Pakistan is deferring LNG cargoes from Qatar. Why is this happening?

Pakistan recently received Qatar's go-ahead for deferring five cargoes of liquified natural gas (LNG) till next year. The request was made (and accepted) during Prime Minister Shehbaz Sharif's visit to the country.

An official of the Ministry of Energy informed Nukta that the prime minister requested the Qatari government to defer 18 cargoes from the scheduled import plan in 2025. This was primarily done because Pakistan's economy and the industrial sector in particular have seen dismal growth, resulting in lower demand for electricity.

In fiscal year 2023-24 (FY24), Pakistan's economy recorded a growth of 2.4% from negative growth of 0.2% in the previous year, according to government data.

Meanwhile, the government has set a growth target of 3.6% for FY25, but financial institutions such as the International Monetary Fund (IMF) expect growth of 3.2%, while World Bank and Asian Development Bank both expect 2.8% growth.

This means the country's economy is still growing at a snail's speed and industrial electricity consumption has been on the lower side because of dismal performance.

Why did it happen?

Speaking to Nukta, Independent Economic and Investment Analyst A.A.H. Soomro said the government had deferred the cargoes for several reasons.

"Firstly, there is already excess capacity in the system hence, requiring us to delay our contractual agreements. The excess capacity is due to higher prices and low economic and industrial growth," he shared.

Secondly, LNG production rates, while efficient in gas consumption, are still higher than nuclear, hydel and local coal. "The government is rightly prioritizing this to reduce energy costs, utilize efficient assets and avoid the need to pay dollars for imports of RLNG which already is at high prices globally," Soomro added.

Why does it matter?

The Pakistani government has two agreements with the Qatari government to import 108 LNG cargoes per year or nine cargoes per month. Meanwhile, one cargo arrives from Italian energy company ENI under long-term agreements.

Pakistan signed the first long-term agreement with Qatar in 2016 for a period of 15 years at a price of Brent crude slope of 13.37% while the second agreement was finalized in 2022 for a period of 10 years at a price of Brent crude slope of 10.2%. The agreement with ENI was 15 years long and was signed in 2017 with the current price pegged at Brent crude slope of 12.14%.

The five deferred cargoes of LNG will now be imported in 2026, the Ministry of Energy official said.

Head of Research at Ismail Iqbal Securities Saad Hanif said that deferring the five LNG cargoes has immediate implications for Pakistan's economy. On one hand, it provided short-term cost savings and on the other, relieved pressure on foreign exchange reserves.

Additionally, Pakistan has opted to reallocate these cargoes to meet peak winter demand, which may help to avoid higher costs associated with spot market purchases during high-demand periods, he added.

Pakistan's electricity consumption in October was 10,262 giga-watt hours (GwH), a 17.8% drop compared to the previous month.

Moreover, in the first four months of FY25, power generation decreased by 5.4% to 50,808 GwH, down from 53,709 GwH during the same period last year.

Chief Executive Officer of Chase Securities Ali Nawaz said that the decision to defer cargoes would provide temporary relief by reducing dollar outflows, which may help stabilize the Pakistani rupee and ease inflationary pressures tied to energy imports.

Pakistan's inflation in May 2023 peaked at 38% but started easing this year. It clocked in at 28.3% in January, with October inflation easing to around 7.2%, according to Pakistan Bureau of Statistics data.

Declining production & need to diversify

The situation highlights the critical need for Pakistan to diversify its energy sources, such as investing in renewable energy and increasing domestic gas production to decrease reliance on imported LNG, Nawaz said.

In the long-term, structural energy reforms will be necessary to enhance energy security and reduce vulnerability to global market fluctuations, creating a more resilient and sustainable energy sector, he said.

Pakistan's gas production in nine months of 2024 declined by 7% to 3,042 million standard cubic feet per day (mmfcd), according to official data.

"Reduced gas demand from both the industrial and power sectors, driven by subdued economic conditions, has led to increased line pack pressure in the gas distribution network alongside rising RLNG imports," Muhammad Awais Ashraf, head of research at AKD Securities, said.

This situation has forced local exploration and production companies to shut down some wells, leading to a decline in gas output, he added.

Gas demand is expected to stay low as captive power plants will be shifted to the national grid amid weak economic activity, Ashraf said.

Under its agreement with the IMF, Pakistan has to end gas supply to captive power plants installed at domestic industries from January 2025. Gas consumption by captive power plants stands at around 338 mmcfd where nearly 1,180 units have been installed across the country.

Gradual economic recovery

Head of Research at KTrade Securities Limited Syed Fawad Basir noted that the economy was still in a recovery phase. "At this point, the interest rate decline effect is starting to show in high frequency datasets. However, accelerated growth has not been seen, instead aptly, we are in a gradual recovery phase."

This also means that while economic activity has picked up, demand recovery is also gradual.

"With the use of solar energy increasing, energy requirement as a whole is low, requiring lower levels of LNG as well," he commented.

To give perspective, 18 cargoes were supposed to be delivered to Pakistan, out of which only five have been deferred, meaning that the country will still get the remaining 13 cargoes.

The government's hasty decisions for the last two decades are costing the treasury either through ill-planning, delay in approvals, smuggling or hiccups in manufacturing sector and shrinkage in industrial output in economy — all of which has affected the country's demand for electricity.

Earlier, Pakistan had to tap the spot market and bought costliest LNG cargoes, which became one of the reasons for the skyrocketing inflation. But this year, it has had to defer cargoes.

This reflects how inconsistent policies hurt businesses as costly electricity derived from LNG and other sources made Pakistani exporters less competitive in global markets.