Interview with Mr. Sohail A. Butt – CEO, Energy Energetics
PAGE: KINDLY TELL US SOMETHING ABOUT YOURSELF:
SOHAIL BUTT: I am a UK qualified Chartered Accountant and have spent over thirty years of my career working in the energy sector value chain that includes oil & gas exploration and production, refining, petrochemicals and oil marketing companies. My most recent area of focus is to provide consulting and advisory services in the field of energy strategy, midstream and downstream projects development.
I have in the past two years focused on highlighting energy sector issues and discussed reforms required for addressing the chronic problems of Pakistan energy sector and stressed on bringing about structural changes and improving governance throughout the energy sector value chain. With these thoughts in mind I have setup an advisory, knowledge gathering and sharing platform of ‘Energy Energetics’, a consulting firm specializing in value creating strategies for the energy sector in different time spans — short medium and long term. I am a strong supporter of applying latest project management techniques, tools and technology for implementation of all projects in Pakistan and specifically energy sector initiatives from conception to completion and commissioning.
It is time to put maximum emphasis on merit, recruit qualified and well trained human resources who are than developed and mentored on a continuous basis to meet the changing needs of doing business today with a watchful eye on the future. This also equally applies to all operational entities as well as regulatory and watchdog bodies. The world is undergoing massive transition in the field of energy and related technologies. The age of renewable energy has arrived with all the innovations, efficiencies and cost reduction initiatives. In every year since 2011, renewable power generation technologies have accounted for half or more of total new power generation capacity added globally. This trend continues unhindered and is likely to continue despite challenges being faced in the post ‘President Trump Era’ where climate change policies of the US government are being reversed and fossil fuels are being encouraged regardless of their impact on environment and resulting climate change. In future those entities and economies will survive, grow and flourish that can produce and deliver ‘energy’ in an environmentally friendly and economically sustainable manner on where required, when required and a least cost basis.
Accordingly in order to face the new challenges and competitive technologies in a rapidly innovative environment, a comprehensive and dynamic policy and strategy development framework would need to be established in line with changing regulation, rules of conducting business and resulting impact on policy formulation and implementation of project development in different segments of the energy sector in Pakistan.
PAGE: WHAT ARE YOUR VIEWS ON CURRENT OIL PRICES AND THE UPCOMING IMPACT ON PAKISTAN’S ECONOMY?
SOHAIL A. BUTT: The oil prices will continue to be ‘unstable’ for multiple reasons of geopolitics, economics, technology and innovation as well as influences of different lobbies working to protect their self-interest all in the backdrop of climate change compulsions and regulations. The last 20 months have demonstrated just that phenomenon whereby the prices have fluctuated from the high twenties to mid-sixties in a roller coaster ride. Here it is important to mention some of the main reasons that impact international oil prices:
FACTORS: IMPACTING OIL PRICES:
A brief (but certainly not all inclusive) list of factors impacting oil prices would include:
- Global economic growth – current and forecast.
- Oil demand – globally at different times of the year and under different weather conditions.
- OPEC and non0OPEC oil supply/exports.
- US oil output, US drilling activity as measured by the ‘Rig Count’.
- Refinery maintenance schedules.
- Geopolitical events.
- Internal OPEC oil consumption.
- The value of the US dollar, oil price volatility measures.
- Global and US crude oil and refined petroleum product inventories.
- Hedge funds and investment positions (short and long) of crude oil speculators.
- Policy and regulatory framework of major oil producers and oil consumers.
- Investments in conventional and renewable segments of energy sector.
- Technology and Innovation.
The energy sector would remain highly susceptible to market forces everywhere in the world and Pakistan is no exception. We are one of the blessed countries in the world to have both conventional and renewable energy sources and unlucky not to have used such a vast resource base of energy to our advantage in both cost, self-reliance and sustainability terms, which could have brought positive changes to our GDP growth, regardless of instability in oil prices. With a proactive approach, better governance and structural set up we could have been in the forefront in adoption of green energy as well as new technologies in the energy sector value chain that could have had a positive impact on the country’s short and long term growth plans. We can still say to ourselves ‘better late than never’ provided we do not repeat our past mistakes. Like any other commodity the price of oil will also be determined principally by ‘Demand and Supply’ factors.
