New govt must aim on the issues of demand/supply balance and offer investor-friendly environment for sustainability of the sector
Interview with Mr. Sohail Butt – an energy expert
PAGE: Tell me something about yourself and your career:
Sohail Butt: I have spent over twenty 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 to develop and implement value creating strategies in transformational and business development mode. I qualified as a Chartered Accountant from Ernst and Young, UK and most recently my focus is to provide consulting and advisory services for oil and gas, water & power, climate change and energy efficiency areas. In addition I also concentrate on developing sectorial reforms, improving governance at macro and micro levels and lobbying for improving project management discipline for implementation of energy sector projects in Pakistan. I provide consulting and advisory services for developing energy and related business strategy for midstream and downstream projects for entities in Pakistan who are seeking either local or international collaboration based on my international career and resulting key contacts with international oil companies as well as the Middle East state oil entities.
I have also been extensively involved with print and electronic media highlighting energy sector issues in Pakistan and steps that must be taken to overcome the crisis in bringing about structural changes and improving governance throughout the energy sector value chain.
I also keep myself up to date on the developments in the world of oil and gas, the current developments, the future scenarios and ongoing impact of geo politics on energy prices, availability and sustainability at global, regional and country level.
My consulting firm Energy Energetics being a knowledge gathering and sharing platform helps me to achieve my objectives and help me in 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 that need to regulate dynamically to remain competitive and remain ahead of the curve in regional and global contexts. The world is undergoing massive transition in the field of energy and related technologies. The age of renewable energy has arrived with all its rapid 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 again regardless of their impact on environment and resulting climate change goals. 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 different segments of the energy sector in Pakistan.
PAGE: How would you comment on the oil and gas exploration in Pakistan over the period of last ten years?
Sohail 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 – Currently 827,000 Square Kms of sedimentary area out of which nearly 57 percent remains to be explored through concession blocks awarded or to be awarded both onshore as well as offshore has the potential to resolve our looming energy crisis. Also need to mention here that our past success ratio has been close to one out of every three/four exploratory/development wells drilled or say success ratio is 40 percent, which is very encouraging for E&P activity. Therefore going forward and with enlargement of base area even if the success ratio falls of one to five or more, Pakistan has enough potential for future discoveries.
E&P of Shale Oil & Gas – Initial estimates of 58 Billion Barrels of oil and 105 Plus TCF (trillion cubic feet) of gas in shale formations waiting to be explored and produced. Gas Reserves – Currently producing around 4 BCF of natural gas with currently evaluated remaining reserves of 23 TCF though diminishing reserves at a very fast pace. Likewise in the context of ‘Renewable Energy’ we have estimated wind potential of approx. 132 GW as estimated by USAID – Estimated Solar potential is more than 2.9 Million MW according to studies from Asian Development Bank (ADB), various authors and research papers – Cost of power generation from solar and wind based projects are on the decline and have become the cheapest source @ Rs. 6-8/KWh in Pakistan – Solar thermal/solar off-grid applications need to be encouraged on a large scale with active support and coordination from provincial and federal governments. Total potential for hydropower generation in Pakistan is approximately 60,000 MW (existing 7,116 MW) – currently, approx. 4000 MW of hydel power projects are at different stages of execution – multiple projects of over 25,000 MW at feasibility/engineering stage are in hand with WAPDA – since upcoming run of the river power projects are becoming increasingly expensive versus other renewables, large scale storage based projects must be encouraged to ensure power and water availability for the country Pakistan’s energy sector continues to be dominated by hydrocarbon, with oil and gas contributing over 80 percent of the overall primary energy mix.
In order to attain the energy security and sustainability goals, Pakistan needs to develop and implement a very aggressive E&P policy. Despite the increase in primary energy supply due to induction of LNG and coal along with the commissioning of several alternative energy projects that is wind, solar, bagasse and nuclear an energy deﬁcit of approximately 10 MTOEs (Million Tons of Oil Equivalent) currently exists. The total primary energy supply of 80 MTOEs against an estimated energy demand of around 90 MTOEs now and in short term is contributing to the deficit. The demand of energy supplies is likely to cross 100 MTOEs in the next year or two and significantly by 2030 if the GDP cumulative growth rate on average of 5 percent per annum is achieved on a consistent basis.
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 – tight gas reserves are estimated at 40TCF+ shale gas and shale oil reserves estimated at 105 tcf and 9.1 billion barrels respectively as per US Energy Information Administration (EIA) – – indigenous gas availability through exploration of tight and shale gas should be ensured to reduce the electricity tariff further.
PAGE: Could you tell us about the cost of exploration activities and the returns on investment?
