Pakistan LNG Story. Presented by: Sheikh Imran ul Haque Managing Director and CEO Pakistan State Oil Company Limited

Transcription

1 Pakistan LNG Story Presented by: Sheikh Imran ul Haque Managing Director and CEO Pakistan State Oil Company Limited

2 Effective LNG Import Structure by MPNR PSO LNG Importer SSGC Receiving LNG at terminal Transmission of regasified LNG (RLNG) to SNGPL through swap SNGPL Supply RLNG to end consumers

3 And Why PSO? GOP assigned the role of importing LNG to PSO owing to its: Financial strength PSO imports around 200 vessels of POL products annually, amounting to USD 6 bn (USD 8 bn in 2014) with margins supporting trading business risks: Description PMG HSD OMC Margin Equivalent in USD/MMBTU As %age of cost 5.5% 5.4% International Credibility With oil suppliers which would grandfather with LNG Suppliers (ENI, BP, Petrochina, Trafigura, Gunvor, Glencore, Shell, GNF) Expertise in Financial Management, Skills in Energy Supply Chain Despite severe constraints, has managed its debt and kept the wheels of industry operating

4 LNG Journey Starts Three procurement streams were utilized for import of LNG to Pakistan: Direct negotiations under Government to Government arrangement; Spot purchases; Term procurement for a period of time Meetings were held with: Petronas, Malaysia s designated entity and PB Trading Sendirian Berhad, Brunei Darussalam s designated entity, Qatar which has liquefaction facilities to produce 77 Mtpa of LNG with all 14 LNG trains running at full capacity which confirms Qatar as the world s main LNG supplier with a market share of over 30%. PSO and GOP s international consultants were engaged to develop contracts and provide market intelligence

5 G to G ECC vide decision dated 2nd July 2013 authorized Ministry to engage in negotiations with Qatargas on Government to Government basis for importing LNG on delivered Ex-ship basis. Pakistan State Oil Company Limited (PSOCL) and Qatargas Operating Company Limited (QOCL) were nominated by respective governments to negotiate the LNG Sales Purchase Agreement (LNG SPA). Resimulations undertaken in Spain and meeting of Port Qasim, Engro & PSO held in November, 2015 in Doha, Qatar. Qflex can deliver LNG. Port Charges (USD 660, ,000) capped Port at USD 320,000 The pricing and principal commercial terms of the LNG were reviewed and finalized by the Price Negotiation Committee constituted by the GOP. The negotiations have taken time to complete and agreed at 13.9% of Brent

6 PSO Qatargas Long term SPA Highlights Tenure 2016 to December 31,2031 Extendable with mutual consent Terms Type Take or Pay Delivered Ex-ship Volumes 2016 (prorate of 2.25 mtpa) 2017 (3.75mtpa) Buyer Seller Price revision Price negotiated by Support Pakistan State Oil Company Limited Qatar Liquefied Gas Company Limited 2 After 10 years Price Negotiating Committee setup by GOP/ECC PSO and GOP s international consultants have been engaged in negotiations with Qatargas, the State of Qatar s designated entity, on the terms of a long term LNG Sale and Purchase Agreement (LNG SPA) for 15 years, on Government to Government basis.

7 Current LNG Import and way forward Government to Government Deal with Qatargas Presented to ECC 2 months ago

8 The LNG Journey Continues Spot/Multi-Cargo Tender PSO has issed Spot / Multi cargo tenders since May 2015 and first cargo received in July 2015.

9 The Long Term, Spot & Short Term Market Afforded and Opportunity Long Term Nuclear Shutdown in Japan Japan`s long term contracts extended at roughly half of the volumes Mild winter, South Korea retreats from Spot Market 17.80% 16% 18.90% 25.40% 25.10% 33% 29% A number of key factors have contributed to the rapid growth of non long-term trade in recent years including The growth in LNG contracts with destination flexibility, mainly from the Atlantic Basin and Qatar, which has facilitated diversions to higher priced markets. The increase in the number of exporters and importers. 26 exporters & 28 importers in 2014 as compared to 6 exporters and 8 importers in Reliance of Japan, South Korea & Taiwan on spot market for sudden changes in demand (Fukushima) due to lack of domestic production or pipeline imports. The large growth in the LNG fleet, which has allowed the industry to sustain the long-haul parts of the spot market (chiefly the trade from the Atlantic to the Pacific).

