Bloomberg Businessweek (December 18, 2023)
Год выпуска: December 18, 2023
Автор: Bloomberg Businessweek
Издательство: «Bloomberg Businessweek»
Формат: PDF (журнал на английском языке)
Количество страниц: 68
HOW ENERGY TRADERS LEFT A COUNTRY IN THE COLD
Pakistan, one of the world’s poorest nations, thought it had deals for the energy it needed. Commodity traders had other ideas
TOWARD THE END OF 2021, IN AN OFFICE BLOCK ABOVE the luxury boutiques of Geneva’s Rue du Rhone, Ksenia Alleyne called her team into a meeting. Alleyne is the co-head of liquefied natural gas trading at Gunvor Group Ltd.—a Swissbased commodities firm with customers around the world. Once everyone had assembled, she delivered a message to her fellow traders and analysts. Above all, she said, they needed to find more LNG—fuel that’s chilled to -260F and loaded onto ships for long-haul export—and fast. Russian forces were massing on the borders of Ukraine; one certain result of an invasion would be a spike in global energy prices.
The traders began to scour Gunvor’s existing sales agreements, which promised to deliver gas at rates far lower than where Alleyne believed prices were going. Specifically, according to a person with direct knowledge of the situation, they looked into which ones Gunvor could cancel. Like most of the dozens of LNG traders and government officials Bloomberg Businessweek interviewed for this story, the person asked not to be identified describing private deliberations.
Within a few weeks, Alleyne’s colleagues identified a candidate: Gunvor’s deal with Pakistan, which depends heavily on LNG but is a far smaller customer than major importers such as China and Japan. After some internal debate, the traders ran the idea of scrapping it past the firm’s legal team and decided to proceed. When the Russian army invaded Ukraine on Feb. 24, 2022, gas prices soared more than 150% in 11 days. Around the same time, according to people familiar with the events, Gunvor stopped responding to communications from the Pakistani government. Then it terminated Pakistan’s deal, saying the country had underpaid for one of its LNG shipments. (Pakistan disputes this.)
Under the terms of the contract, Gunvor was supposed to supply Pakistan with five tankers’ worth of LNG over the next several months. Instead, ship-tracking data show, Gunvor sent the cargoes to countries including the UK and Italy, where buyers paid the “spot,” or market, price. If the gas had been delivered to Pakistan as originally planned, the value of the sales would have been about $200 million, according to calculations by Businessweek. By the same arithmetic, Gunvor’s traders unloaded it for more than $600 million. Some would receive seven-figure bonuses for the year, the highest of their careers.
Gunvor’s decision to redirect its supplies—and other canceled gas deliveries by Eni SpA, a state-controlled Italian energy group—helped prompt an energy crisis in Pakistan that continues today. The nation of 240 million people, which has a per capita gross domestic product of just over $1,500, uses natural gas to heat homes, power industry and even run cars and buses. When it ran short, factories were forced to shut or dramatically cut their output, throwing workers into poverty; so were fertilizer plants, threatening food production. As it scrambled to procure replacement LNG, Pakistan paid record spot-market prices, draining its modest foreign currency reserves and pushing it to the brink of default. Now its government is trying to implement economic reforms after receiving a bailout from the International Monetary Fund before elections scheduled in early 2024.
Pakistan has brought arbitration claims against both Gunvor and Eni in the UK, seeking compensation. A spokesperson for Gunvor—declining to comment on the matter in detail, citing confidentiality requirements—says “we stand by the decisions we make and will address those in arbitration.” The spokesperson adds that Gunvor “has a rigorous governance process for decision-making” for trading matters, including input from legal, compliance and risk staff as well as senior traders, with “no single person” determining strategy. An Eni spokesperson says its failure to deliver gas was “beyond the control of Eni,” with supply disruptions to blame. “Eni has not benefited from the situation,” the spokesperson says, and sought “alternative commercial solutions among the affected parties, including supply of replacement cargoes.”
There’s no suggestion that Gunvor or Eni acted illegally. Both appear to have operated within the bounds of their contracts—albeit in a way that’s all but unique in an industry where suppliers have traditionally done whatever they can to meet customers’ need for gas. Moreover, Pakistan’s woes are the result of much more than a fuel shortage. Successive governments—some installed through military coups—have mismanaged its economy for decades. Notably, politicians have long subsidized power and gas rates, providing little incentive for energy efficiency and forcing the government to pick up the difference between the true cost and what consumers pay.
