Pakistan LNG Mulls Axing Supply Deals as Cheap Options AriseBy...

Pakistan LNG Mulls Axing Supply Deals as Cheap Options Arise

By Stephen Stapczynski and Faseeh Mangi

25 February 2020, 22:35GMT+11 Updatedon 26February 2020, 11:30 GMT+11

· Contracts with Eni, Gunvor may beterminated: person familiar

· Penalties near $300 million weighed against record low spot

Pakistan’s main buyer of liquefied natural gas is considering canceling twolong-term contracts as a slump in spot prices and abundant production createopportunities for cheaper supply, according to people familiar with thesituation.

State-owned Pakistan LNG Ltd. is weighing the possibility of exercising termination clauses in contracts it signed with Eni SpA and Gunvor Group Ltd. in 2017, according to the people, who asked not to be identified because the matter is private. No final decision has been made and the company is seeking input from the Ministry of Energy, said the people. Canceling both deals may cost the Pakistani firm nearly $300 million in penalties, according to Bloomberg calculations.

Pakistan LNG directedquestions to the energy ministry, which didn’t respond to requests for comment.Gunvor declined to comment, while Eni didn’t respond to requests for comment.

A glut of new LNG supplyand sputtering demand growth have sent spot prices to record lows, strainingmore expensive long-term supply deals based on oil prices. The globaloversupply may persist over the next few years, analysts including Morgan Stanley forecast, stoking speculation that buyers will be pressuring sellers for revisions to term contracts.

Pakistan isn’t alone inseeking better deals. Japan’s Osaka Gas entered into arbitration last year with the marketing unit of Exxon Mobil Corp.’s PNG LNG project after a dispute during a price review. Indian gas importers have started discussions with Qatar on moving away from linking LNG prices to oil and are seeking cheaper rates. In 2015, Petronet LNG reworked the pricing formula in its 25-year contract with Qatar’s RasGas that resulted in lower prices.

See also: LNG Buyer Cancels Cargoes From Biggest U.S. Exporter inGlut

Pakistan LNG is stillopen to sourcing supplies through new or revised contracts if the pricing termsare more favorable, according to one of the people. The South Asian nation isseen as one of the biggest growth markets for the fuel, with BloombergNEFforecasting imports could grow 80% from last year’s level to 2023.

Under the terms of the contracts, which are posted on Pakistan LNG’s website, the company must give a 90-day termination notice and pay damages equal to the value of six cargoes, which is based on average Brent prices for the three months preceding the month the notice is served. That would be about $142.5 million for the Gunvor deal and $148.8 million for Eni, according to Bloomberg calculations based on front-month Brent futures traded on ICE Futures Europe.

The two deals are linkedto oil at a rate that prices cargoes more than double what’s currentlyavailable through the spot market. The Gunvor contract, which runs for five years to June 2022, is priced at 11.62% of Brent -- or about $7.42 per million Btu according to Bloomberg calculations using the average of November to January.

The Eni contract, which runs for 15 years to 2032, is priced at 11.6247% for the first two years, 11.95% for the following two years, then 12.14% for the remaining 11 years, according to one of the people. Both deals are for one cargo per month.

The Japan/Korea Marker,the spot Asian LNG benchmark published by S&P Global Platts, has droppedmore than 50% in the past year and reached a record low this month of $2.71 per million British thermal units. Front-month futures traded at $2.90 per per million Btu on Tuesday in New York. A spot cargo to neighboring India was purchased recently for as low as $2.40 per million Btu.