ENERGY OUTAGES TO RETARD GDP GROWTH

SHABBIR H. KAZMI
Nov 02 - 08, 2009

With winter approaching Sui twins, particularly Sui Northern Gas Pipeline Limited (SNGPL) has announced extensive gas load shedding plan. The decision has attracted a lot of criticism, but does the country have any option?

Reportedly, this winter gas shortfall is estimated around 1000mmcfd. The situation is worst in the SNGPL franchise area. The company has released the priority list, keeping the domestic consumers at the top. It is feared that partial or permanent closure of industries up to five months will plunge the industrial growth and will not allow the country to achieve GDP growth target.

The situation is likely to further aggravate because PEPCO will also resort to load shedding of electricity with the steep fall in hydel power generation due to low water levels in the dams. Though, electricity demand has come down substantially to around 11,000MW against an installed capacity of 20,000MW, the actual generation has reduced to about 9,500MW. Load shedding spell stretches from 8-15 hours.

Textile industry is most critical of the twin menace because continuous process industries are the worst victim of load shedding. A large number of textile units have installed gas-fired stand-by generators. However, when electricity and gas load shedding are done simultaneously their operations come to a grinding halt. Export oriented units will find it very difficult to meet the orders placed by the foreign buyers.

Pakistan is already facing acute shortage of urea. The level of distress can be gauged from the fact that lately Trading Corporation of Pakistan has placed order for import of 600,000 tons urea. It was expected that with the commencement of production by Fatima Fertilizer in November the situation will improve but suspension of gas supply to three fertilizer units (Dawood Hercules, Pak Arab and Pak American) will result in shortfall necessitating further import of urea.

MANMADE CRISIS

One could only regret at the mindset of those topping ministry of petroleum. Last year the country faced about 500mmcfd shortfall of gas but the havoc was too big to withstand. The expected shortfall this year indicates that hardly any step was taken to enhance supply. Rather line losses and theft, stated under UFG, have increased. The UFG of SSGC is estimated around 7.5% and in case of SNGPL the loss is touching almost 10%. The supply could have been enhanced by 100mmcfd simply by bringing down UFG to 5%, a realistic level.

According to the information made available by the exploration and production companies the prolonged litigation has not allowed extraction of up to 300mmcfd gas from already discovered field. They go to the extent of saying that commencement of gas production from Tal Block alone can enhance supply by 200mmcfd.

The prevailing situation of the power generation and distribution in the county can be termed the worst in the recent history of the country. At present electricity generation in the country hovers around 9,500MW against installed capacity of 20,000MW. The crisis can only be attributed to gross mismanagement and inability to take timely decisions. Circular debt issue has plagued the entire chain, from power generation companies to exploration and production companies.

Failure of KESC and PEPCO in making timely and full payment to oil and gas distribution companies is the root cause of circular debt. One often reads the news that PSO cannot open letter of credit for import oil. The latest threat is closure of Pakistan Refinery in case it does not get outstanding payments from PSO etc. The situation has prevailed despite issue of term finance certificates worth more than Rs180 billion rupees.

Some of the power sector experts say that the drama of extensive load shedding is being staged to create a justification for establishing rental power plants (RPPs). They say to begin with the basic concept of RPPs was aimed at gratifying the blue-eyed kids. The statement gets some credibility when one looks at some of the recent happenings.

These include fire eruption at Mangla and intermittent faults at Bin Qasim Power plant of KESC along with exceptionally low capacity utilization of generation companies operating under the umbrella of PEPCO. It is also said that if RPPs do not commence operations load shedding would stretch beyond 2010.

Two objections on the RPPs must be dwelled upon 1) supply of gas and 2) bulk power purchase tariff. In a country suffering from an acute shortage of gas, for whatever reasons, permission for gas-fired power plants has no justification at all. One completely fails to understand the logic behind curtailing gas supply to PEPCO and KESC but allowing RPPs to run on gas. The high tariff being offered to RPPs will necessitate further hike in tariff being charged from the consumers.

Another point raising serious concerns is depleting oil stocks of the oil marketing companies and the thermal power plants. The prevailing security situation demands ample storage of petroleum products. Flotation of TFCs does not offer a sustainable solution; it converts one type of debt into another type of liability. This problem cannot be overcome without the resolution of circular debt issue by improving cash flow of power distribution companies. There is also an urgent need to bring down transmission and distribution losses, mostly comprising of blatant power theft.

