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Pakistan’s energy landscape must put in order to meet future realities and challenges

Pakistan’s energy landscape must put in order to meet future realities and challenges

  1. Development of indigenous hydrocarbon resources absolutely imperative for the sustainable economic growth
  2. New government should offer incentives to foreign E&P sector for more investment
  3. Need to aggressively pursue offshore drilling in the coastal belt of the Arabian sea

Interview with Mr Sohail A. Butt – CEO, Energy Energetics

PAGE: Tell me something about yourself, please:

Sohail Butt: I have spent over thirty five years internationally in the energy sector value chain as a finance professional, systems and business process improvement specialist and as a consultant/advisor working with senior oil and gas executives internationally. I specialize in developing and implementing value creating strategies for entities in evolving, transformational or business development mode through a consultancy services firm named Energy Energetics Consulting. By profession I am a Chartered Accountant qualified in UK and have worked in upstream, mid-stream and downstream petroleum sector entities in the Middle East, North America and Pakistan.

Most recently my area of focus is to provide consulting and advisory services in the energy sector focusing on sectoral reforms, governance issues and development of projects in the energy sector supply chain. I feel there is a dire need for expert professionals to remain aware of all the technological developments, strategic shifts taking place, supply/demand variations as a result of economic and geopolitical activity and remain engaged in a collaborative mode. The emerging business opportunities taking place in the Asia-Pacific region are enormous.

Energy Energetics through its knowledge and experts database is trying to create a niche for itself in supporting organizations achieves these objectives.

The world is undergoing massive transition in the field of energy and related technologies. The age of renewable energy, energy efficiencies and climate change initiatives is past its period of infancy along with recurring disruptions as a result of rapid technological innovations and cost reduction initiatives now in full swing. In future those entities and economies will survive, grow and flourish that can produce and deliver ‘energy’ in an environmentally friendly and economically sustainable criterion 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 and regulatory framework would need to be established. This should result into matching regulation and policies to a dynamic business environment on an ongoing basis and reviewing of rules of conducting business in different segments of the energy sector in Pakistan in a regional and global context.

From Pakistan’s perspective we too are passing through critical times in view of firstly our own chronic energy sector issues and secondly due to major transition in the energy sector globally. This will drive and alter energy availability, change energy mix and resultantly impact its cost in a significant manner. Accordingly in order for Pakistan to remain competitive and relevant in the international market for its exportable and import substitution industries it is imperative that Pakistan’s energy landscape is aligned with the rest of the world. All energy sector development projects in Pakistan must now be conceived and implemented based on future realities rather than past practices.

PAGE: Your views on the indigenous oil & gas potential in Pakistan:

Sohail Butt: Pakistan’s energy sector continues to be dominated by hydrocarbon, with oil and gas contributing over 80 percent of the overall primary energy mix. Despite the increase in primary energy supply due to induction of LNG along with the commissioning of several alternative energy projects that is wind, solar, bagasse and nuclear an energy deficit of 10 MTOEs (Million Tons of Oil Equivalent) existed in the country for the FY 2016-17. The total primary energy supply of 72 MTOEs against an estimated energy demand of 82 MTOEs resulted in the deficit.

Pakistan has a dynamic E&P (Exploration and Production) sector with national and international companies (24 active companies as of June 2016) operating independently. E&P activities have increased with approximately 7,632 sq. km of 2D seismic data and 6,585 sq. km of 3D seismic data acquired. Further, ninety-nine wells were spudded and 27 oil & gas discoveries were made FY 2015-16 though insufficient to replace depletion. In 2015-16, Pakistan’s average oil and gas production was 86,481 BPD and 4,048 MMCFD respectively, whereas, the remaining recoverable oil and gas reserves were 350.6 MMBBL and 19.2 TCF respectively.

Though Pakistan’s conventional oil and gas reserves have been considerably depleted but its shale gas recoverable reserves stand at around 105 trillion cubic feet as per US EIA data. Likewise its shale crude oil reserves are also estimated to be close to 58 billion barrels. The need for development of indigenous hydrocarbon resources is absolutely imperative for the sustainable economic development and growth of Pakistan due to its current reliance on imports of oil and gas that accounts for nearly 30 percent of its total import bill. This together with the volatility of oil prices exposes Pakistan to enormous risks in foreign currency management and resulting trade and current account deficits.

Pakistan has a sedimentary area of over 827,000 square KMS out of which 43 percent has been explored for oil and gas discoveries while the remaining 57 percent (under different exploratory blocks both onshore and offshore) is either unexplored or under various stages of granting exploration concession licenses to interested parties by Director General of Petroleum Concessions (DGPC) under the Ministry of Energy. Pakistan is said to have the highest success ratios in the world. For every three wells drilled one well of oil or gas becomes a development or producing well from an exploratory well stage. Accordingly both onshore and offshore areas should be further brought under the exploration stages in order to enhance our indigenous oil and gas production capacity in the medium-long term.

