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Short-term LNG supply: Shell to lose $1b contract as Qatar offers lower price

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By Zafar BhuttaPublished: January 15, 2016

ISLAMABAD: Energy giant Royal Dutch Shell is going to lose a five-year liquefied natural gas (LNG) supply contract worth over $1 billion as a Qatari company has agreed to provide the commodity at a lower price to Pakistan.

Gunvor and Royal Dutch Shell had won supply contracts in response to the two tenders floated by Pakistan State Oil (PSO) a few weeks ago for bringing 120 LNG cargoes over a period of five years.

Gunvor offered to bring 60 cargoes at 13.37% of Brent crude price whereas Shell quoted 13.8% of Brent crude price for another 60 cargoes.

During negotiations after the opening of bids, Qatargas agreed to match the price offered by Gunvor, which was the lowest, prompting the government to consider scrapping the contract with Shell and award it to the Qatari company.

This was disclosed in a meeting of the Economic Coordination Committee (ECC) on Wednesday this week, which approved a long-term LNG supply agreement worth $15 billion.

The ECC was told that the government would save a substantial amount by transferring the contract won by Shell to Qatar at a lower price. However, Gunvor’s contract will remain intact.

In the tenders, nine trading firms including commodities giant Vitol, Glencore, Trafigura, Marubeni and US-based Excelerate Energy had submitted bids but all were rejected.

Owing to the plunge in crude oil prices, Shell is focusing on LNG business in the world market. During the previous Pakistan Peoples Party government too, Shell had tried to strike an LNG deal with Pakistan, but failed due to a controversy over the Mashal LNG project, which landed in the Supreme Court.

Pakistan produces 4 billion cubic feet of natural gas per day (bcfd) against demand for over 6 bcfd. The government considers LNG as a fast-track source to bridge the growing energy shortfall.

The lower price offer on the part of Qatar came after Petroleum and Natural Resources Minister Shahid Khaqan Abbasi visited Doha on January 6 and sought a reduction in the LNG rate. Qatar agreed to match the price offered by Gunvor for the short-term supply contract spread over five years.

Earlier, Pakistan and Qatar had finalised a long-term supply deal at 13.9% of Brent crude price. The two sides are going to sign a commercial agreement as the ECC has given the go-ahead. Reports suggested that India had struck an LNG deal with Qatar at the lowest price, but Petroleum Minister Abbasi insisted the Indian price was 20% higher compared to the rate agreed between Islamabad and Doha.

Under the proposed arrangement, the long-term LNG supply contract will be for 15 years, but it will be renegotiated after 10 years. The two sides can end the contract if they fail to develop consensus over the price.

Every three months past price of LNG would be taken to calculate the price with Qatar.

As part of the agreement, PSO will receive 1.5 million tons of LNG from Qatargas in the first year and the annual volume will be enhanced to 3 million tons from the second year.

Published in The Express Tribune, January 15th, 2016.

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