Sohail Butt: Cost of exploration activities are generally lower in Pakistan in a regional and international context based on lower comparative manpower costs and lower cost of obtaining exploration blocks and helpful investment friendly petroleum policies recently developed in order to encourage foreign direct investment in the oil and gas sector. However the cost of exploration and return on investment depends on two key factors. The first being the technical efficiency of the exploratory rigs employed by the concerned E&P entity and secondly the cost of operations and the terms offered for concessionary blocks allotted. Higher international crude oil and gas prices also impact the rate of returns for E&P entities. Many exploratory activates were abandoned worldwide during the oil price slump during 2014-16 period and were restarted after the recovery of oil prices during 2017.
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 litigations has also generally impacted the business climate in Pakistan adversely and energy sector is no exception. Pakistan has also the advantage of higher success ratio in exploratory drilling whereby one out of three or four wells drilled becomes a development or producing well eventually. However due to higher security concerns, inaccessibility in areas of operation, local conditions the cost of exploration escalates due to higher risk factors involved. Accordingly the rate of returns is also impacted. The rate of return on upstream projects as opposed to midstream and downstream petroleum projects is very much dependent on future international oil and gas pricing scenarios, local fiscal policies, regulatory duties/taxes etc. and finally supply and demand projections and geo politics.
Accordingly the return on investments for foreign E&P entities can be improved as incentives by the policies of the Government of Pakistan, investor-friendly environment and providing security and support services at a minimum or no cost to the potential investors. A higher share of the exploratory block in case of ‘success’ for the investing E&P entity that brings in state-of-the-art technology and transfers such technology and equipment to Pakistan’s state-owned E&P entities is another way of achieving our objectives.
PAGE: Your views on the efforts being made by the state-owned institutions regarding the exploration of oil and gas in Pakistan?
Sohail Butt: State-owned institutions engaged in exploration and production of oil and gas in Pakistan are mainly Oil & Gas Development Corporation (OGDC) and Pakistan Petroleum Limited (PPL) and they are working under the direct control of Ministry of Energy. OGDCL being the largest E&P company in Pakistan is on top regarding exploration and production activities with a 48.5 percent share of oil and 27.6 percent share of gas production in the country.
PPL – a pioneer of exploration and production in Pakistan is the second highest gas producing company with a 16.3 percent share. Moreover, UEP formerly BP is the largest international E&P company in Pakistan with an approximately 13 percent share of the oil and gas production. Other major companies include MOL, MPCL, ENI, & OMV. The prices of locally produced oil and gas are indexed with the basket price of Arabian Gulf region with adjustments for quality, levy etc. and discounts. The price for local produce also varies with respect to the petroleum policy under which the producing block falls.
Going forward there is lot of emphasis on enhancing the share of locally produced oil and gas in the energy mix of the country and in that context the Ministry of Energy has recently developed/updated petroleum related policies that encourage foreign direct investment in the exploration and production in oil and gas both conventionally as well as unconventionally (tight and shale gas).
State-owned institutions as opposed to large foreign E&P entities are in a better position to carry out exploration activities and produce tangible results in accordance with the national interests of Pakistan but may lack in latest 3D exploration technologies and related equipment and expertise. Therefore the federal government needs to provide tools and technical expertise through high level international collaboration initially through political and diplomatic initiatives to procure state-of-the-art oil and gas RIGS along with ‘transfer of technologies’ for state-owned entities to explore the sedimentary area of Pakistan (both onshore and offshore) conventionally and unconventionally.
The government itself can reach out to international E&P entities in encouraging them to invest in Pakistan and allot ‘exploratory blocks’ on concessionary and investor-friendly terms and conditions and provide them full security in their area if operations. Pakistan’s oil production hovering around 86,000 BPD. Small discoveries are eaten away by annual production and resulting in depletion of reserves. During the year 2016, OGDCL was the highest oil producing company with a production of 15.3 MMBBL and an average rate of 41,928 BPD, OGDCL share was 48.5 percent in the annual oil production of the country. MOL and UEPL’s production stood at 7.4 MMBBL and 3.9 MBBL with share of 23 percent and 12 percent respectively in the annual oil production of the country. Country’s gas production peaked at 4.3 BCFD in 2012 and since then been at a decline, falling to around 4.0 BCFD by 2016. Higher decline rates from mature bigger ﬁelds such as Sui, Qadirpur and Zamzama have outweighed additions from newer ﬁelds. The total gas production is projected to reduce to 1.5 BCFD by 2030 as per data provided by the companies to the oﬃce of DGPC. This rate has been normalized to 2.5 BCFD by PIP after history matching of production proﬁle. The country’s remaining recoverable oil/condensate reserves decreased marginally from 353 MMBBL in 2014 to 351 MMBBL in 2016. Gas reserves as of 2016 are 19,158 BCF. The gloomier part of the picture is the trend in the natural gas production.