PAGE: What is your take on the foreign investment in the oil and gas exploration in Pakistan?

Sohail Butt: During the last decade in the E&P sector in Pakistan unfortunately some foreign oil and gas exploration and development entities have exited their operations or sold their interests locally and left the country. The reasons of this exit may be attributable to security issues, law and order problem or diminished chances of successful discoveries or unfavorable terms and conditions. It could also be due to the fact that geo politics have taken precedence over the economic rationale in continuing with exploration and development of E&P activities in Pakistan. Cost of doing business and the complexity of doing business, the regulatory framework and litigation and counter litigation has also generally impacted the business climate in Pakistan adversely and energy sector is no exception. All these areas of concern need to be addressed on a consolidated and comprehensive basis by the relevant ministries, regulatory authorities going forward. The new government should offer incentives to foreign E&P sector entities and encourage them to invest in the oil and gas exploration using latest exploratory and drilling technologies in Pakistan and aggressively pursue offshore drilling in the now extended ‘coastal’ belt of the Arabian sea that falls within our territorial waters.

Major criteria for investments in energy sector being funded from local or foreign sources should meet the following key objectives:-

(a) Sustainability; (b) Energy Security; (c) Energy Equity; (d) Environmental Sustainability; (e) Cost competitiveness.

Energy sustainability is effective management of primary energy sources, reliability of infrastructure, and ability to meet current and future demand. Energy equity is the accessibility and affordability of energy across the whole population of the country.

Environmental sustainability is the use of renewable energy and low carbon sources and achieving supply and demand side efficiencies.

In any economy, the individuals’ first choice is energy equity i.e. having power at all the times everywhere at an affordable price, whereas the governments’ emphasis is on energy security i.e. securing the supply chain of energy resources and infrastructure like grid, pipelines, railroads and port facilities.

 

PAGE: How would you comment on oil import bill of Pakistan?

Sohail Butt: The oil import bill weighed heavy on the country’s foreign exchange reserves. There were periods in the past when oil import bill on its own was over half of the amount of total export earnings. The oil import bill increased from US$7.4 billion in 2015-16 to US$9.1 billion in 2016-17 as a result of increase in international oil prices and increased demand of petroleum products in Pakistan. Imports of petroleum products went up 11.8 percent as compared to last year’s imports. The import bill of Liquefied Natural Gas (LNG) hiked up from $642 million to $1.2 billion in 2016-17 resulting in an increase of 85 percent while that of Liquefied Petroleum Gas (LPG) consumption registered an increase of 22 percent as a result of 17 percent increase in local production and 42 percent increase in imports during the same period. Import of coal also added to the energy import bill amounting to Rs 81,280 million in 2016-17 compared to Rs 47,415 million in 2015-16 showing an annual growth of 44 percent. Pakistan also imported electricity equivalent to 496 GWh in 2016-17 compared to 463 GWh in 2015-16 resulting in increased import value of energy from external sources.

Going forward the increased industrial and transportation activities due to CPEC projects would further increase the demand of petroleum products in Pakistan thereby resulting in higher import bill for crude, petroleum products, LPG and LNG. Since the immediate impact of additional capital expenditure and enhanced economic activity will not bring revenues and/or result in higher exports in the short term, the pressure on trade deficit and resulting balance of payments will continue to exist for quite some time.

PAGE: How could Pakistan reduce its imported oil consumption?

Sohail Butt: Oil or gas or coal that falls into fossil fuels category and have historically provided the backbone of primary energy supplies on a worldwide basis are now being challenged by a different world of energy that we call ‘alternative or renewable’ sources of energy. Likewise the consumption of energy primarily depends on the demand factor that results from the population increase, rate of economic growth and socio cultural factors. Accordingly imported fossil fuels consumption in Pakistan in view of population and economic growth targets is only possible if ‘alternative sources ‘of energy that is developed locally replaces imported fuels. Besides this an aggressive ‘energy efficiency’ and energy conservation plan based on sound policy and regulatory framework needs to be developed and implemented. Innovation and adoption of technological developments in transport, agricultural and industrial sectors will also result in curbing the demand for fossil imported fuels and hence reduced consumption globally as well as in Pakistan.

PAGE: What are your views on the long term energy policy of Pakistan?

Sohail Butt: Mismanagement of energy sector over the last few decades has been either due to lack of policy and regulatory framework or outdated regulation and policies that were not aligned to each other and were developed an adhoc basis at different times with different objectives. Such policies or lack of ones failed to meet the evolving challenges in a very key sector of national economic development. This anomaly and conflict resulted in poor governance across the energy sector value chain leading to a snowballing negative impact on the budgetary allocation in terms of higher subsidies, reduced exports and higher imports due to un-competitiveness as well as industrial shutdowns. Almost two percent of Gross Domestic Product (GDP) is said to have been lost due to non-availability or expensive energy.