On a worldwide basis and at a macro level, energy demand growth to 2050 looks set to be around 1% per year on an optimistic note and about 0.7% per year on a realistic basis, driven by structural shifts in population, industry focus and energy efficiencies being aggressively pushed everywhere. Therefore we need to look at the demand side thoroughly, which is a prime factor in determining future oil and gas prices. If we drill down to individual sectors dependent on oil or gas and impacting its demand, the chemicals industry is expected to grow at around 2 percent, which is double the rate of the rest of total demand till the time period to 2035.Chemicals will drive around 65 percent of liquids demand growth through to 2035, with petrochemical feedstock for light end products responsible for around 70 percent of this growth. Another factor impacting demand for Oil and Gas will be an expected increase from 8 percent to 20 percent in plastic recycling, alongside a decline of 5 percent in the use of plastic packaging that could reduce the demand for liquid hydrocarbons by around 2.5 million barrels per day additionally.
Other than chemicals industry, overall demand for liquids looks set to peak and flatten by around 2025, as a result of adoption of electrical vehicles in the ‘light vehicles’ category. A conservative estimate suggests that by 2030, electric-powered vehicles could represent close to 50 percent of new cars sold in the US, EU, India and China, and around 30 percent globally. Many countries in the west (UK, France) as well as in the east (India and China) have already set a target of 100% EV’s by 2040. This adoption will result in eroding about 8% of annual demand of oil or liquid fuels, which will roughly be equivalent to 8 million barrel a day of oil lesser in demand. If the market penetration of electric, autonomous and shared vehicles rises to 50% globally (and not just in the US, EU and China), and the number of autonomous vehicles as a percentage of new cars sold rises to 69% from the current projected 41%, we could see a further depletion of three million barrels per day by 2035.
Switching power generation from fossil fuels (oil, gas & coal) to renewable sources of energy has already impacted on the supply demand imbalance of the three commodities and hence reduction in prices over the last two years. The overtaking of global investments in renewable energy over oil and gas exploration and production suggests that the overall mix of renewables in world energy mix will fast approach the 30% target set for renewables in the COP 21 in Paris in 2015. The use of renewable sources (solar and wind) for power generation is additionally impacting the demand for oil as well as gas and coal. However, gas has become a preferred source of power generation within the fossil fuels category and hence ‘Gaseous Fuels’ (LNG/LPG/CNG) are also replacing ‘Liquid Fuels’ for use in power generation, transportation and domestic usage sectors. This demand erosion will be mitigated to some extent by increase in population and resulting higher usage of liquid fuels. However, changing human patterns due to technology, innovation and changing rules of doing business will have a sluggish impact on demand growth. Therefore, the oil prices will be determined largely by supply fundamentals of which future investment in exploration and production(having considerably diminished over the last few years) will be the key factor.
Availability of additional supply through unconventional means (shale oil & gas) at a competitive price and on sustainable basis will also play a key role in determining future oil prices. Supply can also be diminished by choice as is happening currently that OPEC and Russia have resorted to supply cuts to balance the market to their favor. In conclusion we can say regarding demand that if the scenarios mentioned above become reality than we can expect a peak in oil demand by 2025, at fewer than 100 million barrels per day on a long term basis as we see now. On a short/medium term time span we see an increasing trend in oil prices as the recent surge of over 100% compared to 2016 lows of $27 per barrel and now in the $60 range suggests. This is mainly due to production cuts by OPEC/Russia as well as geopolitical factors. This will continue and we can see the oil prices in the range of $55 to $65 averaging through the year 2018. The negative impact on Pakistan’s economy has already been felt in terms of our dwindling foreign exchange reserves principally because of falling exports and increasing imports. The higher oil prices since June 2017 by 40 percent have contributed to adverse trade deficit of over $12 billion in the first four months of financial year 2017-18 in a significant way. The higher oil prices mean increased prices of all petroleum products used in power and transport sectors thereby increasing the cost of living and resulting inflation in the country.
