PAKISTAN: LNG IMPORT FORM QATAR CONTENTS

1. Energy Crisis In Pakistan 2. CNG Basic Facts 3. Pakistans LNG Policy 2011 4. Qatar LNG Producing Capability 5. Pakistan Qatar LNG Project 6. Foreign Investment In Pakistan 7. Global LNG Developments In 2011key Points 8. Conclusion 9. References

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1.

ENERGY CRISIS IN PAKISTAN

Energy is the most important sources for economic growth of a country. Unfortunately Pakistan has to face a major energy crisis in Natural gas, Power and Oil in next two to three years. This would delay the Economy of Pakistan (which is already in complexity). The high cost of the import of Oil, Construction of Big Dams, uncertain regional security environment attached with lack of national agreement to build dams are likely to delay quick resolution of energy crises. This energy deficit will lead to inflation. Similarly subsidies of billions of rupees have to be doped out Water and Power Development Authority (WAPDA) to bear loses. This would affect the national exchequer heavily. There is an expected short fall up to 50% because of increase in demand and supply gas up to 3,000 MW. Pakistans total energy requirement would increase by 48% to 80 million tons of oil equivalent in 2011. Pakistan energy sector comprises of major sources with share of 50.4% of gas, followed by oil 29%, hydro electricity 11%, and coal 7.6%. Consequently, Pakistan imports energy to overcome the problem and maintain standard of living of people. The major shortfall is expected in natural gas supplies. Pakistan had 28 trillion cubic feet reserves of natural gas in 2006 but due to increase in its demand it is expected to be exhausted in next two decades. Pakistan has a total hydro potential of 40,000 MW against which it generates only 6500 MW. If the dams are not built there would be short fall of 40 million acre feet of water by the year 2006 and 108 million acre feet by 2013. Consequently power shortage will be up to 11,750 MV per year. It will affect agricultural, industry, and particularly the storage capacity of Mangla, Terbela and Chashma Dams will be reduced due to mud deposits. Pakistan has worlds seven largest reserves of coal after discovery of THAR. These reserves are still untouched due to lack of technique in coal mining. The government plans to generate 7880 MW electricity by 2011 out of it 4860 MW is to be generated by firing natural gas. It should maximize the utilization of hydroelectric resources through building of dams such as KALABAGH DAM, BHASHA DAM etc. to produce cheap electricity.It should make effort to fulfill the project with TURKEMANISTAN and AFGHANISTAN gas pipe line which was floated by TURKEMANISTAN in 1991 to meet the demands of gas for Pakistan. Similarly a Sharjah based company initiated and sponsored a gas import project through an offshore pipe line from QATAR TO PAKISTAN IN 1990 but it is still under consideration. LNG (Liquified Natural Gas) import from Qatar is one of the option for Pakistan to meet its urgent energy needs. Qatar is the largest LNG producer in the world and it can provide LNG to Pakistan on urgent basis.

2.