10 Over USD 400m Procurement Has Ensured Supply Chain Cargo Berthing at Quantity Quantity Quantity FOB/DES PQA [m3] [M Tonnes] [MMBTU] $ / MMBTU 1 26-Mar ,545 65,297 3,419, Apr ,219 63,354 3,294, May ,959 63,310 3,293, May ,959 63,246 3,290, Jun ,653 63,404 3,297, Jul ,994 60,188 3,133, Jul ,010 56,146 2,904, Jul ,455 58,779 3,041, Aug ,713 60,738 3,139, Sep ,001 64,170 3,305, Sep ,385 57,604 2,999, Oct ,951 60,345 3,155, Oct ,658 58,415 3,057, Oct ,058 57,008 2,966, Nov ,013 60,138 3,147, Dec ,180 62,625 3,241, Dec ,597 61,677 3,210, Total 2,361,350 1,036,446 53,897,

11 The End Journey Term Tender Two term tenders issued to cover the deficit with Qgas and bring in increased volumes required

12 LNG Players Participated in PSO s Tenders 1. GUNVOR 7. ENI SPA 2. BP SINGAPORE 8. EDF 3. TRAFIGURA 9. GLENCORE 4. PETRO CHINA 10. MARUBENI 5. SHELL 11. VITOL 6. GAS NATURAL 12. EXCELERATE

13 But..Supply Chain Needed to be Maintained Government to Government Deal with Qatargas Deal in ECC approval process Spot/Multi-Cargo Tender PSO had to issue Spot / Multi cargo tenders for 1Q2016 Term Tender Two term tenders issued to cover the deficit with QGas already underway

14 Supply Chain Being Maintained Cargo Berthing Schedule % of Process Remarks at PQA Brent Jan Spot Tender - 15 awarded Feb Spot Tender - 15 awarded Feb Spot Tender - 15 awarded Mar Term Tender -13 awarded Scenario 1. Based on Q Gas response and ECC approval 1/2 cargoes in Jan and Feb from Q Gas 2/3 cargoes per month from QGas starting March 1 cargo per month from Gunvor starting March 2 In case of no approval Term Tender for 2 additional cargoes per month starting March 1 cargo per month from Gunvor starting March 1 cargo per month from Shell starting March

15 Imported Gas Price at Brent of USD 50 per barrel Offers in the Past Gas Price mmbtu Quantity Bscfd Total Investment US$ 5 year contract Qgas current offer Scrapped tender Qgas earlier Offer Maashal offer 13.37% of Brent 13.9% of Brent 83.5% or 14.4% of Brent 89.9% or 14.9% of Brent 91.0% or 15.2% of Brent $6.69 $6.95 $7.20 $7.45 $ b 0.20b

16 Current Status Government to Government Deal with Qatargas Under ECC approval process and Qgas Visited Spot/Multi-Cargo Tender PSO has issed Spot / Multi cargo tenders since May 2015 and first cargo received in July Term Tender 1) Term Tender # 13 has been awarded to Gunvor 2) Shell is the lowest bidder in Term Tender # 14 and bid valid till

17 Challenges Low Margins Infrastructure Circular Debt Volumes for 2 nd Terminal

18 RLNG Pricing Guidelines As per ECC Decision dated June 6, 2015, RLNG pricing components for PSO include: i. LNG DES/ FoB price (including freight) ii. Other import related actual costs iii. PSO margin upto 4 percent of LNG DES Price, subject to review after 3 months by an Inter-Ministerial Committee

19 RLNG Price Cost Components Delivered Ex-Ship Price (DES price) Provisional RLNG Price per OGRA Actual PSO Margin Restricted to 1.82% of DES Insurance Premium Wharfage Load Port Surveyor Charges Actual Actual Actual Discharge Port Surveyor Charges Stamp Duty Infrastructure Cess Exchange Loss/Gain Excise Duty Terminal Charges Actual Actual Disallowed Actual Actual Fixed at $ 0.66/MMBTU SSGC & SNGPL Cost of Service SSGC & SNGPL Admin Margin Retainage Transmission Losses Disallowed Disallowed Restricted to 0.75% of total LNG cost 0.5% of DES price Note the DES price of September 2015 has been fixed by OGRA for all cargoes that fall in the preceding period- March to September 2015

20 OGRA Price Determination Subsequent to the ECC Decision, OGRA issued its Provisional Price Determination on October 7, 2015 wherein: PSO s margin was reduced from 4.0% to 1.82% (Est. Loss to PSO: Rs. 750 mn) * Infrastructure Cess paid by PSO to Sindh Government was disallowed (Est. Loss to PSO: Rs. 342 mn)* Lower Sep 2015 price made applicable to all previous cargoes from April to August 2015 (Est. Loss to PSO Rs. 749 mn)* PSO filed a petition for review of the above determination on December 7, 2015 First session of Public Hearing conducted by OGRA in Karachi on December 28, Next session held in Lahore on January 4, 2016 * Note: Amounts are based on cargoes imported till December

