Introduction
The Liquefied Natural Gas (LNG) Policy 2011 was crafted to address the acute gas shortages in Pakistan by facilitating LNG imports. Pakistan’s energy policy aims to ensure a sustainable, reliable, and competitively-priced energy supply by optimizing the primary energy mix, maximizing indigenous resources, enhancing private sector participation, developing infrastructure, and nurturing technical expertise in the energy sector.
LNG Import Project Structure
The LNG import projects can be structured in two primary ways:
- Integrated Project Structure: Here, a single entity (public or private) is responsible for the entire LNG supply chain—from purchasing LNG to supplying regasified LNG (RLNG) in the domestic market. The LNG Developer enters into a Gas Sales and Purchase Agreement (GSPA) directly with buyers.
- Unbundled Project Structure: In this model, the LNG procurement, shipping, terminal operation, and RLNG sales are handled by separate entities. LNG Buyers can directly import LNG and enter agreements for its transport, storage, and regasification.
LNG Procurement
LNG procurement can be undertaken through various methods to ensure sustainability and competitive pricing:
- Direct Negotiations: Buyers can negotiate directly with LNG suppliers.
- International Competitive Bidding: This ensures transparency and competitive pricing.
- Spot Market Purchases: LNG can be bought from the spot market based on market dynamics.
Public sector entities can adopt direct negotiation if market conditions warrant it.
Ownership & Operation of LNG Terminals
The LNG Developer or Terminal Operator (TO/O) must obtain a license from the Oil and Gas Regulatory Authority (OGRA). The licensing criteria encompass technical expertise, financial capability, and adherence to health, safety, and environmental (HSE) standards. Key requirements include:
- Technical Experience: Proven track record in LNG terminal operations.
- Financial Strength: Adequate liquidity, revenues, and net worth.
- HSE Compliance: Adherence to World Bank HSE Guidelines, Pakistan’s Environmental Protection Act, and international LNG industry standards.
RLNG Marketing & Transportation
LNG Developers or Sellers must secure licenses from OGRA for marketing RLNG and, if necessary, constructing gas pipelines. This ensures they comply with regulatory standards and facilitate the seamless distribution of RLNG in Pakistan.
Regulatory Framework
OGRA oversees both the construction and operation phases of LNG terminals:
- Construction Period: Ensuring compliance with technical standards and HSE guidelines.
- Operating Period: Regulating access rights, terminal tariffs, and reporting requirements. Terminals operate on a regulated third-party access (RTPA) basis, except for those developed for dedicated use.
Government Incentives
To promote LNG import projects, the government offers several fiscal incentives:
- Customs Duty Exemption: Zero percent duty on imported LNG.
- Tax Exemptions: Reduced custom duties and sales tax on plant and machinery imports, initial allowance on depreciable assets, and exemption from withholding tax on foreign lenders’ interest payments.
- Land and Port Facilities: Assistance in acquiring necessary facilities at reasonable costs.
The government also encourages participation from multi-lateral development banks (MDBs) for project financing.
Pricing of RLNG
RLNG pricing varies based on procurement methods and sector involvement:
- Public Sector Procurement: OGRA determines RLNG prices for public sector entities, ensuring reasonable returns on investments.
- Private Sector Procurement: Private sector entities can negotiate RLNG prices directly with suppliers.
- Weighted Average Cost: RLNG prices contribute to the weighted average cost of gas in Pakistan.
Government Guarantee
The government does not provide guarantees for LNG import projects but may offer support to secure long-term LNG supplies if necessary.
Participation Freedom
All entities meeting the policy criteria are free to participate in any segment of the LNG value chain, promoting competition and efficiency.
Technical Codes and Standards
The design, construction, and operation of LNG facilities must comply with internationally recognized standards. OGRA ensures these standards are met and oversees the licensing process, which includes a thorough review and audit of proposed projects.
Shipping of LNG
LNG ships must be registered with an acceptable international classification society, ensuring compliance with global maritime safety regulations.
Permits and Licenses
LNG Developers, Terminal Operators, and Buyers must obtain relevant permits and licenses from various government departments, ensuring compliance with national laws and regulations.
Other Measures
OGRA aims to facilitate early project initiation by expediting the licensing process and may terminate licenses if financial close is not achieved within 12 months. The government retains the right to issue instructions for policy implementation and resolve any arising difficulties.
Applicability and Effect of the Policy
The LNG Policy 2011 is effective immediately and applies to all LNG import projects in Pakistan. This comprehensive policy framework is designed to mitigate gas shortages, promote energy security, and enhance the country’s energy infrastructure through strategic LNG imports and investments.
By fostering a competitive and regulated LNG market, Pakistan aims to secure its energy future and meet the growing demand for natural gas in an economically and environmentally sustainable manner.