The key requirements of energy policy going forward should be the following:

  1. Policy should be evolved on hierarchical basis i.e. Broad Energy Policy covering the entire spectrum and supplemented by series of subsidiary or second tier policies that are more detailed and comprehensive and aligned to each other and connects upstream, midstream and downstream of the energy sector value chain in terms of planning, forecasting and execution.
  2. The principal objectives of the policies to developed should result into indigenization to strengthen energy security, achieve optimum mix of fossil fuels and renewable sources of energy leading to cost competitiveness and addressing climate change benchmarks.
  3. Policies should be covering all the segments and aspects of the energy sector management including governance and administration, climate change compulsions, human resource development and alignment with national economic development plans prepared for various timeline periods.
  4. Policies should be dynamic to adapt to changing technology and innovation as well as varying economic scenarios.
  5. Regulatory bodies and their framework to ensure effective implementation of policies so enacted and ensure compliance.
Going Forward: Management of Energy Sector Short-Medium Term
  • State of Energy Efficiency and Conservation should be the top priority of the government and central pillar of the Energy Policy. The current power deficit can be reduced by as much as 50 percent if the full spectrum of energy efficiency in accordance with the latest standards and technologies is implemented.
  • There is a dire need to conduct a techno economic review and reappraisal of all energy sector projects in pipeline. Due to constrained budgetary resources as well as foreign exchange savings and cost reduction requirements some rescheduling and adjustments may be needed.
  • The review and reappraisal of energy sector projects will also teach our economic and energy planners/managers to learn from some of the mistakes committed in the past and determine priorities as well as strike a balance between upstream, midstream and downstream projects. This will result into aligning generation with transmission and distribution as well as reduce technical losses and theft in power sector and minimize unaccounted for gas in the gas distribution sector. Also consumption appetite or ‘Off Take’ capability needs to be established for settlement of liabilities in the energy sector value chain as a result of sound energy strategy. This will arrest ‘circular debt’ accumulation.
  • Develop local energy sources on a high priority basis as a fundamental pillar of new energy policy. Imported coal and LNG based NGCC power plants are creating some major foreign exchange issues. Imported energy will have to be converted to local resources on a war footing basis over a realistic period of time.
  • Major initiative for the injection of solar and wind power on small, medium or large sized basis must be launched closer to main demand and consumption centers which can be major cities as well as all eleven new industrial zones falling under CPEC. Besides this ‘distributed electricity market’ including. Off grid and mini grids with aggressive roll out of renewables is required.
  • In addition local manufacturing of solar panels and wind turbines as well as associated equipment should be encouraged, subsidized or incentivized in the new energy policy.
  • All current generation projects which are under 45 percent efficiency level and are run on expensive fuels be phased out within three years and replaced with high efficiency power generator plants.
  • Power distribution entities (DISCOS) need a major reform and can be broken down into smaller units and privatized, with no subsidy provided further. Review or roll back the present system of disco tariff mechanism so that the 300 unit consumers get refunded for differences between provisional and final tariffs.
  • The investment rationing criterion should be rigorously applied for the next five to seven years. Priority should be given to projects that produce power below Rs.6.00 per kWh and involve minimum foreign exchange component. The reduction of cost of generation reduces our cost of doing business and brings back our competiveness in industrial and agricultural sectors and hence our cheaper exportable products.
  • Lower generation cost would also reduce consumer tariff and resulting lesser incentives for theft and pilferage.
  • Governance reforms, privatization or restructuring options would have to be implemented. Many studies and reports are available for actions in this respect.
  • All public sector companies need a new governance framework in order to improve their performance and contribution to national exchequer.
  • Abolish or significantly reduce ministerial control of Gas and Power sector regulators (OGRA and NEPRA) and start delegating powers to provincial level regulators (to be established under the new energy policy) as per the spirit and objectives of the 18th constitutional amendment.
  • Move towards constitutional cover and signing of ‘Charter of Energy’ between different political entities ensuring consistency of energy policies and their implementation on a long term basis. Energy projects conceived and initiated for implementation and have a long gestation period running through different political tenures needs to be being completed without interruption and political interference to avoid cost overruns as well as meeting the economic development targets. This is imperative for the economic viability and sustainability of the state of Pakistan and the proposal needs a serious consideration.
Medium-Long Term:
  • The prospect of exploring shale oil and gas reserves should also be aggressively pursued both onshore and offshore. Exploitation of the Pakistan’s shale potential is a key to achieving our future energy security and economic sustainability.
  • Pakistan should encourage investment in local manufacturing of solar panels and wind turbines as well as invest heavily in technology and innovation related to renewable energy segment in order to produce ‘low cost’ energy from this source. The incentives could be in the form of long Tax Holidays, Subsidies, Public/Private partnerships etc. in future projects.
  • Government must additionally facilitate and encourage investment through ‘structural and administrative reforms’ in the energy sector besides bringing in professional project management experts in execution of energy sector projects. This will improve governance and restore local and international investor’s confidence in both mid and large sized projects.

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