The situation nonetheless provides a stark example of how traders in the cutthroat world of commodities can profit at the expense of some of the world’s least developed nations. When they agreed to long-term gas deals, Pakistani officials thought they were protecting their economy and citizens from the vagaries of commodity markets. Instead they learned just how quickly, and brutally, those markets could turn against them.
At Al Karim Weaving, a textile mill in Pakistan’s commercial capital, Karachi, owner Ayaz Nagaria had no choice but to dismiss his almost 30 workers when power prices soared last year. Today half-finished sheets of fabric are still lodged in the electric looms, as though the building was suddenly evacuated. The sole remaining employee is a bearded security guard with a shotgun, who protects a shed full of empty spools and discarded white cloth. “With each passing day, with each factory shutting down, the writing is on the wall,” says Nagaria, who’s considering breaking down his looms and selling the parts to generate cash. Many other companies in Pakistan’s textile sector, which accounts for 60% of national exports, are in the same predicament. “This industry will never come back.”
FOR COUNTRIES THAT CAN’T MEET THEIR ENERGY NEEDS domestically, LNG provides major benefits. Until it was commercialized in the 1960s, the most common way to ship large quantities of gas was through pipelines, which have obvious disadvantages for places that are isolated, far from reserves or both. By contrast, a tanker full of LNG can be sent to any port with a so-called regasification terminal, where the fuel is heated up into usable form. To ensure reliable supplies, governments and utilities try to make long-term LNG deals to guarantee deliveries at a relatively stable price, rather than take their chances on the spot market. Even a single shipment that arrives late—or, worse, not at all—can have a significant impact on local energy supply.
Pakistan’s entry into the LNG market was engineered by former Minister of Petroleum and Natural Resources Shahid Khaqan Abbasi, who’d worked in the Saudi energy industry before shifting to politics. (He later served as prime minister.) In 2016, Abbasi made a $15 billion, government-to-government deal for LNG imports from Qatar. The shipments made up for dwindling production from domestic gas fields and eased conditions for Pakistani companies almost overnight. GDP grew more than 5% in 2016, the biggest rise in more than a decade, in part because of stronger output from large manufacturers.
Abbasi wanted to do more, and he opened two additional requests for LNG contracts: one for a five-year supply deal, the other for as long as 15 years. Roughly two dozen companies expressed interest, including Gunvor and Eni. Some had concerns about dealing with such a poor country. According to a person who participated in the tenders, gas traders applied an unusually high degree of scrutiny to the proposed contracts, seeking terms that ensured Pakistan would pay in full and on time. Pakistani officials, who were focused on securing the best possible price, didn’t insist on strict penalties for failing to deliver gas; at the time, cancellations were rare. (The Gunvor spokesperson says the company was “required to sign up to terms stipulated” by Pakistan, without amendment. The Eni spokesperson says that the relevant agreements “were not the results of a bilateral negotiation,” and that Pakistan set out their contents.)
In late 2016 potential suppliers delivered offer letters in Islamabad. The envelopes were opened one by one, with a camera rolling to deter any attempts to rig the deal. Gunvor and Eni offered the lowest prices on the five- and 15-year contracts, respectively. They began deliveries the next year, each sending a tanker a month to Karachi, which augmented larger shipments from Qatar and an earlier supply pact with Gunvor that would expire in 2020. (A single LNG tanker provides enough gas to run Pakistan’s entire industrial sector for about five days.) Abbasi—who’d later be briefly jailed on corruption charges, which he denies, relating to the construction of an LNG terminal—declared Pakistan’s energy dilemma solved. “As long as our demand increases, we will keep making arrangements to meet it,” he said.
IN DECEMBER 2020, PAKISTANI officials received a curious email from Eni. The Italian company said it would deliver only part of its LNG shipment for the following month, explaining that an unnamed supplier had failed to make its own delivery. Eni’s head of LNG portfolio, Ilaria Azzimonti, apologized and said her team would try to send replacement gas later.
In fact, say people with knowledge of the situation, a team of lawyers had earlier told Azzimonti that Pakistan was a “marginal customer”; shortchanging it wouldn’t risk a blacklisting by a major importer. Meanwhile, an early winter cold snap was pushing up gas demand in East Asia. From November 2020 to January 2021, spot prices would jump more than 400%, increasing the value of a shipment from about $20 million to $100 million or more— as long as it was sold to a spot buyer.