PAGE: HOW COULD PAKISTAN TACKLE THE RISING OIL PRICES?
SOHAIL A. BUTT: Pakistan as a net importer of crude oil has no control over the rising oil prices despite the fact that Pakistan produces roughly 88,000 barrels of crude oil daily, which is about one third of the total current demand. The demand for crude oil and petroleum products is constantly increasing partly due to increase in economic activity mainly due to CPEC as well as increase in population using petroleum products in domestic and transport sectors. The rising oil prices are further impacting the consumer in Pakistan due to imposition of higher duties and taxes in various forms. This element of price buildup is certainly controllable and the government should impose lesser taxes and duties when international oil prices are higher than the yearly average. The best solution for Pakistan to mitigate the impact of fluctuating international oil prices is to go for a sustainable and secure energy future based on indigenous resources. We have to harness the energy potential in both renewable and conventional sources by maximizing exploration and production across the sedimentary area of Pakistan, which is currently 40% of 840,000 square KMS. Additionally we need to invest in energy efficiencies across upstream midstream and downstream energy sector value chain. If we maximize energy efficiency potential and reduce our energy conversion wastages, we can reduce power sector demand/supply gap by as much as 50% directly and demand of oil & gas indirectly thereby saving precious foreign exchange, which goes in importing higher quantities of crude oil and petroleum products due to inefficiencies in the system.
PAGE: YOUR VIEWS ON ALTERNATE ENERGY RESOURCES FOR ELECTRICITY GENERATION:
SOHAIL A. BUTT: Pakistan has immense potential to harness the alternative sources of energy mainly renewables and in this respect we have made some progress in case of solar and wind energy over the past few years. However our neighboring countries have once again gained significant advantage in terms of ‘alternate energy projects’ in both size and cost terms. Cost for both solar panels(about 70% reduction) and wind a turbine (about 30% reduction) across the world has substantially reduced along with improved technology, capacity and efficiency. This has resulted in major reduction in solar and wind capital costs and resulting tariffs reduction and hence availability of power as low as 4 cents per kilowatt hour has been attained.
Thus renewable sources of energy will be used in the world extensively reaching a target of about 30% in the world energy mix by 2035. At a very cheap comparative rate compared to coal or gas the power will be available on standalone/distributed/captive mode where it is consumed thus avoiding the need for long distance/cross country transmission lines, avoiding technical/line losses and providing cheap electricity.
Pakistan’s power generation mix is currently about 1.5% from renewable sources (excluding hydro) despite the fact that we have tremendous potential of wind in the province of Sindh and solar across all the provinces of Pakistan. The Alternative Energy Development Board (AEDB) seems to be working hard to enlarge the renewables component on the energy landscape of Pakistan and enhance its share in the energy mix to an initial target of 5% and at the best competitive price in the regional context. To attain the goal of energy security and sustainability we need to enhance renewables mix to as much as 30% by 2035. Additionally Pakistan needs to develop solar panels and wind turbines industries in Pakistan with a view to totally indigenize this segment of power sector from generation to supply perspectives.
PAGE: YOUR COMMENTS ON INDIGENOUS ENERGY RESOURCES IN PAKISTAN:
SOHAIL A. BUTT: Pakistan is a very resourceful country in terms of indigenous energy availability both in terms of fossil fuels and renewable energy. This can be gauged from the following facts:
- Exploration & Production (E&P) of Conventional Oil & Gas – 840,000 KMS of sedimentary area out of which nearly 60% remains to be explored through concession blocks awarded or to be awarded both onshore as well as offshore. Need to mention here that our past success ratio has been that out of three exploratory/development wells drilled at least one has been successful. Therefore going forward and with enlargement of base area even if the success ratio falls of one to five, Pakistan has enough potential for future discoveries.
- E & P of Shale Oil & Gas – Initial estimates of 58 billion barrels of oil and 100 plus trillion cubic feet of gas in shale formations waiting to be explored and produced.
