LNG Strategic Report

30 November 2017

LNG Import Outlook: Pakistan

Kelli Maleckar Krasity, Associate Director

Key implications

Pakistan is struggling to ensure adequate supply is available to meet existing gas demand and growth potential.
Domestic production is declining, and further exploration and development is seriously hampered by regulatory, fiscal,
and security issues. Proposed pipelines from Iran and Turkmenistan offer the potential for sizeable imports, but they
must overcome substantial geopolitical hurdles. Chronic electricity shortages have resulted from the lack of gas supply
and a series of non-payment issues, increasing the impetus for a new source of gas and creating a big opportunity for
growth in LNG demand. Pakistan began LNG imports in 2015 through Engro LNG’s Elengy terminal in order to
counteract domestic shortfalls.

Although there were early concerns that payment risks would impede Pakistan’s ability to ramp up imports quickly, it
finalized its first SPA with Qatargas in February 2016, and has since signed a series of medium-term agreements with
Gunvor and Eni. A second regasification terminal received its first cargo in late November 2017, while at least five
other projects are in early stages of development, including a second terminal from Engro in conjunction with Shell.
Still, the risk of non-payment remains a major hurdle in signing additional long-term contracts, as do the extensive
operational issues that plague the gas sector.

 Owing to recent progress on LNG contracts and regasification developments, the Pakistani government has highly
ambitious targets for LNG demand, expecting imports to reach 30 MMtpa in the next five years.

 Pakistan remains a high-risk market for LNG owing to pervasive payment risk and operational issues in the energy
sector, including rampant corruption. IHS Markit doesn’t expect imports to ramp up quite as rapidly as the
government; we anticipate Pakistani LNG demand will grow to only 8 MMtpa by 2020

Contacts
Kelli Maleckar Krasity, Associate Director∙ Kelli.Krasity@ihsmarkit.com, +1 202 316 6123
Gautam Sudhakar, Director ∙ Gautam.Sudhakar@ihsmarkit.com, +1 202 721 0316
Terrell Benke, Senior Director ∙ Terrell.Benke@ihsmarkit.com, +1 202 721 0334

Confidential. © 2017 IHS Markit™. All rights reserved.

IHS Markit | LNG Import Outlook: Pakistan

Market context
Economic issues have restricted gas supply availability, limiting demand growth
Since the 1990s, Pakistan has strongly promoted the growth of gas demand through highly subsidized consumer prices
and incentives for infrastructure development. The power sector is the largest consumer of gas, but only makes up
~30% of total demand; gas consumption is also widespread in the industrial, petrochemical, and residential sectors.
Pakistan also has a highly developed transportation sector, owing to extensive government incentives in the 2000s to
invest in CNG retail distribution and highly subsidized CNG prices. Thanks to this policy, Pakistan has evolved into
one of the world’s largest CNG vehicle markets.

Figure 1

Pakistan: Gas infrastructure

TURKMENISTAN
Kashmir
Gilgit
Baltistan
TAPI Pipeline

NWFP AJK

AFGHANISTAN
KP

Punjab

IRAN
INDIA
IPI Baluchistan
Pipeline
PAKISTAN
FSRU (Existing)
FSRU (Under Construction)
Sonmiani Bay FSRU (Proposed)
Sindh
FSRU (Stalled)
Mashal LNG FSRU (Canceled)
Karachi LNG Engro LNG
Gas Pipeline (Existing)
Gasport LNG PGPC Port Qasim Gas Pipeline (Proposed)
Gwadar Gas Field
Global Energy LNG Shell Port Qasim
© 2017 IHS Markit. All rights reserved. Provided “as is”, without any warranty. This map is not to be reproduced or disseminated and is not to be used nor cited as evidence in connection with any
territorial claim. IHS Markit is impartial and not an authority on international boundaries which might be subject to unresolved claims by multiple jurisdictions.

However, while Pakistan’s economy grew at a double-digit rate throughout the 2000s, gas consumption grew at an
average annual rate of only 5% in the first half of the decade and only 1% during the second half of the decade. This
was the result of a lack of available supply. Pakistan also has very high unaccounted-for gas, or losses/theft, which
threatens the financial viability of its gas utilities. Prior to 2015, Pakistan’s only source of gas was domestic
production. After increasing rapidly throughout the 1990s and early 2000s, domestic gas production plateaued around
2005, and began to decline in 2013, leaving gas consumption stagnant at around 3.4 Bcf/d. Before the start of LNG
imports, in end-2014, Pakistan’s gas supply-demand deficit was estimated to be close to ~2.3 Bcf/d. The deficit is
worse in the winter, particularly in the north of the country where there is a more critical supply shortfall than in the
south.

