Honorable Sir,
As mentioned earlier that it is the norm in the oil industry to have a large part of the requirements for crude and of product imports on a long term basis with only a part left for spot purchases. Don’t know if you are aware that PSO & KPC have a gas oil supply contract going back to 1977.
Let us also not forget that in Feb 2007, both India & Pakistan had agreed to pay Iran $4.93 per mm Btu for natural gas in the IPI project. The total cost was $7.5-bilion dollars. If anyone cares to put the cost of investment of about $3.75-billion relating to Pakistan's half of the pipeline, the end result would not be much different than the LNG cost from Qatar and that was for supposed to be for the life of the pipeline which could be more than 50 years!
Your question “Why 15 Years?” is however pertinent for those who are not familiar with the mechanics of the international LNG industry and how it developed. This requires a bit of explanation.
Until the late 1950’s LNG was virtually an unknown word and few outside the USA had heard of.it. Understand first commercial plant to store gas in the liquefied form was in the Cleveland Ohio in 1941 but none existed outside the United States until 1964 when the first commercial shipment of Algerian LNG arrived in the UK aboard the ship called Methane Princess. A special ‘Seminar’ on the liquefaction & transport process of natural gas was organized for the Chemical Engineering students by the college.
Construction of an LNG plant costs a hell of a lot of money. LNG plant of Oman consisting of two LNG trains of 3.3-million tons each constructed by a Chiyoda- Foster Wheeler (a JV between Chiyoda & Foster Wheeler) cost about $2-billion in 2000 which is about $3-billion in today’s money. Today it is estimated that the construction of the LNG train has gone up to cost approx. $560/ton. Hence a 6.6- million-ton plant would set you back approx $3.7-billion.
Therefore, before a consortium of banks would agree to finance such a costly project they wanted assurance that the LNG thus produce would have guaranteed buyers. Thus a 25-year long term Sale & Purchase agreement was signed with Korea Gas Corporation for 4.1-million tons per annum in 1996. Another 25- year contract was also signed with Osaka gas in 1998 along with a 20-year contract with Dahbol Power Company of India provided assured outlets for almost all of the LNG output. The first LNG train was inaugurated by Sultan Qaboos in 2000.
Since then long-term contracts have formed the basis for the growth of the liquefied natural gas market in Asia which now represents more than 70% of global LNG demand. LNG importers in Japan, South Korea, and China accounted for the majority of the LNG global market during the 2000-2010 period. During this period Qatar emerged as the largest LNG exporter in the world with an output of 77-million tons per annum. Japanese consortium JERA with 85-million tons p.a. is the largest LNG importer in the world.
The situation has changed with the new LNG manufacturing projects coming on stream in Australia, North America, Russia, and Africa. These project found easier to get financing on the belief that environmental constraints on Sulphur emission would curtail the use of fuel oil causing Asian LNG demand to continue to grow and that the existing contract structure would largely stay in place.
The low oil price environment of the last two years caused primarily by the slowdown in the Indian & Chinese demand coupled with the increased supply situation from the new sources has been a boon as well as a bane for the Asian LNG market. On one hand, LNG buyers are able to purchase cheap LNG on the spot market, long-term LNG contracts indexed to regional oil prices are becoming onerous as the crude price has not dropped as much as the gas prices. However many LNG buyers are seeking to renegotiate the long term LNG contracts. This is causing problems for the producers because their financing arrangement are often tied with the term contract price.
I am not privy to the long term LNG contracts of Qatar, except that JERA imports about 17-million tons and that original term price was close to $12 per million Btu.
In addition to the Korean 4.1-million ton contract already mentioned earlier, I am aware of the following ones involving Oman. I don’t know the price.
Osaka gas 660 K tons p.a. (25 years). Itochu Corp. 700 K tons p.a. (20 years) both signed in 2000. Osaka gas 800 K tons p.a. (17years) signed in2009. Mitsubishi Corp 800K tons p.a. (15 years) signed in 2006.
“Oman LNG and Enron Sign LNG Supply Agreement for Dabhol Power Plant
Oman LNG and Enron's Indian affiliate MetGas signed on 8 December along-term sales and purchase agreement to supply LNG to the Dabhol power plant in India's Maharashtra state. Under the 20-year agreement, MetGas will purchase 1.6mntons/year of Omani LNG beginning in the fourth quarter of 2001 (for details, see
MEES, 30 November)”
http://archives.mees.com/issues/720/articles/28481
Recent news from India:
India may renegotiate LNG import contracts at appropriate time: Dharmendra Pradhan
"Long-term contracts are supposed to be honoured. We will look at an appropriate time (to review). In the past also we had renegotiated the deals," Pradhan said.
NEW DELHI: India may look at renegotiating pricing of its long-term LNG import contracts at an "appropriate time" to help reflect falling rates of the spot market, Oil Minister Dharmendra Pradhan said on Monday.
He was asked if the government is looking at renegotiating liquefied natural gas (LNG) contracts in view of fall in prices of the fuel available in spot or current market
"We see that at an appropriate time," he told reporters on side-lines of an industry event here.
India imports 8.5 million tonnes per annum of LNG from Qatar under two long-term contracts and has tied up 5.8 million tonnes a year supplies from the US. It also has a 2.5 million tonnes import contract with Gazprom of Russia and a 1.44 million tonnes deal with Gorgon project of Australia.
While long-term LNG from Qatar comes for USD 8.5-9 per million British thermal unit, the same gas is available in the spot market for less than half the price.
https://economictimes.indiatimes.co...dra-pradhan/articleshow/70838170.cms?from=mdr
IMHO, the 15 year LNG contract by Pakistan was quite normal. We have only witnessed the first 2 years, it is certain that the LNG price would go up & down quite a few times during the duration of the contract. My approach would be to closely watch what India does with her long term contract with Qatar and as soon as Indian price is reduced, GOP should mount an all-out effort to renegotiate Pakistan’s price as well.
I have virtually posted most of what I know about the LNG market. I stand by my assertion that the LNG contract and the LNG terminal signed by Shahid Khaqab Abbasi were okay in the market conditions prevailing at that time. People are of course free to believe what they like.
