Since the Russian invasion of Ukraine, European countries have rushed to the global LNG markets to replace their main source of gas imports. Europe has almost secured its gas supplies, at least in the short-term, but in the process have driven up global LNG prices considerably. The average price for the Asian benchmark spot, for example, has risen 140% compared to 2021. As a consequence, Europe’s success has had major consequences for developing countries that are reliant on LNG, including Pakistan. 

Pakistan has mostly been unable to outbid European countries on the international LNG market. Moreover, traders are worried that the cash-strapped nation might not be able to make future payments. As such, its invitation last month for bidding on a long-term contract, that was supposed to procure one LNG cargo per month, was left unresponded. Due to its inability to secure new LNG supplies, demand in Pakistan has fallen by 19% respectively, compared to 2021. Spot imports have fallen even further by a staggering 73%. 

Outbidding, however, is not the only problem. Commodity traders have defaulted on their deliveries to make higher profits elsewhere. In the case of Pakistan, both Gunvor and Eni failed to deliver the contractually obligated volumes earlier this year. Most of its long-term contracts contain break-clauses, which require traders to pay a penalty. With record prices, however, traders are able to make a larger profit selling elsewhere, even when facing a penalty. This has led Pakistan to place emergency tenders, which according to IEEFA estimates has cost the country an additional US$58.57 million per cargo. 

Increasing LNG prices are a blow to the country and exacerbate energy insecurity. The Pakistani economy is already under considerable pressure with high inflation and is still recovering from the massive floods earlier this year which affected more than 30 million people. Last month, it received a bailout from the IMF worth $1.17 billion. Moreover, according to some estimates, growing LNG imports could raise the country’s import bill to more than $32 billion in 2030, compared to $2.6 billion in 2021. It marks the financial unsustainability of the Pakistani LNG imports. 

Pakistan’s responses

So far, the government has taken several actions to limit the consequences of its LNG shortage. The country has already upped its oil-fired power generation five-fold, which unfortunately has not been enough to prevent power outages. On top of that, it has introduced electricity conservation measures in June and announced plans to ensure gas supplies through LPG imports. Pakistan also increased its coal imports, most notably from neighbor Afghanistan. Some estimate that Afghan coal exports to Pakistan have more than doubled in 2022. In the period from July till September, however, that increase was equal to 484% compared to that same period in 2021. 

Meanwhile, the Pakistani government has been in discussion with Russia regarding fuel imports and finance. Like India, the Pakistanis have shown interest in buying oil and gas from Russia at a discount. Russia and Pakistan have also reaffirmed commitment to construct the Pakstream pipeline, which connects the port cities of Karachi and Gwadar to Lahore. Some analysts believe the initial involvement of Russia in this pipeline project was to strengthen the Pakistani gas sector and increase its demand, in the process diverting Middle Eastern LNG supplies away from Europe. With current prices and decreasing Pakistani demand, this logic seems flawed. Rather, a better gas infrastructure would allow for additional Russian LNG to be imported by the South Asian country.

With LNG and other energy prices at record highs, Pakistan has suffered as a consequence. It has led to difficulty procuring new gas supplies and problems regarding its “assured'' long-term contracts. The country has suffered power outages and has had to be bailed out by the IMF.. While increasing its oil and coal usage, interest to import gas and invest in the sector, together with Russia, remains. Betting on Russian investments and imports, however, remains risky business.