids at the rate of $17.1449 per mmbtu for delivery on October 17-18 and $17.5350 per mmbtu for November 16-17 delivery window.

PLL had not awarded any of the seven cargos and still had time until September 8 under the bid bonds to decide. PLL is now expected to pick five cargos from previous bids and two from fresh bids in case it decides to secure seven cargos, even though at these rates furnace oil and diesel are slated to be cheaper than LNG.

On Thursday also, EETPL asked Energy Minister Hammad Azhar, Petroleum Secretary Dr Arshad Mahmood and SSGC Managing Director Imran Maniar to allow within a day “two years’ waiver on its options rights on Exquisite (old vessel) while the rights are negotiated on Sequoia”. The SSGC has reportedly been advised that rights once surrendered could not be reinstated and then it would not be able to take ‘step in’ action in case of any default, even though it was under pressure to give in.

EETPL has told the government that US-based Excelerate Energy (EE) had to deploy one of the FSRUs in Brazil in a government terminal and could not keep two FSRUs encumbered for Pakistan. It said the SSGC agrees that step in rights is not automatic and reasons for its activation are not going to happen. Even if they happen, the “SSGC has full rights under the LNG supply agreement (LSA) to take over the terminal. All rights in LSA remain, including SSGC’s right to the option to buy the FSRU under an event of default which could not be cured”, EETPL said.

It said the SSGC had the first right on the excess capacity and in the event mutual agreement in good faith is not reached in five months, only ask from the SSGC to either allow third-party access (TPA) to EETL or agree on “take or pay” with the SSGC, as this is the eventual end goal to utilise the excess capacity as the terminal partners were taking “unprecedented risk”.

“This plan requires Excelerate to reshuffle its fleet utilisation plan, take on increased risk to accommodate a short notice vessel swap and accept additional limitations on both the FSRU Sequoia and the FSRU Exquisite,” said EETPL.

EETPL wrote that rights to buy FSRU Exquisite were not being terminated but only being waived for two years and in the meantime similar option on the FSRU Sequoia will be established.

In two years if the option to buy Sequoia is not established, the right to buy FSRU Exquisite is reinstated, it said, adding that they had never heard of any option agreement exercised in the LNG industry.

It said the risk for the SSGC was very low if not non-existent but warned that “ability to retain the FSRU Sequoia after September 3, 2021, will diminish”. In the absence of SSGC’s approval on the two asks (surrendering rights to take over for two years and ‘take or pay’ for full 780mmcfd capacity), allowing FSRU Sequoia to be substituted as per the LSA, FSRU Sequoia cannot be placed in Pakistan as long-term FSRU and FSRU Exquisite will return around second week of week of September 2021 to resume its operations under the existing structure of the LSA.

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