LNG BASIC FACTS

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1) What is LNG? Liquefied Natural Gas (LNG) is natural gas that has been cooled to -161 degrees Centigrade. Natural gas is made up mainly of methane, with low concentrations of other hydrocarbons such as ethane, propane and butane. It also contains water, carbon dioxide, nitrogen, oxygen and some sulfur compounds. Most of these additional compounds are removed during the liquefaction process. The remaining gas is primarily methane with only low quantities of other hydrocarbons. In its liquid state, LNG is reduced to approximately one-six hundredth (1/600th) of its volume compared to the gaseous form. This makes it easier to be stored and transported safely and reliably to all corners of the globe. LNG is an odourless, colourless, non-corrosive and non-toxic liquid and is stored and transported at an atmospheric pressure equivalent to its boiling point, meaning its temperature stays constant as long as it is maintained at a constant pressure. Because natural gas is colorless, odorless and tasteless, a chemical called Mercaptan (that has sulfur like odor) is added before distribution, to give it a distinct unpleasant odor (like rotten eggs). This serves as a safety device by allowing it to be detected in the atmosphere, in the event of a leak. 2) Liquefied for easy transportation For countries where the gas is used in local markets, it is technically and economically viable to transport the gas through pipelines, an option that is used to deliver Russian natural gas to European markets, and Canadian gas to U.S. markets. When transport through pipelines isnt possible, as is the case in Qatar when main markets are many thousands of kilometres distant, liquefying the gas is the preferred option for ease of transportation. 3) Producing LNG in the liquefaction train The gas then flows into a liquefaction train for processing into LNG. A production train is a self-contained processing unit, the complex line up of compressors, turbines, vessels and interconnecting pipework that liquefies the gas to turn it into LNG. During the first phase of this process impurities in the gassulfur compounds, carbon dioxide and waterare removed in stages. 4) How is the gas measured? The natural gas business uses many different measures, depending on whether you want to measure LNGs volume, its energy content, or if it is in gas or liquid form. The main measures we use in this website is (mtpa millions of tones per annum), which measures the amount of LNG we produce at our facilities each year. 5) The clean energy of choice LNG is increasingly becoming the fuel of choice for energy utilities around the world due to its clean-burning qualities and lower CO2 emissions per unit of energy, together with its high-energy efficiency when used to generate power in combined cycle power stations.[8]

3.

PAKISTAN LNG POLICY 2011

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According to the LNG Policy 2011 given on the website of the ministry of petroleum and natural resources key points are as following: [9] 1) Introduction Pakistans policy for the sustainable development of the energy sector, including the provision of reliable and competitively-priced energy is based on the following objectives: (a) Optimization of the primary energy mix, based on economic and strategic considerations; (b) Maximizing the utilization of indigenous energy resources; (c) Enhancing private sector participation in the energy sector by strengthening the regulatory framework and institutional capacity; (d) Developing energy infrastructure; and (e) Developing human resources with emphasis on energy sector-specific technical skills and expertise Natural gas plays a key role in Pakistans energy balance which is currently around 50% of the countrys primary energy supplies. With accelerating economic growth, the demand for gas is projected to increase sharply and the countrys recoverable indigenous gas reserves will be insufficient to meet this demand. Gas shortages have already emerged and shall increase substantially in the following years if indigenous supply is not supplemented through imports. In order to address the shortage, strong emphasis is being laid on importing gas from neighbouring gas-producing countries through cross-border gas pipelines and also in the form of liquefied natural gas (LNG). Necessary measures are being taken for installation of LNG receiving, storage, re-gasification facilities and expansion of gas transmission infrastructure, for the distribution and sale of regasified LNG (RLNG) in the domestic market. The LNG Policy 2006 has been modified to facilitate expeditious implementation of the LNG Projects. 2) LNG Import Project Structure An LNG import project may be structured under one of the following alternatives: (a) Integrated project structure, under which a private or public sector party, joint venture or consortium (hereinafter referred to as LNG Developer) is responsible for purchasing LNG supplies, transporting them to its LNG import terminal (comprising of receiving, storage and re-gasification facilities) and supplying RLNG to the domestic market and/or for its own use. The LNG Developer would enter into a Gas Sales and Purchase Agreement (GSPA) directly with a Government-designated buyer, gas utility or any customers (hereinafter referred to as RLNG Buyer(s)); or (b) Unbundled project structure, under which: i. A Government designated buyer, gas utility, any consumer or any LNG supplier (hereinafter referred to as LNG Buyer(s) would directly import the LNG under a LNG Sale Page 4 of 11

