Comment: Pakistan’s Liquefied Natural Gas (LNG) Policy, 2011

Pakistan’s Liquefied Natural Gas (LNG) Policy of 2011 was developed to address the growing demand for natural gas amidst limited indigenous supplies. The policy aims to facilitate the importation, storage, and distribution of LNG to ensure a reliable and competitively-priced energy supply. This article provides a comprehensive overview of the LNG Policy, highlighting its structure, procurement processes, regulatory framework, and the various incentives provided by the government.

LNG Import Project Structure

The LNG import projects can be structured in two main ways:

1. Integrated Project Structure:
   • A private or public sector party, joint venture, or consortium (referred to as “LNG Developer”) is responsible for purchasing LNG supplies, transporting them to its import terminal (comprising receiving, storage, and re-gasification facilities), and supplying Regasified LNG (RLNG) to the domestic market and/or for its own use. The LNG Developer enters into a Gas Sales and Purchase Agreement (GSPA) with a Government-designated buyer, gas utility, or any customer (referred to as “RLNG Buyer”).
2. Unbundled Project Structure:
   • An LNG Buyer, which could be a Government-designated buyer, gas utility, consumer, or LNG supplier, directly imports LNG under a Sale and Purchase Agreement (SPA) on a delivered ex-ship (DES), free-on-board (FOB), or cost-and-freight (C&F) basis.
   • For FOB purchases, the LNG Buyer enters into an agreement with a shipping company for LNG transportation.
   • The LNG Buyer then contracts with the LNG Terminal Owner/Operator (LNG TO/O) for receiving, storage, and re-gasification services under a tolling agreement.

LNG Procurement

The procurement of LNG by LNG Developers or Buyers follows these guidelines:

1. Import Authorization:
   • LNG Developers and Buyers are allowed to import LNG in accordance with applicable laws. OGRA ensures sustainability by requiring technical and commercial experience from at least one consortium member.
2. Procurement Approaches:
   • Direct Negotiations: Engaging with one or more LNG suppliers.
   • International Competitive Bidding: Conducting competitive bidding for LNG supply.
   • Spot Market Purchases: Procuring LNG from the spot market based on commercial considerations.

Ownership & Operation of LNG Terminals

1. Licensing:
   • The LNG Developer or LNG TO/O must obtain a license from OGRA for designing, constructing, operating, and owning an LNG terminal.
   • Compliance with technical standards, financial thresholds, and Health, Safety & Environmental (HSE) standards is mandatory.
2. Site Approval:
   • The terminal site must meet several criteria, including population demographics, land use, and proximity to existing infrastructure.
   • Port authorities must approve the site based on the NOC from SEPA, QRA study, and navigational simulation study.

RLNG Marketing & Transportation

1. Licensing for Marketing and Selling RLNG:
   • An LNG Developer or Seller must obtain a license from OGRA to market and sell RLNG in the domestic market.
   • Construction and operation of gas pipelines require a separate license from OGRA.
2. Local Production and Distribution:
   • Interested parties in small-scale LNG production and distribution using LNG trucks must also obtain a license from OGRA.

Regulatory Framework

1. Construction and Operation:
   • OGRA ensures compliance with technical and HSE standards during the construction and operation of LNG terminals.
2. Third Party Access (TPA):
   • LNG terminals must operate on a regulated third-party access (RTPA) basis with published/negotiated tolling tariffs.
   • Exceptions are made for terminals developed for own or dedicated use, which operate on a negotiated third-party access (NTPA) basis.
3. Gas Pricing and Transmission:
   • RLNG prices for supply to public sector utilities are determined by OGRA.
   • Private sector RLNG sales are based on negotiated prices.
   • Access to the SSGC and SNGPL pipeline network is regulated, with tariffs determined under TPA rules.

Government Incentives

1. Fiscal Incentives:
   • Zero percent customs duty on imported LNG and exemption from withholding tax at the import stage.
   • Exemption from customs duty in excess of 5% and total exemption from sales tax on plant, equipment, and machinery.
   • Initial allowance and normal depreciation on plant and machinery under the Income Tax Ordinance, 2001.
   • Exemption from withholding tax on interest payments to foreign lenders.
2. Support for Site Development:
   • The Government assists LNG Developers or LNG TO/Os in obtaining land and port facilities at reasonable costs.
3. Multilateral Development Bank Participation:
   • The Government solicits MDBs’ participation to provide financial guarantees and facilitate project financing.

Pricing of RLNG

1. Public and Private Sector Procurement:
   • RLNG will be procured by gas utilities/RLNG Buyers in the public/private sector through integrated or unbundled approaches, with the lowest price determining the input for the weighted average cost of gas in Pakistan.
2. Pricing Determination by OGRA:
   • For public sector procurement, OGRA determines RLNG prices based on the LNG purchase price, transportation, storage, re-gasification costs, and a reasonable return on investment.

Government Guarantee

The Government does not provide guarantees for LNG import projects but may support long-term LNG supplies. Financial guarantees for payments by public sector companies to LNG/RLNG suppliers can be provided if necessary.

Freedom to Participate in the LNG Business

All interested parties meeting the criteria can participate in any segment of the LNG value chain, ensuring a competitive and open market.