21 Return to Shareholders HSD (Rs. Per Ltr) PMG (Rs. Per Ltr) HSFO-IMPORTED (Rs. Per MT) Cost ,371 Margin % 5.46% 4.00% Distribution & Marketing -1.49% -1.49% -1.49% Administrative -0.27% -0.27% -0.27% Infrastructure cost -0.43% -0.43% -0.43% Subtotal Margin 4.44% 3.27% 1.81% Taxation -1.73% -1.27% -0.71% Return to Shareholder 2.71% 1.99% 1.10% Average 1.94% Net return to shareholders imbedded in other products is around 1.94% of import cost

22 Return to shareholders Dividen per share Circulare Debt (Rs. in billion) Dividend per share Circular Debt Due to PSO s support to power sector, dividend payment to its shareholder have declined from Rs. 34 to Rs. 10 per share LNG project carries significant risk and any unforeseen event might turn PSO into a loss making company Therefore, fair return to shareholders (includes GoP) to ensure long term sustainability togop s Strategic Company

23 Business Risk Consideration Following PSO exposures have not been considered: I. Take or Pay due to Term LNG SPAs II. III. IV. Delay in Payments IPP Capacity Charges Payment Risk of regulatory disputes V. Guarantees for Term LNG imports (SBLC Arrangement) VI. Demurrages One major risk event can wipe off PSO s return. The allowed margin of 0.5% fails to provide an adequate return to PSO for the business risks. The will also impact our other Businesses as LNG business will become 37% of PSO s total business and is already consuming significant time of key management personnel and support departments

24 Long Term Deal Way forward Government to Government Initiate with Qatargas, Petronas, Malaysia, PB Trading Sendirian Berhad, Brunei, Angola LNG and CNOOC Spot/Multi-Cargo Tender Retain flexibility Term Tender for LNG Supplies Be part of the portfolio

25 Thank You

26 Tax Impact on Margin Exemption on Withholding Tax on LNG Import withdrawn through Finance Act Accordingly 1% withholding tax on the import value increased by Custom duty, sales tax and federal excise is applicable on LNG import As a result, the Tax on LNG Business is more viz a viz the normal corporate tax rate as depicted below: OGRA Determined Margin ECC Approved Margin Margin Tax Amount at import Net Margin Tax as a % age of margin 72.5% 33% Normal Corporate tax rate is around 40%

27 Margins in Other Sectors Sector Gross Margin EBITDA Margin Net Margin Cement 38.6% 38.6% 22.7% Automobile 15.7% 13.4% 8.7% E&P 49.4% 55.1% 35.5% Power 23.8% 17.9% 10.7% Fertilizer 34.3% 29.3% 11.1% Data compiled based on annual reports

28 LNG Business Risks Take or Pay and IPP Capacity Charge Liability of over Rs 7bn In the LNG market, supply contracts are structured on Take or Pay basis PSO is liable for full cargo value (approx USD mn) to the supplier(s) if PSO is unable to take delivery Estimated financial impact of failure to take delivery of even a single cargo is Rs bn SNGPL under Tripartite Agreement may order upto 4.5 mtpa of LNG for a term of upto 30 years and PSO is required to supply/procure these volumes In case PSO is unable to supply the required volumes: It is liable to pay capacity charges to IPPs Capacity payment for a single month is estimated at Rs. 6 bn This is 4 times the margin of both the 5 year term contracts that PSO has bid recently

29 LNG Business Risks Risk of Delayed Payments & Shortfall in SBLC Arrangement Average receivable of Rs. 9 bn during the last 9 months PSO has a loss in its LNG business due to delay in payments SNGPL/IPPs At full capacity the amount is expected to increase to Rs 36bn at current low brent price (2 month cargoes) Interest liability is estimated at around Rs 2.1 bn p.a For 600 mmcfd of RLNG, PSO has to open Standby Letter of Credit (SBLC) worth USD 150 mn for the LNG suppliers SNGPL SBLC in favor of PSO is renewable and replenish able only when the IPPs SBLC(s) in favor of SNGPL are renewed and or/replenished Resultantly the imbalance in credit support mechanism as per LNG Supply Agreements vs against credit support mechanism in the Tripartite Agreement is to be managed by PSO Moreover, the opportunity cost is significant for PSO and it could obtain a higher USD return by investing in business that yield better returns