and Purchase Agreement (SPA) either on a delivered ex ship (DES) basis, or a free-onboard (FOB) basis, or C&F basis. 3) Government Incentives The following fiscal incentives will be granted to the LNG Developer, LNG TO/O or LNG Buyer as applicable: (a) Zero percent customs duty will be charged on imported LNG. LNG Buyer or LNG Developer importing LNG will also be exempted from withholding tax at import stage in respect of such import. FBR will issue necessary notification in this regard. (b) Exemption from custom duty in excess of 5% with total exemption from sales tax in respect of plant, equipment and machinery, not locally manufactured, imported by that LNG Developer or LNG TO/O, as the case may be, by expanding the scope of SRO 678(1)/2004, dated 7/08/2004. Import of such plant, machinery and equipment and parts will also be exempted from withholding tax at import stage as allowed under clause 56(vii) of the part (vi) of the second schedule to the Income Tax Ordinance, 2001; (c) Initial Allowance will be admissible at the rate of 50% of the cost of depreciable assets under section 23 of the Income Tax Ordinance, 2001. In addition, normal deprecation at the rate of 10% will be also allowed on plant and machinery. (d) Exemption from withholding tax on interest payments to foreign lenders will be allowed as permissible under various provisions of the Income Tax Ordinance, 2001. (e) Sales tax and Federal excise duty will be charged on import and supply of LNG at applicable rates. When an LNG Developer or LNG TO/O, as the case may be, has identified a suitable site (whether land based or offshore), the Government will actively assist the LNG Developer or LNG TO/O, as the case may be, in obtaining land and port facilities for an LNG terminal at a reasonable cost and within a reasonable time frame. The Government shall not provide any guarantee for LNG import projects. However, Government support may be considered, if needed, to secure long term, LNG supplies to Pakistan.

4.

QATA R LNG PRODUCING CAPABILITY

According to Oil & Gas Journal as of January 1, 2011, Qatar's proven natural gas reserves stood at approximately 896 trillion cubic feet (25.4 trillion cubic metres), that is almost 14% of all known natural gas reserves and the thirdlargest in the world behind Russia and Iran. The majority of Qatar's natural gas is located in the massive offshore North Field, which spans an area roughly equivalent to Qatar itself. Part of the world's largest non-associated natural gas field, the North Field is a geological extension of Iran's South Pars field, which holds an additional 450 trillion cubic feet (13 trillion cubic metres) of recoverable natural gas reserves.[6] Page 5 of 11

While Qatar is a member of the OPEC and is a significant oil producer, the government has devoted more resources to the development of natural gas in recent years, particularly for export as liquefied natural gas (LNG). In 2006, Qatar reportedly surpassed Indonesia to become the largest exporter of LNG in the world.[2] Together, revenues from the oil and natural gas sectors amount to 60% of the country's GDP. Domestically, the vast majority of Qatar's total energy consumption comes from natural gas (79%), while the balance is supplied by oil. Qatar gas, established in 1984, has pioneered the Liquefied Natural Gas (LNG) Industry in Qatar. Today, Qatar gas is the largest LNG producing company in the world, with an annual LNG production capacity of 42 million tons per annum (MTA).Top LNG exporter Qatar will reach full export capacity of 77 million tones per year by the end of 2011, the head of the state oil marketing company said on Sunday. Qatar gas trains six and seven, the last two plants in Qatar's liquefied natural gas (LNG) expansion plan, have yet to reach capacity, Saad Abdullah al-Kuwari, chief executive of Qatar International Petroleum Marketing Co (Tasweeq), told Reuters in an interview. "The last two trains, 6 and 7 from Qatar gas, they did not reach operating capacity," he said. "Train 7 is almost stabilized and now it is ramping up. By end of this year we will be producing 77 million (tones)."

5.

Pakistan Qatar LNG project

Qatar is one of the largest LNG producers of the world, operated by the state-owned Qatar Gas Company. LNG is one of the fastest growing fuels in the world and due to high demand, its supply has been under stress. The Sui Southern Gas Company (SSGC) is already working to establish an LNG terminal in the country. NaveedQamar said LNG import from Qatar would be instrumental in overcoming energy-related issues of Pakistan. The cost of LNG to be imported from Qatar would be equivalent to the price of furnace oil, but it would result in fuel diversification in the country. It would also prove as an environment-friendly fuel. Import of LNG from Qatar would ensure regular fuel supply to industrial units and power plants at a time when furnace oil prices shot up in the international market. It would also help accelerate economic growth that is hurt by power and gas shortage. Pakistan requires additional gas supply for at least five years when there is likelihood of IranPakistan (IP) gas pipeline becoming operational. Qatar produces around 1,600 million cubic feet natural gas per day, which is transferred to plants known as the trains, which are 300 meters long and the trains process the natural gas into exportable liquefied natural gas (LNG). According to a recent development reported by The Nation on 11th Jan, 2012: Pakistan plans to import around 500,000 Mcf/day of LNG from Qatar starting at the end this year, an official at the ministry of petroleum and natural resources said Wednesday. A four-member delegation will leave for Qatar within a week to finalize plans including Page 6 of 11

