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Special Report

Coal as an alternative source of energy

 

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Special Report

Engine for growth

By Syed Jamil Ahmed Rizvi, FCMA
 and Mohammad Nasiruddin Ahmed, FCMA
Mar 26 - Apr 01, 2001

The importance of exploitation and exploration of alternative source of energy as against petroleum and petroleum products was not fully realized by the world until 1973 for the simple reason that in addition to abundant supply the international prices of crude oil were low and competitive.

The first oil crisis of 1973 shook the world. The entire world in general and the developed world in particular, depending upon the intensity of impact, and the realized gravity of future consequences of such a crisis started to look for conservation of power and explore and develop alternative source of energy where possible. This gave rise to investigations with possibility of research and development of various forms of alternative resource exploitations including solar and fossil fuel.

Pakistan apparently remained contented because it managed to receive petroleum at confessional rates from friendly countries in the Middle East. The then and successive planners of economy did not visualize the long-term economic impact of increasing oil prices for geopolitical reasons. So much so that more than thirty years after the said crisis, very few mineral resources have been evaluated or developed for want of inadequate geological data, lack of infrastructure in remote mineral bearing areas and above all the geopolitical environment.

Despite the fact that Pakistan has a great potential of untapped mineral reserves, very few have been evaluated or developed even after over half a century of its Independence. An average share of Mining and quarrying to total GDP at current prices based on the last 10 years is worked out to 0.57% as shown in Table "A".

Table A: Sectoral Share in GDP (Rs. Million)

Year

Share of Mining & Quarrying

Total GDP
At current prices

%
share

1990-91

6,437

908,374

0.71

1991-92

7,117

1,077,943

0.66

1992-93

7,403

1,200,129

0.62

1993-94

8,664

1,412,858

0.61

1994-95

9,007

1,688,126

0.53

1995-96

11,272

1,929,891*

0.58

1996-97

11,483

2,226,580*

0.52

1997-98

13,510

2,480,884

0.54

1998-99

14,512

2,711,078

0.54

1999-00

16,851

2,922,924

0.58

Total

106,256

18,558,787

0.57

Source: Economic Survey 1999-2000 P. 13 Table 1.5 of Statistical Appendix
*SBP Annual Report 1999-2000 P.6 Table 2.1

The mining and exploration is a high risk capital investment. The current situation is that the mineral sector is mainly concentrated in three minerals such as natural gas, crude oil and coal. These constitute four-fifths of the weight in the total value addition in the mineral sector.

It can be seen from Table "B" that the annual import bill on fuels alone is now close to US $ 2.9 billion. According to confirmed report, the country's own reserve of petroleum crude at current rate of production will most likely last upto the year 2011 and that of Natural gas would last up to 2026. The impact of this would result in yet another addition to our already increasing import bills in the absence of any balancing measure.

Table B: Imports of Mineral, Fuels (US $ Million)

Year

Coal, Coke Briquettes

Petroleum, Petroleum products and other related materials

Others n.e.s.

Total value of imports

1996-97

58.5

2,255.1

69.3

2,382.9

1997-98

60.9

1,570.3

144.0

1,775.2

1998-99

51.9

1,393.1

55.8

1,500.8

1999-00

46.6

2,804.4

22.1

2,873.1

Source: SBP Annual Report 1999-2000. Table 8.4 P.98-100

 


 

Table C: Exports of Mineral, Fuels, Lubricants & other Materials. (US$)

Year

Coal,Coke and
Briquettes

Petroleum,
Petroleum
products and
other related
materials

Others
n.e.s.

Total value
of exports

1996-97

400,000

81,700,000

-

82,100,000

1997-98

100,000

35,600,000

-

35,700,000

1998-99

-

47,400,000

-

47,400,000

1999-00

100,000

81,900,000

-

82,000,000

Source: SBP Annual Report 1999-2000. Table 8.4 P.98-1000

Table 'C' indicates that the Mineral sectoral export value of US $ 82 million represents around 3% of the import bill of mineral and fuel which costed $ 2,873.1 million to government exchequer for the year 1999-2000.

Though Pakistan is basically an agrarian country, God has gifted this country with economically exploitable mineral reserve, which is evident from table 'D'. There are four major companies operating in mineral development sector of Pakistan. They are Pakistan Mineral Development Corporation (PMDC), Saindak Metals Ltd (SML), Geological Survey of Pakistan (GSP), and Lakhra Coal Development Company (LCDC). In addition there are a number of foreign companies involved in mineral exploration who can successfully help in exploitation of the resources and employment opportunities to the population in their designated areas if iron clad guarantees for their securities are provided by provincial governments. In this connection various incentives such as preference of employment opportunities to local population of the area, development of socio-economic infrastructure and poverty alleviation programmes in the prospective exploration blocks may greatly help in exploiting the mineral resources.

