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Europe’s push to boycott Russian fuel is intended to punish Moscow for its invasion of Ukraine. It’s also wreaking havoc thousands of miles away, throwing Pakistan into darkness, destabilising one regime, and jeopardising the country’s new leadership’s stability.
A decade ago, the world’s fifth-most populated country took particular steps to protect itself from the kinds of severe price increases that are currently shaking the market. It made a large investment in liquefied natural gas and inked long-term contracts with suppliers in Italy and Qatar. Some of those suppliers have now defaulted, albeit they continue to sell into the more lucrative European market, leaving Pakistan in the very position it sought to avoid.
To avert blackouts during the Eid holiday last month, the government paid roughly $100 million for a single LNG shipment from the spot market, a record for the cash-strapped country. The country’s LNG costs could reach $5 billion in the fiscal year ending July, more than double from the previous year. Even still, the government is powerless to soften the impact for its citizens: the International Monetary Fund is in talks to bail out the country on the condition that it reduces fuel and energy subsidies.
Parts of Pakistan are currently suffering planned blackouts lasting more than 12 hours, reducing the ability of air conditioning to provide respite during the continuing hot. The previous prime minister continues to gather enormous audiences to demonstrations and marches, exacerbating voters’ outrage about 13.8 percent inflation. The hosts of prime-time talk shows frequently discuss how Pakistan will receive the petroleum it requires and how much it would have to pay.
The administration introduced a slew of new energy-saving measures last week. Regular Saturday shifts for civil servants were eliminated, and the funding for security staff was cut by half.
“I am painfully aware of the sufferings people are facing,” Prime Minister Shehbaz Sharif stated in an April tweet before of the Eid holiday. That same week, he directed his administration to resume acquiring expensive offshore natural gas cargoes. And earlier this month, he cautioned that they don’t have the money to keep importing gas from other countries.
The supply crisis will extend beyond blackouts. The government has rerouted existing natural gas supply to power plants, shortchanging fertiliser manufacturers which rely on the fuel as a feedstock. This approach could jeopardise the next harvest, resulting in even higher food prices next year. Cellphone towers are utilising backup generators to keep service running during blackouts, but they, too, are running out of gasoline.
There’s little hope on the horizon. The price of LNG has increased by more than 1,000% in the previous two years, first due to post-pandemic demand, and then due to Russia’s invasion of Ukraine. Russia is Europe’s largest supplier of natural gas, and the possibility of supply disruptions drove spot rates to an all-time high in March.
Not long ago, Pakistan represented the LNG industry’s future. By the mid-2010s, demand for the fuel, which is gas cooled to 162 degrees Celsius so that it can be carried around the world via tanker, had peaked in developed economies. However, technological developments had reduced the costs and building timeframes for import terminals, while new gas sources had reduced the price of the fuel itself.
Poorer countries could finally contemplate fuel at the new, lower prices. Suppliers put their sights on these new markets, and when Pakistan launched a tender for long-term LNG supply, more than a dozen corporations bid for it.
However, the two suppliers have already cancelled more than a dozen cargoes slated for delivery between October 2021 and June 2022, coinciding with the rise in European gas prices.
Such defaults are nearly unheard of in the LNG market, according to Bruce Robertson, an analyst with the Institute for Energy Economics and Financial Analysis. Traders and industry insiders interviewed by Bloomberg couldn’t recall the last time so many cargoes were cancelled without being directly tied to a big outage at an export terminal.
Gunvor declined to comment for this report. Eni’s supplier failed to satisfy their obligations and was thus obliged to default on shipments to Pakistan, the Italian company said in an emailed statement, adding that it did not take advantage of or benefit from the cancellations and used all contractual options to manage such delays.
Suppliers are frequently reluctant to cancel orders. It harms the company connection and is frequently extremely costly. In developed markets, “failure to deliver” fines of up to 100% are common. “It’s quite rare for LNG suppliers to renege on long-term contracts beyond force majeure occurrences,” says Valery Chow, an analyst at Wood Mackenzie Ltd.
Pakistan’s contracts stipulated for a more modest 30 percent penalty for cancellation, most likely in exchange for reduced overall rates. Prices on the European spot market are currently high enough to more than outweigh those penalties. According to Bloomberg calculations, an LNG shipment for May delivery to Pakistan via a long-term contract would cost $12 per million British thermal units. In comparison, May delivery spot cargoes to Europe were trading at more than $30. Eni and Gunvor have kept their promises to their clientele.
So Pakistan is back to square one, in a worse negotiation position than before. Prime Minister Imran Khan was deposed in April following a spat with Pakistan’s army over a variety of topics, including his handling of energy supply and the larger economy.
Shehbaz Sharif, the new prime minister, has directed the state-owned importer to acquire the fuel at any cost in order to end the debilitating blackouts. It is also attempting to negotiate new long-term LNG purchase agreements, albeit the conditions will almost definitely be harsher than they were six years ago. The government “will seek the best possible deal,” the Ministry of Energy said in a statement to Bloomberg News.
The cost is having an effect on itself. In a paper published last month, the Institute for Energy Economics and Financial Analysis stated that the government is now “at high risk of default.” Moody’s Investors Service reduced Pakistan’s outlook to negative from stable, citing financial risks such as a delay in an IMF bailout.
Pakistan’s reliance on LNG, as well as its suppliers’ tendency to default, has exacerbated the country’s energy dilemma. And Pakistan is not alone. Emerging nations around the world are trying to meet the requirements of their citizens within the restrictions of their budgets.
It has also compelled them to purchase electricity from Russia, mitigating the impact of Europe’s efforts to isolate them.
Sri Lanka has resorted to Russia for fuel in the face of a financial crisis and severe oil shortages. Pakistan is also in talks with Russian LNG producers about long-term contracts. India has already increased its purchases from Russia, and this trend may continue. In reaction to the scorching summer heat, the government has directed power plants to purchase fuel from outside the country.
Pakistan’s problems are also bad news for other cash-strapped importers, such as Bangladesh and Myanmar. Bangladesh’s state-owned utility recently purchased the nation’s most expensive LNG shipments on the spot market to keep the grids functioning and industry stocked, while Myanmar has suspended imports for the last year owing to price increases.
Europe’s major change may cause other countries, such as India and Ghana, to reconsider long-held plans to increase their reliance on super-chilled fuel. Governments would instead increase their reliance on dirtier-burning coal or oil, undermining efforts to meet aggressive pollution-reduction objectives this decade.
In a recent letter, Fereidun Fesharaki, chairman of industry consultancy FGE, strongly condemned European energy policy for causing “increased costs, economic shortages, and economic pain” around the world. “It is fine for Europe to decide what they want within their borders,” he added. “However, it is unfair and unreasonable to export the mess overseas, particularly to the developing countries.”