To meet its rapidly rising demand, Pakistan had discussed gas imports as early as the mid-1990s, both via LNG and via
pipeline. An inability to pay for imports and high levels of corruption long hindered attempts to develop import
infrastructure, while high geopolitical risk further complicated pipeline import plans. End-user gas prices have slowly
risen in past years, but have neither kept pace with inflation nor have reached levels needed to fully economically
support either pipeline supply or LNG. Fertilizer plants pay $2.09/MMBtu on average for their feedstock gas, and the
domestic sector pays $1.06/MMBtu on average, which is significant given that these two sectors accounted for ~40%

Confidential. © 2017 IHS Markit. All rights reserved. 2 30 November 2017

IHS Markit | LNG Import Outlook: Pakistan

of gas consumption in the 2015–16 fiscal year (July to June). Further complicating the value proposition for LNG in
the fertilizer sector is the controlled price of the end-product, preventing higher feedstock costs from LNG from being
passed on to the selling price and making it difficult for LNG-fed fertilizer to compete against fertilizers sourcing low-
priced domestic gas.

Another complicating factor for LNG imports is the low average heating value (900 Btu/cf) of domestic gas
production. This then limits the number of foreign companies that are willing to sell their higher heating value LNG
directly to end users, as they could end up losing money as gas is sold on a per-Mcf basis. The LNG import
responsibility has therefore fallen to the Pakistani gas market’s three dominant state-owned gas and fuel distributors—
Pakistan State Oil (PSO), Sui Southern Gas Company (SSGC), and Sui Northern Gas Pipelines (SNGP)—all of which
suffer from the country’s energy debt burden and are beset by corruption and mismanagement. Although there are
proposals for private importers to buy LNG, these are largely nascent, and some have already been beset by fee
disputes. Another challenge for private importers is the high level of losses in the distribution sector, meaning they may
need to carry the burden of significant unaccounted-for gas.

Figure 2 Figure 3

Power production by fuel Share of Pakistani gas consumption by price, as of

December 2016
120 42%

100 35% CNG

80 28%

60 21% Residential,
TWh

fertilizer
Power, feedstock
40 14%
industry,
commercial,
20 7% fertilizer fuel

0 0%
2009- 10 2011- 12 2013- 14 2015-16

Gas Oil Coal

Hydro Nuclear Wind
Imports % gas
<$3/MMBtu $3–$6/MMBtu >$6/MMBtu
Note: The Pakistan fiscal year runs from July to
June; 2015-16 represents July 2015 to June 2016.
Source: IHS Markit © 2017 IHS Markit Source: IHS Markit © 2017 IHS Markit

As of August 2017, the country’s circular-debt burden, which represents the delta between the true cost of electricity
and the payment received (or not received) under strictly regulated electricity tariffs, was estimated at $3.8 billion. The
crisis is a complex payment issue resulting from inefficiencies in payment collection and distribution, electricity theft,
prices that do not reflect full cost, and subsidy burdens. Although it does not directly involve LNG and gas buyers, it
indirectly affects consumers’ ability to pay for high-priced LNG—a major concern for the market. The Pakistani state
is both the largest contributor to the problem and the only source of its resolution, whether through payments from its
own treasury or by organizing a loan from a development aid organization such as the Asian Development Bank—
though the latter option is likely only possible after the implementation of price reform. Although Pakistan has recently
made progress in correcting some macroeconomic imbalances, its fundamental pricing and payments structures remain
weak, and will continue to impede further development of the energy industry.

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IHS Markit | LNG Import Outlook: Pakistan

LNG terminal plans

After the startup of Pakistan’s first LNG terminal in 2015, a group of new proposals gained steam as the government
announced plans to massively ramp up LNG imports and bring four regasification terminals online by 2019. As of mid-
November 2017, a second terminal was mere weeks from starting up, while three others had made significant progress.