In order to fill the gap between resources and investment, a National Mineral Development Policy was announced by Government of Pakistan in the year 1995 with aims of attracting foreign investments. A number of multinational companies are engaged in examining prospects of exploration and development of precious and base metals in Pakistan. The foreign direct investment (FDI) is provided in Table 'E'. According to the Economic Survey Mining and Quarrying sector is the second largest recipient of FDI inflow after power generation sector.

Table D: Extraction of Principal Minerals

Mineral

Unit

1997-98

1998-99

Coal

Million Tonnes

3.1

3.3

Natural Gas

000 m. cu. mtr

19.8

20.9

Crude Oil

Mln. Barrels

20.5

20.0

Marble

000 tonnes

345.0

403.0

Chromite

000 tonnes

35.0

16.0

Dolomite

000 tonnes

116.1

198.8

Gypsum

000 tonnes

307.0

242.0

Limestone

000 tonnes

11.2

9.5

Magnesite

000 tonnes

3.4

3.5

Rock Salt

000 tonnes

971.0

1190.0

Sulphur

Million tonnes

2.2

18.9

Baryte

000 Tonnes

30.0

18.0

Source: Economic Survey 1999-2000 Table 3.9 P. 42

 


 

Table E: FDI Inflow in Mining and Quarrying (US $ Million)

Year

FDI

%Share in Total FDI

1996-97

37.7

5.5

1997-98

99.1

16.5

1998-99

69.2

18.4

1999-2000

59.8

15.2

(July-April)

   
Source: Economic Survey 1999-2000 Table 3.10, P. 42

Statutory Requirements: Section 230 sub-section (1) clause (e) of the Companies Ordinance, 1984 makes it mandatory to maintain books of accounts for a company engaged in production, processing, manufacturing of mining activities, such particulars relating to utilization of material or labour or to other inputs or items of cost as may be prescribed, if such class of companies is required by the Authority (SECP) by a general or special order to include such particulars in the books of account. The Federal Government may direct that an audit of cost accounts as defined in the aforesaid provision shall be conducted under Section 258 of the Companies Ordinance in such manner and with such stipulation as may be specified in the order.

Bangladesh Cost Audit (Reports) Rules, 1997 section 3 makes it mandatory for a company engaged in production, distribution, transportation, processing crop grinding, preparation, powdering, mining and lifting of minerals to maintain cost accounts book for using materials, instruments, labour and other overhead expenditure. Section 6 of SRO 265 Law/97 of Bangladesh specifically defines that no body can be appointed as a cost auditor if one is not a Cost and Management Accountant as defined in their notification. It is conditional that no Cost and Management Accountant can be appointed if he did not obtain certificate of practice from the Institute of Cost and Management Accountants of Bangladesh as per the Government notification. Cost Accounting Account books of each and every company (including mining) shall have to be audited by a cost auditor and this audit will be additional to an audit by a statutory financial auditor appointed under Section 210 of Bangladesh Companies Ordinance. Similar provisions of statutory law for maintaining books of account and controlling of cost have been prescribed by the Companies Act, 1956 of India. Statutory Cost Audit definitely serves as a vital measure not only for controlling the cost but also for implementing cost containment policies in hyperiflationary trends.

Coal as a fuel for Cement Industries: According to an estimate the cement industry alone consumes US $ 240 million worth of furnace oil per year, which is equivalent to 35 million tonnes of coal. Using the above ratio 419 million tonnes of coal per year will constitute a saving of entire annual foreign exchange of US $ 2.9 billion required for the import of fuel and related products.

Other things remaining unchanged, the current estimated reserve of 218 billion tonnes of coal at the annual production rate of 419 million tonnes if exploited efficiently would effectively last for about 500 years. Discounting for the effect of exhaustion of the oil and gas reserves in the year 2011 and 2026 respectively, the said coal reserve would still last for over 400 years.

It is encouraging to learn that FECTO Cement Limited has decided to convert its plant from furnace oil to coal fired to save the fuel cost. The production capacity of FECTO is 2000 tons per day. Its annual rated capacity is 630,000 tonnes. Expected time for converting the plant from gas to coal firing is about 9 months. Annual estimated requirement of coal consumption is 75,000 tonnes for this plant.

Production Cost of Cement: Energy constitutes more than 50% cost of production of cement. Until fifties cement industry was using coal as fuel for clinkering of raw material. After discovery of natural gas, all cement plants were converted into gas. In early eighties, the then Government decided to preserve gas for fertilizer and domestic consumption. All the cement plants were advised to switch over to furnace oil. Quite a good number of plants have been operating on furnace oil except for 2/3 plants which succeed in getting gas for few months in a year. Gas allowed to few plants in the recent past is being strongly contested by other plants.

