The other day a write up was posted covering salient features of the decision of Government of Pakistan (GoP) regarding use of LNG for power generation. Many of the analysts instantly termed the GoP decision a ‘horrendous mistake’. While one can put forward uncountable factor to substantiate his/her point of view, an AKD Securities report is enough to convince the GoP to review its decision.
Uncertainty regarding tariff, supply, storage and payment for procuring LNG in the power space has pervaded since its inception. Finalization of a payment plan and intended supply of 265mmcfd LNG to the power sector is a positive for the space, however, a number of question marks remain.
Primarily with regards to the pricing of LNG, as the spot prices of East Asia bound LNG (EAX) currently hovers at attractive levels of US$6.5-7.5/mmbtu, the final cost of LNG supplied to power plants will be closer to US$12-13/mmbtu.
Based on this price the cost of generation of electricity on LNG for a power plant operating at 40% efficiency will be between Rs9.7-Rs11.8/KwH, making LNG fired power approximately twice the price of indigenous natural gas fired plants, and almost at par with furnace oil based generation.
In addition to the exorbitant price, uncertainty regarding storage, supply framework and sapping of liquidity by mandating standby letters of credit continues to hinder an otherwise illiquid space.
Keeping these developments in mind, the brokerage house believes within its coverage cluster KAPCO, and in the listed space SPWL will opt for generation on LNG as compared to RFO/HSD generation. As the cost of generation exhibits no marked decrease, analyst expect NTDC to maintain generation demand on LNG fired plants at prevailing levels.
Opting to price present shipments on spot prices of LNG, with the Japan, South Korea, China and Taiwan bound exchange of East Asia Index (EAX) ranging the price of LNG between US$6.5-7.5/mmbtu (discount of 14.5% to Brent). Tolling charges of US$3/mmbtu, terminal charges of US$0.66/mmbtu, US$1/mmbtu under UFG charges in addition to a 5% net profit being paid to PSO, SSGS and SNGP.
Thus, LNG priced at US$12-13/mmbtu is closer to actual cost of procuring the input for power generation, implying a tariff of PkR9.7-11.8/KwH for plants. Sensitivity analysis of total supply and efficiency levels reveals the ability to improve generation capacity on LNG, adding between 1,250-2,365MW to the national grid, depending that it is used as an additional generation source and not as a substitute of other fuels.
NEPRA’s analysis under a gas supply deficit scenario reveals that 26,800GwH of energy may be generated annually, while these levels can be supplemented by increasing gas supply by 690mmcfd to 950mmcfd translating into an increase in generation on gas to 49,000GwH, lowering the overall cost of generation significantly.
Four IPPs currently generate power on gas, which due to lack of availability is curtailed during November – March, forcing these IPPs to use HSD instead, while only 150mmcfd of additional gas is required to keep them operational on gas throughout the year.
With the cost of generation on working out at levels similar to furnace oil, this can be classified as a case of effectively substituting an expensive fuel source with another expensive imported fuel source. Although LNG prices currently at levels below its 2-year average of US$11.8/btu, the present dynamics are slightly in favor of LNG based generation. However, long term pricing sustainability at these levels remains to be seen. Furthermore, the need to hold funds under standby letters of credit, implementing an escrow system to use in case of payment default, imposes greater burden on a power chain already facing severe stressors.