- Hydro Potential – Exceeding 60000MW on conservative basis in KPK and Northern areas of Pakistan.
- Gas Reserves – Currently producing around 4 BCF of natural gas with a currently evaluated reserved of 23 TCF though diminishing reserves at a very fast pace.
- Thar Coal – Immense potential for future power generation.
- Wind corridors of Jhimpir & Gharo – Immense power generation potential exceeding 40,000MW.
- Solar Power – Unlimited.
- Tidal/Wave/Biomass — Substantial Potential.
PAGE: WHAT ARE YOUR VIEWS ON ELECTRICITY SHORTAGE IN PAKISTAN?
SOHAIL A. BUTT: Electricity shortage in Pakistan has been primarily the result of bad and inept planning by the relevant organizations and entities at the helm of affairs of power sector management at various levels over the past many decades. The problems of governance, long term integrated planning, lack of dynamic energy strategy and ad hocism leading to power generation plants built on expensive imported fuels with unfavorable terms and conditions for the government that eventually led to the expensive tariffs and inefficiencies in the power generation system. In addition to the above flaws the emphasis have always been on Power Generation projects and NOT on the Transmission and Distribution network that entails line, technical losses and thefts worth billions of rupees.
China-Pakistan Economic Corridor (CPEC) activity in Pakistan will increase the current demand of around 76 MTOE (Million Tons of Oil Equivalent) against supply of 68 MTOE to 100 MTOE gradually over next 3 years. Current deficit is around 8 MTOE, which will grow in line with GDP growth envisioned in the future years along with a multiplier impact of CPEC and CPEC related Industrial zones in the country.
Accordingly electricity shortage which is part of the total energy availability shortage will need to be addressed in line with the expected demand determined as a result of integrated planning between concerned government departments as well as public and private sector entities.
PAGE: ARE WE AS A NATION MOVING IN THE RIGHT DIRECTION FOR ENERGY SELF-SUFFICIENCY?
SOHAIL A. BUTT: We are trying hard, we are running from pillar to post but the results so far show that we are NOT appropriately moving in the right direction and succeeding to attain our primary objective.
Primarily our energy investment is not balanced and not aligned within the constituent elements of energy sector value chain comprising Upstream, Midstream and Downstream. There is a disconnect between Pakistan’s power generation capacity increasing by 10,000MW by 2018 and a further thousands of Megawatt by 2022 with transmission and distribution system, power evacuation and consumption and ability of the users to pay in order to keep the supply chain moving in the right direction.
Secondly and most importantly we are NOT investing aggressively in exploration and production of oil and gas across the sedimentary area of Pakistan. Onshore and offshore, conventionally (existing E&P technologies) and unconventionally (shale oil & gas). Likewise our progress in renewable energy, energy efficiencies and adopting state-of-the-art technologies in the energy sector supply chain as well as that of future is dismally poor. Lack of coordinated planning between different organs of the state will weigh very heavily on the cost and availability of energy and its role in value addition for industries that add value and bring in precious foreign exchange for the country.
The following points of critical nature should be part of our energy plan and strategy in order to achieve the goal of sustainably energy security and self-sufficiency on a long term basis:
- The additional generation capability being rigorously pursued by both provincial and federal governments with focus on better fuel mix and cheaper cost of generation should be carried out simultaneously along with coordinated efforts to achieve a comprehensive resolution of current power sector issues having direct negative impact on our economy.
- The expected cost per unit produced in Pakistan in the near future should also be competitive in the regional and international context.
- There is an efficient transmission and distribution system in place to deliver the generated power to the final user with minimum technical and distribution losses and theft. This requires heavy capital investment in the midstream infrastructure sector.
- There are sufficient off takers among domestic, commercial, agricultural and industrial sectors of the incremental most efficiently delivered KWH of power units.
- Most rather all of the off takers of incremental cost efficient power generated have the capability to PAY the power sector debts promptly and preferably within DUE DATES.
- Such capability to pay should be from the economic activity generated (rather than borrowing) that translates into REVENUES (Internal or External – Exports or Import Substitution).