Elengy (FSRU)
Pakistan’s inaugural import terminal, Elengy, was first proposed in 2011 as one of three projects to receive government
approval. Engro Group, a Karachi-based conglomerate, contracted Excelerate Energy to provide an FSRU in
September 2014. Excelerate agreed to provide the Exquisite, with 500 MMcf/d of baseload capacity (690 MMcf/d peak
send-out rate). Elengy received its first commissioning cargo in late March 2015, over two years after the originally
proposed start date of late 2012. Official commercial operations are considered to have started in May 2015. The
terminal was initially restricted by insufficient dredging, which prevented larger carriers from reaching the port and
forcing the Exquisite to shuttle back and forth between Qatar and Pakistan to deliver cargoes. The vessel has been
stationary since mid-July 2015, so these dredging issues are assumed to have been resolved. Since the startup of a long-
term contract with Qatar in March 2016, terminal has operated at a high utilization rate (see Figure 4).

Figure 4

Pakistan: LNG imports by source

600

400
thousand tons

200

0
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17

Qatar Australia Equatorial Guinea Netherlands Nigeria

Spain Trinidad United Kingdom United States Capacity
Source: IHS Markit © 2017 IHS Markit

PGPC Port Qasim (FSRU)

The Pakistani government invited bids for a second terminal in December 2015, managed by the government-created
Pakistan LNG Terminals. In May 2016, reports suggested that the Pakistan GasPort Consortium Limited (PGPC)—
consisting of Pakistan GasPort Limited, Fauji Oil Terminal and Distribution Company, BW Group, and Trafigura—
submitted the lowest bid for the tender. This was confirmed in June 2016, when the government approved the project to
begin construction.

BW Group announced in August 2016 that it would deliver a newbuild FSRU to the project under a 15 year charter
agreement; the BW Integrity was completed in December 2016 and was delivered to the port in October 2017. A
dispute between Fatima Fertilizer and Sui Southern Gas Company over the fee for pipeline transit between the terminal
and Fatima’s fertilizer plants delayed the start of imports by a few weeks, but the terminal received its first cargo in late
November. Trafigura has announced plans to add a second FSRU at the site in order to expand imports, though it did
not announce a schedule for the increased capacity.

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IHS Markit | LNG Import Outlook: Pakistan

Shell Port Qasim (FSRU)

In August 2016, Shell, Fatima Group, and Engro agreed to jointly develop another LNG terminal in Pakistan. In
February 2017, Excelerate Energy confirmed that it would work with the consortium to supply an FSRU to the project,
but has not stated whether the vessel would be an existing, conversion, or newbuild FSRU.

Engro hopes to reach FID on the terminal in early 2018, with construction targeted to be complete one year later in
order for imports to start in early 2019. Given Shell’s involvement in the project, IHS Markit optimistically forecasts
this to come online only slightly behind the targeted start date, in mid-2019.

Global Energy LNG (FSRU)

Developer Global Energy Infrastructure (GEIL) had no known experience in LNG, but in June 2016, Qatargas
announced that it had signed an SPA with the company to provide 1.3 MMtpa of LNG to Pakistan. In February 2017, a
consortium including Qatar Petroleum, TOTAL, Mitsubishi, ExxonMobil, and Hoegh announced that it would work
with GEIL to advance the latter's proposed regasification terminal in Pakistan. In December 2016, Hoegh announced
that it had signed an agreement to supply an FSRU to the terminal, with construction targeted to begin by early 2017.

However, in October 2017, ExxonMobil was reported to have left the project, and by November Hoegh announced that
the entire consortium had folded after the partners failed to reach an agreement on project structure with GEIL. It
subsequently terminated its charter with GEIL. IHS Markit no longer expects this project to move forward.
ExxonMobil, along with several other partners in the consortium, are reportedly in talks to join one of the competing
LNG terminals under development in Pakistan.

Gwadar (FSRU)
Pakistan's Interstate Gas Systems has proposed building an LNG terminal with capacity of up to 600 MMcf/d in
Gwadar, on the southwest Pakistan coast. The government approved the terminal and an associated pipeline project in
October 2016. As the project was originally proposed in conjunction with the China Petroleum Pipelines Bureau, the
approval came as a part of the requirements for Pakistan to secure a $1.4 billion loan from the China Export-Import
Bank. However, at the end of the month, the Chinese government reportedly withdrew their offer to build and operate
the terminal. Further, the proposed domestic pipeline that would have connected Gwadar to other demand centers in
Pakistan was canceled by the government in June 2016, which severely limits the potential end-markets for LNG
imported at Gwadar; thus, IHS Markit has not assigned a start date to the terminal.

