RLNG-based power generation sets to shoot up

Web DeskWeb Editor

05th Aug, 2021. 04:37 pm

KARACHI: The production cost of the regasified liquefied natural gas (RLNG)-based electricity generation is estimated to increase over 100 per cent in the current fiscal year, as global liquefied natural gas (LNG) prices are likely to remain elevated for the majority of FY22.

“Increased RLNG rates will translate into higher electricity production costs from the commodity. We estimate [the] generation cost from RLNG to increase to around Rs19/kWh, a jump of 135 per cent from the average of Rs8.1/kWh witnessed in FY21,” Yousuf Rahman at KASB Securities noted in a report.

“As RLNG comprises 20 per cent of the generation mix, the national electricity production cost can increase Rs2.2/kWh. This increase is expected to be reflected in the national grid’s tariff through future monthly fuel price adjustments, likely impacting a considerable portion of the industrial sector.”

Pakistan has become one of the top emerging markets for the super-chilled fuel in recent years, as domestic gas production has plateaued.

The domestic RLNG prices are slated to increase in the coming months, largely reflecting the rise in the global oil prices and LNG spot rates. The domestic RLNG rates in July 2021 had already increased to $12.92/mmbtu compared with an average of $8.42/mmbtu witnessed during FY21.

The Pakistan LNG Limited (PLL), the state-owned importer, procured four LNG cargoes at over $15.2/mmbtu for September 2021, highest-ever rates, with a landed cost estimated around $17.2/mmbtu.

“LNG commodity price has spiked recently to over $15/mmbtu due to a variety of supply-related issues. Therefore, PLL was forced to accept four cargoes at $15/mmbtu. Otherwise, the replacement fuel, i.e., furnace oil, which is even more expensive, would have resulted in September power prices higher by at least 20 per cent,” Petroleum Division tweeted.

The sudden opening up of global economies, amid the tightness of supplies caused LNG spot rates to surge rapidly. Unforeseen factors, including prolonged winters in the EU region and hotter summers in the Asian region also kept the demand for the commodity high.

The supply tightness is likely to persist as key producers, including Australia, undergo planned maintenance. Moreover, the political impasse between Russia and the EU over the Nord Stream 2 pipeline caused Russia to keep its LNG supplies tight, despite the record-high prices. While the LNG market may stabilise, as the supplies resume, analysts think the LNG prices will likely remain elevated for the majority of FY22.

“[The] RLNG’s premium over domestic gas would then rise to over 150 per cent. This sharp increase in the RLNG prices is expected to have a considerable impact on various fronts of the Pakistan’s economy. Most notably, the economy can witness additional pressure on its import bill if rates persist,” Rahman added.

However, the higher RLNG prices are expected to incentivise the use of furnace oil (FO) for electricity generation needs as the furnace oil sales have shot up more than twofold during the last two months.

“Our discussions with the management of notable industries revealed an actual shortage of the commodity. To recall, the furnace oil was under a severe supply glut over a year ago and refiners were compelled to offload the commodity at discounted rates, realising the sharp losses on their sales. In view of high FO demand, we foresee improved pricing and margins for the commodity to play out in the near term,” the KASB report noted.

Indigenous gas supply has been declining at a CAGR of 3 per cent since FY12, while the gas demand is consistently rising by a CAGR of 7 per cent. The imported RLNG will bridge this gap, while four additional licences have been issued with two being on a fast-track basis. These two projects will enhance the national RLNG processing capacity by an additional 2,000mmcfd from the existing 1,200mmcfd.

“The two new merchant LNG terminal developers would achieve financial success and start construction this year. “We do need at least one additional import terminal (without any “take or pay” commitment on the part of the government) by 2023,” Special Assistant to the Prime Minister (SAPM) on Energy Tabish Gauhar said last month.

The circular debt balance emanating from the RLNG sales is expected to rise sharply, as RLNG rates escalate further.

“Most notably, the PSO’s [Pakistan State Oil] receivables from its RLNG sales (Rs250 billion in FY21) have already crossed Rs100 billion, straining the company’s cash-starved balance-sheet.

The PSO; however, may find some solace in the potential increase of its margins on the RLNG sales. “[The] PSO’s margins for RLNG are set at 2.5 per cent, suggesting higher prices for the commodity will result in higher gross profits. For FY21, we project [the] PSO’s RLNG sales to touch Rs250 billion, provide a gross contribution of Rs6.3 billion,” the KASB report noted.

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