A framework deal for the import of liquefied natural gas (LNG) with Azerbaijan was agreed by the Economic Coordination Committee (ECC) of the Cabinet. The agreement is being signed in Baku as Prime Minister Shehbaz Sharif is currently there.
Approval of the Framework Agreement
In a recent meeting, the ECC, presided over by Finance Minister Ishaq Dar, gave its approval to a framework agreement between Pakistan and Azerbaijan for the import of LNG. The agreement is expected to be signed during Prime Minister Shehbaz Sharif’s visit to Baku. This agreement marks an important milestone in strengthening bilateral relations between the two countries and meeting Pakistan’s growing energy needs.
Supplementary Grants Approval
During the meeting, the ECC also approved two supplementary grants amounting to Rs562.5 million. These grants are allocated for the maintenance of VVIP helicopters and employees-related expenses of the Heavy Electrical Complex. The approval of these grants highlights the government’s commitment to investing in important sectors and ensuring the smooth functioning of crucial facilities.
Framework Agreement Execution
Based on the summary presented by the Ministry of Energy (Petroleum Division), the ECC authorized the state-owned Pakistan LNG Ltd (PLL) to execute the proposed framework agreement with the State Oil Company of Azerbaijan Republic (Socar) Trading. The execution of this agreement will take place on a government-to-government basis, ensuring a strong foundation for cooperation in the LNG sector.
Advance Determination of LNG Needs
Given the need of accurate planning and forecasting, the ECC instructed the Ministry of Petroleum to estimate Pakistan’s LNG requirements at least three months in advance on a rolling basis. This proactive approach will help in ensuring a stable and consistent supply of LNG, meeting the energy demands of various sectors in the country.
Key Provisions of the Agreement
The framework agreement, valid initially for one year and extendable for another year, outlines important terms and conditions for LNG import from Azerbaijan. Socar, as the supplier, will offer one LNG cargo per month, 45 days prior to the relevant delivery window. PLL will have a set validity period to accept or decline each offer. The LNG price, expressed in US dollars per mmBtu (million British thermal units), will be offered by Socar to PLL. The payment will be due within 30 days following PLL’s receipt of the invoice, for which PLL will issue a prior letter of credit (LC) from local banks.
Port Charges and Confirmation Notices
According to the agreement, port fees for Socar will be limited to $500,000, whereas port fees for Port Qasim will include all fees, including taxes. Each offer will also contain the applicable demurrage rate, which will be agreed upon by PLL and Socar upon acceptance of the offer and represented as a fixed sum in US dollars per day.
Price Evaluation Mechanism
To ensure affordability and competitiveness, the agreement includes a mechanism for evaluating the offered price. PLL will assess the offered price in light of the market pricing elsewhere in the world and discuss with downstream power sector clients. This evaluation process will help in determining the suitability of the offered price and ensure that it aligns with market dynamics.
Business Model and Challenges
Informed sources have indicated that the business model for this agreement will rely on distressed cargoes available in the market beyond committed schedules. These cargoes will be picked at a discount by firms capable of diverting them to their clients, creating a mutually beneficial arrangement. It is worth noting that PLL has faced challenges in securing LNG cargoes through spot tendering since June 2022 when its repeated tenders failed to attract any bidders.
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The approval of the framework agreement between Pakistan and Azerbaijan for the import of LNG marks a significant step in addressing Pakistan’s energy needs. The agreement, executed on a government-to-government basis, ensures a reliable supply of LNG from Azerbaijan. With the provision of advance determination of LNG needs and a price evaluation mechanism, the agreement aims to secure LNG at competitive prices. This development will contribute to the country’s energy security and foster closer ties between Pakistan and Azerbaijan.