prices, the official said. Pakistan's gas shortfall is expected to hit 3.021 Bcf/day in 2016 with no big discoveries in sight, and the country will become increasingly dependent on imports to meet its energy demand, the State Bank of Pakistan said last month in a report. While rationing of natural gas is inevitable in the near future, meaningful steps must be taken to curtail residential consumption, while prioritizing supply to the fertilizer and power sectors, the central bank said. The net demand in fiscal 2011-12 (July-June) is expected be around 5.497 Bcf/d and will expand to around 6.354 Bcf/d by 2015-16. As a result, the gas shortfall is estimated to grow from 2.458 Bcf/d in 2011-12 to 3.021 Bcf/day in 2015-16. Qatar will provide LNG to Pakistan based on a sovereign guarantee from Islamabad, the official said. Last year, Pakistan gave licenses to three companies -- Pakistan Gasport, Engro Corporation and Global Energy Infrastructure to bring 1.5 billion cubic feet/day LNG into Pakistan, and these companies are to build terminals to handle the LNG. Following the finalization of the plan with Qatar, Pakistan is expected to use these terminals to bring LNG into the country after paying these operators. Pakistan now faces a gas shortfall of about 1 Bcf/d to 1.2 Bcf/day, as demand is estimated at around 5.2 Bcf/d to 5.4 Bcf/day, while production is 4.2 Bcf/d. The shortfall is expected to increase to 3.18 Bcf/d in 2014, with projected gas supply of 4.28 Bcf/d against estimated demand of 7.46 Bcf/d. The government estimates gas consumption by the power sector at around 29%, industry at 26%, domestic users at 19%, fertilizers 15%, and transport 10%. [7]

6.

Foreign Investment in Pakistan

Federal Investment Minister Senator Waqar Ahmad Khan said here on Tuesday that Qatar will start providing Liquefied Natural Gas (LNG) and Liquefied Petroleum Gas (LPG) to Pakistan by November this year. He was addressing at press briefing here on Tuesday after returning from his visit to China, Hong Kong and State of Qatar. Qatar would provide 1.5 million tons LNG and one million tons LPG to Pakistan, he said adding that decision regarding the necessary logistics for fuel transportation would be finalized within a month. Terming his visit to these countries as very successful, the federal minister said that he had got very positive response from investors as Pakistan offers great investment opportunities in various fields of economy. Senator Waqar said that nobody in China and Hong Kong raised question about security in Pakistan rather, they want to have strategic investment in Pakistan to lead the country as well as the region towards economic stability. The federal minister said that Pakistan would attract $10 billion foreign investment this year including 6 billion dollars to 7 billion dollars from China adding that major investments would come in telecom communication and oil and gas sectors.

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He said that from China, major investment is coming from Metallurgical Corporation of China (MCC) and China Mobiles adding that MCC eyes on investment up to 4 billion dollars whereas the mobile company aims to reach 25 million consumers. He said that a MCC delegation is expected to visit Pakistan on July 9 for exploring various options for investment. He said that China would also host a seminar which would provide Pakistan an opportunity to attract Chinese potential investors to invest in Pakistan adding that this would be followed by another seminar to be held in Pakistan. He said that China would be spending $100 billion in foreign investment and it would be Pakistans top priority to attract maximum portion of this investment.

7.

