Overreliance on LNG a risk to Pakistan’s energy and financial security

KARACHI: Faced with rapidly declining domestic natural gas reserves, Pakistan is relying more on imported liquefied natural gas (LNG) as an alternative fuel, which is misguided policy, according to a latest report released on Friday.

“But rather than simply replacing one form of gas with another – the switch to imported LNG – undermines the country’s energy security and financial stability,” concludes the latest report from the Institute of Energy and Energy Economics. financial analysis (IEEFA) on Pakistan.

The IEEFA estimates that Pakistan’s LNG imports could reach more than $32 billion by FY2030, up from nearly $2.6 billion in FY2021, according to the report’s co-authors and energy finance analysts Haneea Isaad and Samuel Reynolds.

“LNG from global markets has become 5 to 10 times more expensive than gas produced in Pakistan,” says Isaad.

LNG has also been unreliable. LNG suppliers under long-term contracts with Pakistan have defaulted on at least 11 shipments since January 2021, contributing to fuel and power shortages. Extreme LNG price volatility continues to hamper energy sector planning and exposes the government to massive subsidy burdens.

“Pakistan’s vulnerability to commodity market shocks has only increased in the wake of the Ukraine crisis,” says Reynolds.

“Coupled with the global economic recovery from the COVID-19 pandemic, price-sensitive countries like Pakistan may not be able to compete with wealthier buyers in Europe and Northeast Asia.

In this report, the authors examine the main risks associated with LNG imports and provide recommendations to mitigate the financially unsustainable growth in LNG import demand in Pakistan.

Pakistan imported 7.4 million tonnes of LNG in 2020, and the government expects LNG demand to grow rapidly over the next decade. There are currently at least four major LNG import terminal projects in various stages of development.

However, the high cost of LNG has shed new light on many pre-existing problems with the country’s gas system. These issues include end tariffs that do not reflect gas costs, inefficient cross-subsidization of gas tariffs, and high volumes of unaccounted gas (UFG) that are lost while being transported through the network.

“As more LNG is injected into this faulty network, the financial problems of Pakistan’s gas sector are likely to worsen significantly,” says Reynolds. “Circular debt, chronic cash shortages that have historically plagued the power sector in Pakistan, are now plaguing the gas sector.”

Greater reliance on imported LNG would only increase credit risks for investors in the country’s LNG-power value chain. Pipeline projects and planned terminals can also take time to materialize, as geopolitical conflicts and unsustainable economies exacerbate stranded asset risks for LNG infrastructure.

In January, fuel shortages forced textile factories in Punjab to close for more than two weeks. As a result, exports worth $250 million, or 20% of annual revenue for the entire sector, were lost.

“In Pakistan’s textile sector, electricity generation costs can be around 30 to 40 percent of production costs,” says Isaad.

“Since the textile industry depends on gas-based electricity generation, rising LNG prices can significantly reduce profit margins.”

The fertilizer industry is also deeply dependent on natural gas as a fuel and feedstock, but the industry pays some of the lowest gas prices despite high costs. The fertilizer industry accounts for 16% of national gas consumption, but only 3% of the revenues of public gas transmission companies.

Instead of rapidly increasing LNG imports, Pakistan can focus in the short term on more efficient use of existing LNG supply by changing regulatory incentives, streamlining tariff structures and implementing programs energy efficiency, among other measures.

“The focus should be on the demand side of the equation, and less on expanding supply,” says Reynolds, adding, “The promotion of energy-efficient equipment and more cost-reflective rate structures can incentivize more efficient use of gas to reduce imports. Needs.”

According to Isaad, more coherent strategies for LNG supply and tendering, as well as maximizing the use of existing LNG terminals, can also help improve energy security without major new infrastructure additions.

Sarah J. Greer