Pakistan’s agreement stipulated that in the event of a missed or partial shipment, Eni would pay a penalty equal to 30% of the value of the undelivered cargo, calculated on the basis of the long-term contract. While richer importers can demand compensation of as much as 100%, that was the stiffest fine Pakistan could get suppliers to accept, says Imran Maniar, the managing director of distributor Sui Southern Gas Co. Propose anything higher, he says, and “people don’t really want that in the clause.” In this case the penalty amounted to just $2.8 million, pocket change in the energy business.
Under the terms of Eni’s contract, it didn’t have to provide details about the supplier default. But even after telling Pakistan it lacked sufficient gas to meet its commitments, according to a person with direct knowledge of the transaction, Eni sold an LNG shipment elsewhere at the spot price of roughly $100 million.
Although it was just part of the expected cargo, representing less than 10% of the country’s monthly supply from long-term contracts, losing the Eni gas put Pakistan in a difficult position. Cold weather was coming, increasing the need for fuel, and domestic production had declined significantly, the result of years of underinvestment. The government tried to find a spot-market shipment to make up the shortfall, but it deemed all the options too expensive. It had no choice but to temporarily curtail supplies to some households and factories.
There are occasional cancellations in the LNG business, often when problems at an export terminal affect supplies, and at first the undersize Eni delivery looked like a one-off. Regular shipments resumed in February 2021, coinciding with a collapse in spot prices. But later that year, with the recovery from the Covid-19 pandemic driving energy demand, more of the gas expected by Pakistan failed to arrive. In August, Eniblamed reduced output at an Egyptian LNG plant for a missed shipment. (Ship-tracking data indicate Egypt’s exports fell that month compared to previous trends.) In October a Gunvor-chartered vessel docking near Karachi didn’t unload its full payload, according to ship-tracking data. The remainder of the fuel went to Turkey—where, traders involved with the transaction say, it yielded three times the price it would have in Pakistan.
Then, in November 2021, both companies canceled their deliveries, documents reviewed by Businessweek show. Gunvor cited a “force majeure,” a legal term for an unavoidable event that makes it impossible to fulfill a contract. Specifically it blamed an outage at a plant in Equatorial Guinea, a tiny, hydrocarbon-rich Central African dictatorship. (Although Gunvor didn’t offer details, there had been technical problems at a facility at the country’s Alba gas field that September.)
That justification from Gunvor, as well as the earlier statement by Eni about production in Egypt, took advantage of another part of Pakistan’s contracts. Unlike other LNG deals, which stipulate where a supplier will obtain the gas it’s selling, the Pakistani agreements said shipments could come from anywhere within Gunvor’s and Eni’s global portfolios. Pakistani officials have said they believed this would insulate them from disruptions, by allowing the companies to provide any gas they could source.
In their communications with Pakistan, people with knowledge of the discussions say, Gunvor and Eni turned that logic on its head, arguing that because no source was specified, a disruption anywhere gave them the right to cancel delivery. Problems in Equatorial Guinea therefore qualified as a force majeure, even though Gunvor rarely shipped gas from the plant to Pakistan. Over the next several months, Gunvor declared force majeure on two additional shipments and only partially delivered one more. At the same time, it was continuing to sell large quantities of gas to wealthier countries at spot prices, according to traders who participated in the deals.
This was a novel interpretation of contract terms. “It is not typically sufficient for a seller to simply say, ‘My unrelated project on the other side of the world that has no connection to this contract is down, and therefore that’s force majeure under this contract,’” says Jessica Ham, a special counsel at US law firm Baker Botts who’s advised clients on LNG deals. “The buyer might have the ability to claim that this event is unrelated, and it doesn’t actually prevent you from performing, which is a key element of a force majeure claim.”
Any claim against Pakistan’s suppliers could take years to resolve. In the meantime, the country needed gas. After the cancellations, the board of Pakistan’s state-owned LNG importer authorized an emergency tender to procure more fuel. Qatar stepped in to fill the deficit, but at a price at least 230% greater than the Gunvor and Eni contracts.
Meanwhile, tensions over Ukraine were mounting, pushing gas prices to more than $40 per million British thermal units, a fourfold increase from the previous year. That multiplied the rewards for anyone who could sell at spot rates...
How Energy Traders Made a Fortune Off Pakistan
Lab-Grown Chicken Becomes an Expensive Mess
A Tainted Cancer Drug Is a Global Tragedy
SOLUTIONS / GOOD BUSINESS