If all or most of the above objectives are not achieved than the nation should be prepared for even a bigger crisis which is likely to happen (hopefully not) as follows:
- Astronomical increase in circular debt due to –
– Power available but not distributable or usable due to lack of infrastructure or off takers who can repay their debts.
– Very high Transmission & Distribution losses in absolute terms and increased theft.
- Inability of power generators to deliver or find off takers who do not have the capability to pay power bills also means higher capacity payments and resultantly higher SUBSIDY requirement from the government.
- The sum total of the above points would be that Power Generators of (FO, Coal, RLNG, Hydro, Renewables) specially the new entities who feed the national grid will become ‘ Financially Stressed’ over a short period of time and will be unable to service their debts or to repay their loans when they become due if the situation prevails for longer. This may raise serious ‘going concern’ issues and resultant adverse consequences for the countries stock markets. Accordingly in order for incremental Power Generation Capacity to succeed and remain sustained in the real economic sense the entire Value Chain starting from Generation to Final consumption utilizing maximum installed capacity and prompt liability settlement process has to be streamlined and move in tandem with each other.
DEMAND FORECAST – AN ABSOLUTE MUST
The demand forecast linked with the short and long term plans of the various segments of the Government of Pakistan should be prepared which will help prepare a comprehensive ‘Load and Generation plan’ for the future decision making across the power sector value chain. This master plan may be using the historical trends or past information but its core assumptions should be based on future development plans including CPEC and its associated Industrial zones.
The Demand Forecast for future in Pakistan’s specific case enables effective planning in terms of procuring supplies and planning an optimum mix based on indigenous and imported energy in both short and long term. This planned coordinated effort should result into:
- Minimize cost of power (depending on our choices of MIX, Efficiency, Productivity and better Governance). This will further spur incremental economic activity that results into value addition for local consumable items as well as exports.
- Cost competitiveness in international markets of which power and utilities constitute about 25% as a variable cost element can itself increase the demand of our exportable products and import substitution products thereby further increasing the demand/load factor significantly.
- Plan power generation in a smart and efficient manner and ensuring supply inputs at most competitive prices over the planning period.
- Taking corrective measures in time through regular monitoring of energy demand or supply fluctuations and resulting impact on supply cost of power to various users.
- In a changing economic and fiscal conditions of the country, the scarce resources ( Foreign Exchange ) can become ‘critical limiting factors’ on the basis which new decisions are made and earlier decisions are overruled for the best interest of the economy and the country.
KEY SUCCESS FACTORS TO ACHIEVE THE GOAL OF ENERGY SELF-SUFFICIENCY IN PAKISTAN:
- Address structural and governance issues of the energy sector placing qualified and experienced professionals at key positions at all levels.
- Value chain starting from generation to final consumption utilizing maximum installed capacity and prompt liability settlement has to be streamlined from policy, procedural, administrative and technical perspectives
- Align transmission and distribution system to ‘Generation’ and as first complete the two new transmission lines from Mitiari to Lahore and Faisalabad being financed through CPEC Budget of around US$ 3 billion to improve our transmission capacity. Additionally provide/upgrade transmission lines for wind and solar power projects in Sindh and Punjab in terms of KV specification in order for power to be evacuated and transferred to grid and consumption centers.
- Invest more in improving our existing distribution system (both power and gas) to reduce technical losses/ thefts etc. ( Currently UFG 14% and T&D 18%) and in this respect make budgetary transfers from less critical areas or make special allocations.
- Build strategic storages of petroleum products at key locations throughout Pakistan in addition to what the Oil Marketing Companies are currently maintaining. The target should be minimum 45 days of petroleum products requirements of the country on a total demand basis stored at depots and terminals 365 days in a year.
- Revive industry that has been shut down or slowed down due to power shortages through integrated planning and actions. Focus more on import substitution and export enhancing industries.
- The timing of maturity of industrial zones around CPEC as major off takers of surplus capacity should be aligned with distributable additional power generation and transmission.