LNG delays push Pakistan towards coal
Pakistan’s hope that the growth of LNG imports would relieve energy-induced constraints on economic growth has been dashed by project delays. Instead, it has turned to the IMF for economic help and coal to relieve energy shortages
When Pakistan began importing LNG in March 2015, marking its first imports of natural gas in any form, some hoped that the country would become a 30mn t/yr market as early as 2020. The optimists—notably former prime minister Shahid Khaqan Abbasi—thought imports would help the nation escape energy shortages so severe and prolonged that they had constrained economic growth for more than a decade.
Five years and a change in government later, expectations are tempered by the slow pace of LNG import infrastructure development. The Engro Elengy Terminal that started up in March 2015 was followed in November 2017 by the Pakistan GasPort (PGP) project. Since then, nothing.
LNG imports had been growing quickly, from 1.1mn t in 2015 to 6.9mn t/yr in 2018, an average annual growth rate of 85pc. However, provisional data for 2019 suggests that the growth of imports rose just 10pc to 7.6mn t.
The big challenge facing any new LNG terminal is that the government shows little appetite for providing the kind of financing and offtake guarantees that made the first two projects possible
LNG import infrastructure constraints loom over further growth. The Engro terminal has peak regasification capacity of 5.2mn t/yr (690bn ft³/d) while the PGP project has peak capacity of 5.7mn t/yr (750bn ft³/d). The combined total of 10.7mn t/yr is a long way short of the vaunted 30mn t/yr.
Yet another IMF bail-out
By 2018, it seemed that Pakistan’s economic growth had begun accelerating, thanks in part to the easing of energy shortages. GDP growth, which had been languishing at around 4pc/yr, rose to 5.5pc in 2017/18, and the International Monetary Fund (IMF) was expecting a rise to 7pc/year in the 2020s.
Again, hopes have been dashed. The July 2018 general election led to a change of government and, less than two months after assuming office in August, the new prime minister, former international cricketer Imran Khan, was knocking on the door of the IMF to ask for financial assistance.
While LNG growth has stalled, the use of coal has been rocketing
A $6bn 39-month bail-out, Pakistan’s 22nd IMF arrangement, was agreed in July 2019—to address “a legacy of misaligned economic policies” that had been fuelling consumption and short-term growth at the cost of eroding macroeconomic buffers, increasing external and public debt and depleting international reserves.
The fund’s first deputy managing director and acting chairman, David Lipton, commented that “addressing structural weaknesses in the energy sector and improving the governance of state-owned enterprises” would ensure efficiency and better services and therefore boost economic growth. The IMF now projects real GDP growth of just 2.4pc for fiscal year (FY) 2020 (to 30 June 2020).
Turning to coal
While LNG growth has stalled, the use of coal has been rocketing. Its share of primary energy supply more than doubled between 2015 and 2018 from 6.7pc to 13.6pc (see Figure 1). Over that period, primary energy supply grew by a fifth, so in absolute terms coal use rose from 4.7mn t bl oe to 11.6mn t bl oe, or 147pc.
Pakistan has long depended heavily on gas for its primary energy. This has partly been because gas was plentiful and cheap when its indigenous reserves were first developed and partly because it lacks reserves of other fuels.
The government has been striving to boost gas supply by incentivising indigenous production and with other efforts to import gas by pipeline and as LNG. However, the nation’s Oil & Gas Regulatory Authority (OGRA) predicts an inexorable decline in indigenous production, from 3.3bn ft³/d in FY2018 to 1.7bn ft³/d by FY2028.
As for the two import pipelines that Pakistan is hoping for—the 750mn ft³/d Iran-Pakistan (IP) pipeline and the 1.325bn ft³/d Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline—both face a variety of political and financial obstacles and their start-up dates remain uncertain. OGRA’s projection that both will start up in FY2020 and reach full capacity in FY2021 is hopelessly optimistic.
3.7bn ft³/d OGRA estimate of FY2020 demand-supply gap
The regulator’s LNG projections are more realistic, at around 1.2bn ft³/d for FY2020, rising to 1.8bn ft³/d in FY2021 and beyond. This is because the regulator only counts LNG projects that have received licences for construction and operation. Indeed, this makes the projection more pessimistic than it needs to be, given the number of projects under development. While not all are likely to go ahead, there are several credible contenders (see Figure 3).
The demand side of the equation is also problematic. Actual consumption of gas, determined by available supply, is much lower than estimates of unconstrained demand. According to OGRA, “the demand-supply gap during FY2018 was 1,447mn ft³/d and this gap is expected to rise to 3,720mn ft³/d by FY2020”.
It gets worse
All the growth in Pakistan’s gas consumption since 2015 has come from LNG imports, with domestic gas production remaining stubbornly flat at around 35bn m³/yr (3.4bn ft³/d), as Figure 2 shows.
OGRA predicts that unconstrained demand for gas will grow to 8.4bn ft³/d by FY2028. If that turns out to be correct, and so does the projection for the decline in indigenous production, without imports by LNG and pipeline the demand-supply gap would rise to 6.7bn ft³/d by FY2028. With its small nuclear power industry and non-hydro renewables in their infancy, Pakistan would have little option but to turn increasingly to coal and oil, both of which are more carbon-intensive than natural gas.
Much will depend on how much more LNG Pakistan can import—and import infrastructure will not be the only constraint. Pakistan’s first LNG import project is claimed to have the highest utilisation factor of any import terminal based on a floating storage and regasification unit (FSRU); but the second project is still underutilised for various reasons, which include the LNG price and the availability of access to downstream pipeline infrastructure. Pakistan is a price-sensitive LNG market and this sensitivity will increase as import volumes grow beyond those needed to push fuel oil out of electricity generation.
Nevertheless, LNG import capacity will set a ceiling so adding capacity is the central issue. One small increment will come from expansion of its first LNG import terminal, Engro. Excelerate Energy announced in January that it had reached heads of agreement (HoA) with Engro Elengy Terminal (EET) to replace the project’s current FSRU, the Exquisite, with a larger new-build vessel currently under construction by Daewoo Shipbuilding and Marine Engineering. Hull 2477 will expand EET’s send-out capability by over 150mn ft³/d (1.1mn t/yr), taking it to 840mn ft³/d.
Beyond that, the government announced last September that it had given the green light to several groups of companies for another five import terminals. Minister of power and petroleum Omar Ayub Khan is reportedly said that these terminals “could triple the country’s current capacity and make a significant dent in the gas shortage”. So, once again, the government is talking about capacity of 30mn t/yr being reached during the 2020s.
However, none of the five has yet reached FID and some do not even have licences from OGRA (status in Figure 3). The two front-runners appear to be Energas Terminal and Tabeer Energy.
The Energas project brings together Pakistani conglomerate Yunus Brothers Group, textiles company Sapphire Group and generator Halmore Power. These companies are all gas users that want to arrange supply to meet their own needs. Project send-out capacity could be as high as 1bn ft³/d. Initially, the target start-up date was last year but this has slipped to 2021. Interestingly, ExxonMobil has agreed to be involved as a “strategic support provider” for both terminal development and LNG supply. Energas says it “aims to be the first private terminal in Pakistan”.
Tabeer Energy is a project company wholly owned by Japan’s Mitsubishi Corporation. It is planning a two-phase project, with each phase having send-out capacity of 1bn ft³/d. The company does not yet appear to have committed to a start-up date.
The big challenge facing any new LNG terminal is that the government shows little appetite for providing the kind of financing and offtake guarantees that made the first two projects possible. Success in realising Pakistan’s third LNG import project will be a first-of-a-kind achievement. The sooner, the better.