Sonmiani Bay (FSRU)

The Pakistani government has proposed Sonmiani Bay as an alternate location for an LNG import terminal outside Port
Qasim. The current development partners include China Shipbuilding and Trading Corp and the Bahria Foundation (a
charitable trust run by the government). DSME was previously tied to the development of a terminal at the same
location, and had secured a construction license from OGRA, but progress stalled and DSME was last associated with
the project in 2012. Approximately 30 miles of onshore and offshore pipeline would have to be constructed to connect
the terminal to the domestic grid. Given the nascence of any proposals outside of Port Qasim, IHS Markit does not
currently expect this to come online in the near-term.

Energas (FSRU)
A consortium consisting of three private Pakistani industrial companies—Yunus Brothers Group, Sapphire Group, and
Halmore Power Generation Co.—have proposed building a private LNG terminal in Port Qasim. The companies hope
to begin imports by early 2019 via their FSRU, which is targeted to have a capacity of at least 2.1 MMtpa. The project
still needs to secure government approval.

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IHS Markit | LNG Import Outlook: Pakistan

Canceled projects
The last ten years have been rife with proposals for regasification terminals; in total, IHS Markit estimates four serious
regasification terminal proposals (in addition to the five terminals still active) have come and gone during that time.
Additional terminals have been mentioned by Pakistani politicians, but as they were not associated with an LNG
company, these have not been included here. The first real proposal came in 2006, when three companies signed an
MOU to develop a terminal in Port Qasim (see Table 1), in the Karachi area. This proposal lingered with little
development for years. SSGC’s Mashal LNG proposal made more progress, but was ultimately derailed when the
Pakistan Supreme Court ruled that corruption was involved with SSGC’s selection of a foreign development partner.
In 2011, OGRA awarded construction licenses to three terminals offshore Karachi, including a proposal from Engro,
but little concrete progress was made for several years. Regasification development in Pakistan was plagued with a
repeated unsuccessful series of bid rounds, awards, disputes, and court cases until Engro’s proposal finally moved
forward in 2015.

Table 1

List of canceled Pakistan regasification projects

Originally Last activity
Capacity Original announced prior to
Terminal (MMtpa) proposal startup cancelation Owners
Dana Gas (UAE), Granada Group (US), Single
Port Qasim (Granada-Danagas) 3.5 2006 Jan-10 2011
Buoy Moorings (Switzerland)
Mashal LNG (FSRU) 3.5 2007 Jan-10 2010 4Gas (Netherlands), SSGC (Pakistan)
Mashal LNG Phase 2 (Onshore) 10.0 2007 Post 2010 2010 4Gas (Netherlands), SSGC (Pakistan)
Karachi LNG (FSRU) 11.3 2011 Oct-12 2012 Sui Southern Gas Company (Pakistan)
GasPort LNG (FSRU) 3.0 2011 Mar-13 2013 Associated Group (Pakistan)
Source: IHS Markit © 2017 IHS Markit

LNG supply
Long-term deals
Pakistan’s efforts to sign a long-term contract prior to the start of imports hit several hurdles, leading it to rely on the
spot market; the spot prices it paid were reportedly at a premium to other nearby importers, representing the payment
risk involved with the market. However, it reached a significant milestone in February 2016 when it finalized a long-
negotiated 15-year SPA with Qatargas for 3.75 MMtpa (with an initial ramp-up year of only 2.25 MMtpa).

Qatargas signed another SPA targeting Pakistan in July 2016. The 20-year deal for an initial volume of 1.3 MMtpa
(with an option to increase to 2.3 MMtpa) was signed with GEIL; this contract is assumed to have been tied to the
regasification project that Qatar Petroleum and GEIL were developing along with ExxonMobil, Hoegh, TOTAL, and
Mitsubishi. The status of the contract is unclear following the recent collapse of the project’s development consortium.

Pakistan is pursuing additional long-term LNG agreements in order to support the government’s highly ambitious
target of reaching 30 MMt of LNG imports by 2022. As of November 2017, it has signed initial government-to-
government agreements with Malaysia and Russia, and had reportedly been in talks with Indonesia, China, Italy,
Oman, and France for similar deals.