GLOBAL LNG DEVELOPMENTS IN 2011 SOME KEY POINTS

1. EIA: the US gas output to be increased more The US Energy Information Administration (EIA) has predicted that the countrys natural gas production in 2012 will be increased by 2 percent from this year's record-high levels. EIA has expected that marketed natural gas production in 2012 to rise by 1.3 BCF/D to a record 66.9 BCF/D, the administration said in its latest Short-Term Energy Outlook (STEO) report released on 8-Nov-2011. For 2011, however, the EIA has lowered its previous outlook for marketed gas production, projecting output to average a record high 65.6 BCF/D, up 6.1 YoY. All of the growth in production results from increases in onshore production, which more than offset continuing declines from the Gulf of Mexico. The EIA has also raised its prior forecast for the US natural gas consumption growth in 2012, expecting average demand to rise by 0.8 BCF/D as it projected that gas demand to climb 1.7 percent YoY to about 67.1 BCF/D. Growth in the industrial and electric power sectors helped drive 2011 consumption gains, with record heat in the third quarter stirring a healthy increase in demand for air-conditioning across much of the nation, the EIA said. The US LNG import is expected to fall 25 percent to 0.9 BCF/D this year, down from 1.2 BCF/D in 2010. LNG import in 2012 is expected to fall further to 0.7 BCF/D, according to the STEO. EIA has forecasted that Henry Hub gas prices in 2011 to average $4.06/MMBTU. For the next year, the EIA expected that prices rising only slightly to $4.13/MMBTU. The NYMEX near-month (December 2011) contract lost 9.7 cents last week, falling from $3.749/MMBTU to $3.652/MMBTU on 9-Nov. During its tenure as the near-month contract, which began on 28-Oct., the December 2011 contract has lost 27.1 cents, or about 7 percent of its value. The 12-month strip (the average of the 12 contracts between December 2011 and November 2012) also fell last week, dropping from $3.945/MMBTU to $3.825/MMBTU. 2. EIA: slower gas production growth in 2011 EIA has forecasted that the US natural gas marketed production will increase 2.3 percent this year, considerably less than the 4.4 percent growth in 2010. The updated forecast incorporates a decrease of 1.1 BCF/D in marketed natural gas production in February 2011, which was largely due to temporary factors including seasonal maintenance in the Gulf of Mexico and temporarily shut-in production in lower-48 onshore

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production fields resulting from severe weather, The EIA said in its latest Short-Term Energy Outlook (STEO), released on 10-May. EIA expects production will recover from February levels but begin modest month-to-month declines that could continue through the year because of reductions in the number of active natural gas drilling rigs. The number of rigs drilling for natural gas, as reported by Baker Hughes Inc., has fallen from 973 in April 2010 to 882 as of 29 April 2011. More rigs are being directed toward oil instead of gas, largely because of the large price disparity between the two fuels on an energyequivalent basis. (On this basis, crude oil is generating close to three times as much revenue per dekatherm of energy than natural gas.) EIA said that annual average Henry Hub spot prices are also expected to decline slightly in 2011, falling $0.15/MMBTU to an average of $4.24/MMBTU in 2011. Total natural gas consumption will remain flat from 2010 to 2011, according to the EIA forecast. Reported residential and commercial consumption levels are expected to decline by 0.7 percent and 1.6 percent, respectively, primarily because of changes to EIAs methodology for collecting and reporting natural gas consumption data. Industrial consumption rises from 18.1 BCF/D in 2010 to 18.4 BCF/D in 2011, as the natural gas-weighted industrial production index increases during the year. 3. EIA: the US gas demand will rise in 2011