30 Furnace Oil & LNG Description FO LNG PSO Annual Import USD 1.8 bn USD 1.7 bn IPP Capacity Payment Risk Yes Higher Financial Risk Yes Higher Credit Risk Yes Higher Margin Income Tax Gross Margin Risks in LNG are high because of the uniqueness of the LNG supply chain Yet the return on LNG is about one-fourth of FO PSO will bleed unless adequate margins are not provided

31 Margin Determination LNG as per OGRA Other Business LNG proposed..rs. In mn.. Sales 159, , ,300 Gross Margin 2,843 31,448 7,749 Gross Margin % 1.82% 3.44% 4.96% Operating Cost (351) (14,932) (351) Take or pay (1,593) - (1,593) Cost of Working Capital (1,062) - (1,062) Capacity charge to IPP (730) - (730) Tax Expense (2,062) (5,097) (2,062) (5,798) (20,029) (5,798) Net Margin (2,955) 11,419 1,951 Margin % -1.85% 1.25% 1.25%

32 Margins Justification PSO has unique skills to manage multi billion dollar supply chain LNG project requires highly sophisticated treasury and buying department with good reputation in local and international banking sector LNG business will become 37% of PSO s total business and is already consuming significant time of key management personnel and support departments Therefore, PSO s total common administrative expenses (Other than marketing and operations) will be allocated to LNG business PSO is required to operate commercially and its commercial margin ranges between 3.5% to 5.5% Private sector customer is already paying 4% on LNG and is not opting direct imports/ sourcing through other Companies

33 Components of Margins Administrative Expenses 0.68% Distribution Cost 0.00% Marketing Cost 0.00% Infrastructure Cost 0.00% Working Capital Cost (Rs. 29 Billion) 2.40% Taxation 1.32% Insurance of risk elements 0.33% Return to Share holders 1.94% Total Margin 6.67%

34 LNG Expenses Amount Rs. in million Total PSOs Operating Expense 10,668 Less: Distribution and Marketing Expenses Administrative Expenses (Common Expenses) 8,296 2,372 Share of LNG business 37% Allocation of Common Expenses 879 Direct LNG related expenses 110 Total LNG related costs-annual 989 Estimated DES Cost-Annual 145,152 Cost as %age of DES 0.68%

35 Working Capital Cost Annual imports Cost (Rs. In million) 145,152 GST rate 20% GST amount 29,030 Annual import Cost with GST 174,182 Delay in receipts Day Average receivables 29, Cost of Fund 12% Cost of Fund 3, Working Capital Cost as %age of DES 2.4%

36 Return on Businesses LNG is being imported mainly for the Power Sector. Average return to other suppliers in this sector is more than 17% excluding any expenses Sector Internal Rate of Return Risk Free Rate Risk Premium All KSE Companies * 18.00% 10.75% 7.25% Power Generation 17.00% 10.75% 6.25% Gas Utilities 17.00% 10.75% 6.25% Solar 17.00% 10.75% 6.25% Local Coal 26.50% 10.75% 15.75% Imported Coal 24.50% 10.75% 13.75% Pipeline Infrastructure 18.00% 10.75% 7.25% LNG business (PSO) % * Source: i) Pakistan & gulf Economist Issue Ii) State Bank of Pakistan Domestic Markets & Monetary Management Department

37 RLNG Price Cost Components Provisional RLNG Price per OGRA RECOMMENDATION Delivered Ex-Ship Price (DES price) Actual Allow at actual from March 2015 PSO Margin Restricted to 1.82% of DES Allow as Proposed Insurance Premium Actual Same Wharfage Actual Same Load Port Surveyor Charges Actual Same Discharge Port Surveyor Charges Actual Same Stamp Duty Actual Same Infrastructure Cess Disallowed Allow at actual Exchange Loss/Gain Actual Same Excise Duty Actual Same Terminal Charges Fixed at $ 0.66/MMBTU Allow as per actual SSGC & SNGPL Cost of Service Disallowed Allow SSGC & SNGPL Admin Margin Disallowed Allow Retainage Restricted to 0.75% of total LNG cost Allow as per actual * Note the DES price of September 2015 has been fixed by OGRA for all cargoes that fall in the preceding period of Transmission March to Losses September % of DES price Same

38 Recommendations Margin be enhanced to gross margin of 6.84% which will be 1.94% for shareholders