Spot and short-term agreements

In addition to its two SPAs, Pakistan has also awarded short-term tenders for a substantial number of cargoes, first in
2015 and again in early 2017. The first tender was issued in December 2015 for 120 cargoes delivered over a five-year
period. The tender was initially awarded to Gunvor at a 13.37% oil linkage and Shell at a 13.8% oil linkage, with 60
cargoes each. However, upon the finalization of its long-term SPA in February 2016, Qatargas agreed to match the
price offered by Gunvor, prompting Pakistan to cancel the higher-priced Shell award.

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IHS Markit | LNG Import Outlook: Pakistan

In January 2017, Gunvor was awarded a second five-year deal—for another 60 cargoes—at an 11.62% linkage. At the
same time, Eni was awarded a 15-year deal for 180 cargoes at a 12.29% linkage to oil, though this price has reportedly
since been reduced. Since it began imports, Pakistan has also awarded several spot tenders for smaller volumes, (less
than ten cargoes each) for delivery in the winter months; traders like Gunvor have dominated most of these smaller
awards.

Country outlook
Figure 5

Pakistan: Contracted LNG supply by project versus demand

15

12

9
MMt

0
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Eni Portfolio Gunvor Portfolio Qatargas LNG demand

Source: IHS Markit © 2017 IHS Markit

Government outlook for LNG hopeful as alternate options face challenges

Given the progress made on LNG imports over the past two years, the government of Pakistan has seemingly pinned its
hopes for future gas supply on LNG. Pakistan’s Petroleum Minister has repeatedly stated that the market could be one
of the five largest in the world within five years, with imports of 30 MMtpa by 2022. These sizeable and incredibly
ambitious import forecasts reflect the limitations of alternate gas supply options.

Pakistan’s 20.4 Tcf of remaining gas reserves are not sufficient to support the market at its current size regardless of
potential commercialization outcomes. Some upstream exploration is currently underway—with minor new gas
discoveries announced over the past several years—but even if sufficient reserves were discovered, a host of geological
and above-ground risks will make it difficult to rely primarily on domestic production to meet gas demand growth.
Upstream fiscal terms for future projects have been recently improved, but the government still has not increased
producer tariffs enough to fully incentivize new production and prevent the further accumulation of burdensome
subsidies. The prevalence of tight gas formations will require a high cost-threshold for investment and IOC upstream
expertise. Widespread political and social volatility also complicate investments. Upstream companies also need to
count on historically unreliable SSGC and SNGP to connect new upstream developments into the existing national
grid. All of these factors combined make it unlikely that Pakistan will see a return to major upstream production
growth in the near term.

The Government of Pakistan has long been a proponent of both the Turkmenistan-Afghanistan-Pakistan-India (TAPI)
pipeline and Iran-Pakistan-India (IPI) pipeline as a way to bring in additional gas supplies. Iran claims to have
constructed its section of the IPI pipeline, but construction on the Pakistani side of the border has yet to begin owing to
political and geopolitical issues. The TAPI pipeline has been under study for numerous years but the above-ground and
financial risks of building a large trunkline through Pakistan and Afghanistan are likely to indefinitely delay
construction. In July 2014, government representatives signed an operational agreement for TAPI and released

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IHS Markit | LNG Import Outlook: Pakistan

advanced technical details. India and Pakistan would receive 1.4 Bcf/d each and Afghanistan would eventually receive
0.5 Bcf/d, with its unused volumes evenly shared between India and Pakistan until it reached maximum consumption.
Both projects face the question of why India would source energy supply via Pakistan, its historically adversarial
neighbor, and whether either investment is viable without more economically robust India as a customer.

Given the hurdles associated with new domestic production or pipeline investments, LNG still represents the best near-
term opportunity for addressing Pakistan’s gas supply problem. However, the extent to which LNG imports can resolve
gas shortages is in question. A big determinant of Pakistan’s LNG future will be the government’s ability to sign
additional long-term LNG import contracts and to suitably distribute the price risks. At the current level of regulated
prices, LNG will still contribute to the government’s subsidy burden, even at the LNG market’s current low price level.
Pakistan’s history of political risk and payment delays may also mean that future LNG contracts will need to be signed
at premium pricing or with tight credit terms (e.g. cash up front) to entice suppliers. However, the current looseness in
the LNG market has made Pakistan a more attractive growth market, as has its finalized SPA with Qatar. LNG imports
thus grow to 8 MMtpa by 2020 in IHS Markit’s outlook.

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