The US natural gas consumption is expected to average 65.4 BCF/D in 2011, and rise 2 percent to 66.5 BCF/D in 2012, according to the latest EIA Short-Term Energy Outlook. The projected year-over-year increase is driven by increases in the electric power and industrial sectors, while commercial and residential consumption largely remain flat, the EIA said. For 2011 and 2012, EIA forecasts a decline in net gas imports; more specifically, EIA expects gross pipeline imports of 8.6 BCF/D in 2011 and 8.2 BCF/D in 2012, year-over-year decreases of 4.3 and 4.4 percent, respectively. Total marketed production is expected to fall slightly this year, from 61.6 BCF/D in 2010 to 61.4 BCF/D in 2011, as a result in part of a significant decrease in production in the Gulf of Mexico, made up for in part by increases elsewhere. However, the EIA projected that gas production rebounds in 2012 to 62.7 BCF/D with expected increased demand and prices. The EIA forecast shows the Henry Hub spot price averaging $4.02/MMBTU in 2011, a decline of about 8 percent from 2010. In 2012, the projected Henry Hub spot price rebounds, averaging $4.5/MMBTU over the year. 4. Financial firms: The US gas price is not shiny in 2011 Moody's Investors Service (MIS) had predicted that the US natural gas prices which are currently at their floor level, unlikely to rise substantially in 2011. MIS projected that the US gas prices reach $4.50/MMBTU this year. It expected that gas prices slowly increasing to $5/MMBTU in 2012. However, MIS said that the weak gas prices will not deter producers from drilling more shale wells in 2011 because they need to hold acreage by production or fulfil their joint venture commitments. "Weak prices have not slowed down natural gas production so far and we expect this situation to continue suppressing E&P margins through 2011," MIS noted. Offsetting the weak profit forecast for natural gas will be higher profits in natural gas liquids, "at least for the first half of 2011," MIS said.

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Investment bank Macquarie has reported that it has unchanged its previous forecast for the US gas price at $4.4/MMBTU for 2011, because of shale gas production is squeezing US gas prices for the next three years. However, Macquarie predicted that gas prices would average $5.25/MMBTU next year and $5.50/MMBTU in 2013. Having added significant reserves in shale plays, the producers are still getting better at developing the new resources. They keep drilling because they are generating profits either from higher-priced liquids or because their costs are at rock bottom, Stuart said, and he doesn't see that changing, the investment bank reported on 19-Jan. The gas rig count needs to drop below 850 to have any price impact and he doesn't see that happening anytime soon, because drillers are making money with the current 900-plus number of rigs in operation. Baker Hughes had reported that the US gas rig count declined to the lowest level in 10 months and reach 919 at the end of 2010.

5.

Investment bank Barclay has predicted that US gas prices would be at $3.94/MMBTU in 2011. Barclay said that gas prices may fall as low as $2/MMBTU this year but power generators displacement of coal with cheaper gas will push up the prices to stay at the $4/MMBTU range. Last year, gas picked up 2.4 BCF/D of power demand from coal in the US at an average price of $4.38/MMBTU, Barclay estimated. The bank has also forecasted that gas producers will keep drilling activities in spite of the low prices, because much of their production is hedged at prices higher than $4/MMBTU. The producers will only slow drilling and shut in production if prices fell to $2/MMBTU and stayed there for a prolonged period, a prospect he doesn't see happening because the power market will sop up the cheap gas instead of burning coal. While well-hedged producers will continue drilling in a $4 gas market, we expect that in a $2 market, not only would a wave of producers revisit drilling budgets, but a number would also consider shutting in existing production.

8.

CONCLUSION:

At present Pakistan is pursuing a multidimensional pro-longed strategy to ensure adequate and uninterrupted oil and gas supply and other energy resources to sustain the present pattern of energy for the rapid national economic growth. Greater reliance on gas, aggressive pursuit of hydroelectric power generation, and enhancing nuclear power generation capacity are some of the key elements of this strategy.

9.

Reference:

1. http://www.lngpedia.com/2009/05/21/pakistan-qatar-ministers-met-to-discuss-lng-trade/ Page 10 of 11

2. http://www.reuters.com/article/2011/06/05/qatar-lng-idUSL3E7H502F20110605 3. www.globallnginfo.com/develop2009.htm 4. http://www.dailytimes.com.pk/default.asp?page=2010%5C01%5C09%5Cstory_9-12010_pg5_7 5. http://haroonhaider.com/2011/08/06/energy-crises-in-pakistan/ 6. http://www.eia.gov/cabs/qatar/Full.html 7. The Nation; 11th Jan, 2012. 8. http://www.qatargas.com/qatargas-education.html 9. Government of Pakistan; ministry of petroleum & natural resources liquefied natural gas (lng) policy, 2011

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