It must be kept in mind that load shedding of electricity and gas is not because of limited supply. It is mainly due to gross mismanagement and inability to make timely decision. It seems that not all those at the helm of affairs have time to look into the most pressing issues. Due to their immaturity, they often make decisions, which remind the historic statement "If they cannot get bread they should eat cake".

PSO DECLARES INTERIM DIVIDEND

The Board of Management (BoM), Pakistan State Oil (PSO), has declared a cash dividend of Rs. 3 per share to its shareholders for the 1st quarter ended September 30, 2009.

The announcement came following the BoM review of the 1Q FY10 performance of the country's largest oil marketing entity. Sardar Yasin Malik, BoM Chairman, presided over the meeting.

The Board observed that the Company has started FY10 on a positive note after going through a lean patch during FY09. The first half of FY09 saw a significant decline in the Company's profitability mainly on account of a free fall in the international oil prices resulting in inventory losses to the Company. In contrast, the first quarter of FY10 saw oil prices moving across a narrower band ranging between US$60/bbl to US$73/bbl. The Company's sales revenue touched Rs. 201 billion compared to Rs. 222 billion in the corresponding period last year, the decline being mainly due to a reduction in retail prices of POL products across the country. The Company was able to post improved quarterly after tax earnings of Rs 1.9 billion as compared to a loss of Rs. 8.4 billion during the same period last year. Here it is worth mentioning that on account of circular debt, the Company had to borrow from banks thereby incurring financial charges of Rs. 1.6 billion which dented the Company's profitability during the period under review.

During the first quarter of FY10, PSO's management made persistent efforts for recovering its receivables in the circular debt which crossed Rs. 100 billion during the reported period. As a result of all these efforts at the highest possible level, Power Holding (Pvt.) Limited, an entity of Government of Pakistan, issued Term Finance Certificates on September 18, 2009 amounting to Rs 82.4 billion out of which PSO received Rs 41.3 billion thereby allowing the Company to make partial payments to refineries and retire LC payments against oil imports. Due to increase in supply of furnace oil to the power sector and delayed payments from them, the receivables are again growing on a daily basis.

In the period under review, the Company posted a growth of 30.4% in the Black Oil segment against the backdrop of increasing demand of furnace oil by the power sector which was fulfilled by PSO. In addition, a positive volumetric growth of 26.5% and 3.8% was registered in Mogas and JP1 respectively. However, in HSD, the Company experienced negative growth of 13.5% as industry figures also show a downward trend during the reported period. PSO maintained its leadership in the White and Black Oil market segments with market shares of 55.3% and 89.4% respectively. Overall, the market share for the Company stood at 72.1% at the end of the quarter.

During the quarter, PSO signed a Fuel Supply Agreement (FSA) with Northern Power Generation Company Limited (NPGCL), a subsidiary company of the Pakistan Electric Power Company (Private) Limited (PEPCO), for fulfilling Furnace Oil and HSD requirements of all the power stations of NPGCL. In the backdrop of the current energy crisis, this is a significant achievement which will help PSO in establishing consistency and smoothness in operations and correspondingly allow PEPCO to manage the demand and supply of the energy requirements of the country. The signing of this FSA further ensures consolidation of the Furnace Oil business.

The period also witnessed the signing of a Memorandum of Understanding (MOU) between PSO and Pakistan's largest LPG producer, Associated Group (AG) for the development of a sustainable LPG Auto-gas market. Under the MOU, it is envisioned that AG will establish LPG retail infrastructure at PSO retail outlets and provide the product year round at competitive prices. LPG was legalized as an automotive fuel in 2005 but as yet, no LPG Auto-gas station has come online in Pakistan. Currently, consumers of LPG for automotive use rely on dangerous and illegal LPG decanters. Formalisation of the retail channel will ensure the implementation of globally applicable safety practices as well as help stabilise prices.

The Board expressed its profound gratitude towards the Government of Pakistan for its continued efforts in resolving the circular debt issue, and hoped that through the support of Ministry of Petroleum & Natural Resources and Ministry of Finance, the company will overcome all the challenges imposed by different domestic and international factors.