PAGE: What must the incumbent government do to tackle the energy shortfall?
Sohail Butt: Energy shortfall is primarily the result and consequence of decades of poor governance, lack of integrated short and long term planning and failure to implement the ill planned projects within deadlines and target dates. We happen to lag behind our regional competitors (India and Bangladesh) in pursuing projects with latest trends and technologies in the energy sector value chain. Secondly and resultantly the shortfall results in demand/supply imbalance that needs to be plugged but has been hampered by reasons stated above. The main areas of focus that will address the current issues and lead to demand supply balance are as follows:
- Indigenize through policy and regulatory framework and increase the fossil fuels (oil, gas and coal) availability locally by streamlining the relevant segments of energy value chain.
- Simultaneously and gradually increase the ‘renewable energy’ component in the primary energy supply mix at a competitive cost rate. Solar/wind/hydro projects on a large scale bringing the cost per KwH down and providing transmission and distribution facilities to feed the national grid with power so generated.
- Concurrently 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 mechanism has to be streamlined from policy, procedural, administrative and technical perspectives
- Align transmission and distribution system to ‘generation’. Transmission capacity needs to be created and upgraded catering 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%).
- Energy efficiencies if rigorously implemented have the capability to reduce 50 percent of our power sector shortfall. Therefore this risk free resource with minimum investment requirement must be employed at all levels to achieve the desired objectives.
- Recent combined cycle RLNG based power plants have demonstrated 60-62 percent efficiency resulting in electricity tariff of 6-7 cents/KWh therefore this must be encouraged compared to furnace oil /diesel alternatives.
- Thar Desert contains the world’s 7th largest coal reserves – 175 billion tons of Lignite grade coal, which is equivalent to: 50 billion ton of oil (more than Iran & Saudi Arabia combined oil reserves) or; therefore focus on indigenous coal rather than imported coal power plants as has been done in India, China and some European countries.
- The timing of maturity of industrial zones around China-Pakistan Economic Corridor (CPEC) as major off takers of surplus capacity should be aligned with distributable additional power generation and transmission.
- Appropriate incentives to be provided in the policy framework for expeditious development of tight and shale gas/oil potential of Pakistan. New exploration blocks to be identified both offshore and onshore for gas and oil exploration. Tight and shale gas projects having equivalent or less economic cost of LNG delivered price forecast may be considered for exploration and development on the assumption that future unconventional exploration and development technologies will be more efficient and less costly and therefore economically more viable to pursue. This strategy will enhance energy security and sustainability through indigenization of our energy supplies.
The following objectives must be met as a result of above initiatives:
- Balanced fuel mix in terms of local/imported, fossil/renewable components that results into comparatively cheaper cost of generation.
- The expected cost per unit produced in Pakistan in the near future should also be competitive in the regional context in order to provide support to our export-oriented industries.
- Availability of a dependable efficient transmission and distribution system 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 segment. Sooner it is done the better it will be.
- Ensure that there are sufficient ‘off takers’ of power units around commissioning of additional generation capacity buildup among commercial, agricultural and Industrial sectors of the incremental most efficiently delivered power.
- The final consumers and large scale ‘off takers‘ of incremental as well as existing generated capacity have the capability to pay the power sector for electricity supplied and pay their debts promptly and preferably within due dates. This can be done through proper legislation and improving technical and operational controls in the supply chain as well as introducing an incentives regime.
- Additional power generated in Pakistan from incremental import of power generating fuels (oil gas and coal) should translate into incremental revenues and cash flow both from internal and external sources thereby increasing our exports and resulting in import substitution and elimination. This objective should be a ‘key’ one as it reduces our trade deficit and pressure on local currency in the context of foreign exchange balancing.
The consequence of not meeting all or most of the above objectives would lead to a bigger national crisis with the following results:
- Further and speedier accumulation of ‘circular debt’ that currently stands around Rs. 1.4 trillion primarily due to: 1.1 Power available but not distributable or usable due to lack of infrastructure or off takers who can repay their debts. 1.2 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 get streamlined through proper measures and actions on the ground to avoid a situation that seems clear over the horizon.
Accordingly with series of measures suggested above and simultaneous implementation of reforms across the energy sector value chain the country should come out of the crisis that has engulfed its plans of economic development and has kept the economic agenda hostage for a long period of time.