Technical Codes and Standards

The design, construction, and operation of LNG facilities must comply with internationally recognized codes and standards. Used LNG ships for offshore terminals must maintain classification status and hold valid certificates.

Shipping of LNG

All LNG ships transporting LNG to Pakistan must be registered with an acceptable international classification society and comply with IMO regulations.

Other Permits and Licenses

LNG Developers, TO/Os, Buyers, or Sellers must obtain necessary permits and licenses from relevant government departments as per applicable laws and regulations.

Other Measures

OGRA is responsible for expeditiously processing license applications and ensuring early project commencement. The Government may issue additional instructions to OGRA as needed.

Applicability and Effect of the Policy

The LNG Policy, 2011, is effective immediately and applies to all LNG import projects in Pakistan.

For detailed guidance and expert legal advice on navigating Pakistan’s LNG Policy, 2011, Josh and Mak International is here to assist you. Our comprehensive legal services ensure that your LNG projects comply with all regulatory requirements and leverage available incentives for successful implementation.

Critical Analysis of Pakistan’s Liquefied Natural Gas (LNG) Policy, 2011 by Josh and Mak International

The Pakistan LNG Policy, 2011, while ambitious in its goals, presents several challenges and potential pitfalls that merit critical examination. This analysis highlights the areas where the policy may fall short and offers a critique from various perspectives including regulatory, economic, and operational.

Regulatory Framework and Oversight

1. Complex Licensing Procedures:
   • The policy mandates multiple layers of licensing and approvals from OGRA, which can be cumbersome and time-consuming. The requirement for separate licenses for importing, constructing terminals, marketing RLNG, and pipeline construction introduces bureaucratic delays and increases administrative overheads. The stipulated 90-day period for license issuance, although seemingly reasonable, often extends beyond this timeline due to procedural inefficiencies.
2. Regulatory Ambiguity:
   • The policy lacks clarity on the specific roles and responsibilities of various regulatory bodies, including OGRA, Port Authorities, and Environmental Protection Agencies. This can lead to jurisdictional conflicts and regulatory overlaps, complicating compliance for investors and developers.
3. Inconsistent Regulatory Standards:
   • The enforcement of HSE standards and technical codes, although well-intentioned, may not be uniformly applied. The reliance on international standards without considering local contexts and capacities can create compliance challenges for local developers.

Economic and Financial Viability

1. High Initial Costs and Financial Risks:
   • The policy’s requirement for substantial initial investments in infrastructure, including LNG terminals and pipelines, poses a significant financial burden on developers. The financial criteria for obtaining licenses, including liquidity and net worth thresholds, may exclude smaller or local companies from participating, limiting competition and innovation.
2. Uncertain Return on Investment:
   • The policy promises a reasonable return on investment but does not clearly define the parameters for determining such returns. The lack of a robust mechanism to ensure fair and timely returns can deter potential investors, particularly in an already volatile global LNG market.
3. Subsidies and Incentives:
   • While the policy offers several fiscal incentives, such as zero percent customs duty on imported LNG and exemptions from withholding taxes, it does not address the long-term sustainability of these incentives. The reliance on government subsidies raises concerns about fiscal stability, especially given Pakistan’s economic constraints.

Operational Challenges

1. Infrastructure and Technological Gaps:
   • The policy envisions the development of sophisticated LNG infrastructure, but it does not sufficiently address the existing gaps in technology and expertise within the country. The dependence on international standards and practices without adequate local capacity building can result in suboptimal implementation.
2. Supply Chain and Market Dynamics:
   • The policy’s focus on importing LNG does not adequately consider the volatile nature of the global LNG market. Fluctuations in LNG prices, geopolitical tensions, and supply chain disruptions can significantly impact the viability of LNG projects in Pakistan. Additionally, the policy does not sufficiently incentivize the development of indigenous gas resources to complement LNG imports.
3. Environmental Concerns:
   • Although the policy mandates compliance with environmental standards, it lacks a comprehensive framework for monitoring and mitigating the environmental impacts of LNG projects. The focus on compliance rather than proactive environmental management can lead to ecological degradation and community opposition.

Strategic and Long-Term Considerations

1. Overreliance on Imports:
   • The policy heavily emphasizes LNG imports to meet domestic energy needs. This overreliance on external sources makes Pakistan vulnerable to global market fluctuations and geopolitical risks. A more balanced approach, incorporating both domestic resource development and imports, would provide greater energy security.
2. Inadequate Focus on Renewable Energy:
   • While the policy aims to optimize the primary energy mix, it does not sufficiently promote the integration of renewable energy sources. In the global transition towards sustainable energy, Pakistan risks lagging behind by not prioritizing renewable energy development alongside LNG imports.
3. Lack of Comprehensive Risk Management:
   • The policy does not provide a robust risk management framework to address potential operational, financial, and environmental risks. The absence of clear contingency plans and risk mitigation strategies can lead to project delays, cost overruns, and legal disputes.

Conclusion

The Pakistan LNG Policy, 2011, while a significant step towards addressing the country’s energy needs, presents several challenges that need to be critically addressed. Simplifying the regulatory framework, ensuring economic viability, addressing operational challenges, and incorporating strategic long-term considerations are essential to making the policy more effective and sustainable. For stakeholders looking to navigate these complexities, Josh and Mak International offers expert legal guidance and comprehensive support to ensure successful compliance and implementation.