Furnace Oil Price: Price of furnace oil has witnessed unprecedented rise during last few years. As against average increase of 4% per annum during early nineties, price of furnace oil has moved up by average 55% per annum during last five years. Cost of production increased by Rs. 755 from Rs. 361 per ton to 1,116 per ton due to increase in the price of furnace oil during last five years. Very recently (February - March 2001) price of furnace oil per ton have been increased, which are given below:

Oil companies

Previous price

Current price

Price increase

% increase

Caltex Oil

9,887

10,609

722

7.3

Pakistan State Oil

9,885

10,517

632

6.4

Shell Pakistan

9,846

10,609

763

7.7

Coal Firing System: The increased level of furnace oil prices strongly suggests that Pakistani cement industry should switch over to coal firing system. Almost 90% cement plants world over use coal for clinkering. Pollution is no more a problem due to advance technologies arresting gas emissions. Cost of coal firing is estimated to be 2/3rd of the cost of furnace oil, if imported coal and local coal is used in the ratio of 50%. However, if huge coal deposits in Thar and Sondha which have lower sulfur content are developed, saving in Fuel cost will be more than 50%. The Government will also be saving foreign exchange if the industry switches over to coal. To encourage switch over to coal firing system, the Government may consider arranging financing on soft terms from DFIs to meet the capital outlay for installing coal firing equipments because with extremely poor liquidity position, most of the cement companies will to be able to meet capital cost for installing coal firing system. The capital cost of coal conversion for each plant is estimated to be between Rs. 200 million to Rs. 300 million, depending on the size and make of the plant.

Electricity Charges: Electricity charges have also been subjected to frequent upward revision by WAPDA/KESC. It will be noted that increase in electricity changes has been much higher during the last five years.

According to expert opinion, the "technology for the switch over from furnace oil to coal is more than simple". The technology for use of coal in power plants instead of oil and gas is no longer a wishful thinking but a reality and a simple reality for that matter. Wisconsin Energy Corporation (WEC), a USA power producer is now building coal burning power plants. The Company plans to augment additional 2,800 megawatts Power Capacity Plants in Wisconsin (USA) despite environmentalists objections over the fuel's release of green house gases. A number of 1000 homes as average may be fed with one megawatt of electricity power. It is rue that coal releases far more carbon dioxide than any other fossil fuels but it is the one, which energized the industrial revolution in Europe.

Per capital consumption of coal power in USA is 11,161 KWH, which is the highest among 18 countries. Out of this Pakistan stands at number 15 where Per Capita Power Consumption of Coal is 414 KWH. A number of 12 major countries in the world, power plants use coal for generation of electricity. Our country is not on the list of coal fired power plants. According to confirmed sources a 26 per cent electricity generated in Asia for the year 1980 which had jumped to 45 per cent in 1998 and would further expected to rise to 60 per cent after 20 years. Proven coal deposits in Sindh are given below which are suitable for power generation.

Region

Qty Est. billion tons

% of deposit

Thar

200.000

91.8

Badin

9.000

4.1

Dadu - Sonda

7.300

3.3

Lakhra

1.440

0.7

Thatta/Jhimpir

0.161

0.1

Total

217.901

100.0

It should also be noted that Pakistan is blessed with enough manpower expertise in the field, identification and utilization of which would not be a big deal. It is encouraging to note that the present regime has apparently taken up the matter seriously. The Sindh Coal Authority Board (SCAB) under the leadership of the Sindh Minister of Industries has drawn up some strategy for exploitation of Thar coal reserves, which alone is considered to be the biggest (91.8%) known reserve in Pakistan.

Development of Thar Coal mines would make a favourable turn for Pakistan creating employment opportunities for one of the most backward and poverty stricken region of the country. Reason being is that the coal industry is a labour dominated industry and by extraction of coal for use in Cement industries and Power Plants will be helpful in creating job opportunities, which will be a step forward for reduction of poverty in the remote areas of the country.

It has been revealed by Sindh Coal Authority that Thar Coal reserves are suitable for foundries as well. Coke for the blast furnace of steel plants is produced fro the coal through a process at such plants named as "Coke-oven batteries". Coke is used as heating agent and its calorific value is much higher than the coal. The coal reserves are of lignite quality and has heating value of more than 6,000 British thermal unit per lb. on moist mineral matter free basis.

We hope that SCAB will take up the matter very seriously and make all out rigorous efforts to utilize the available resource and exploit all the avenues to ensure that the project takes off with the deserved pace and dedication for it impacts seriously upon the future economic development and welfare of the nation.

Conclusion: Freedom from increasing debt burden, dependence upon IMF and the World Bank, increasing foreign exchange requirement of the country, continuous decline in poverty level etc. depends mainly upon how best, efficiently and skilfully we manage our available resources with protracted dedication, wisdom and foresight with the degree of required priority.

The former writer is Director Research at Institute of Cost and Management Accountants of Pakistan (ICMAP) while the later is Ex Head of Group Financial and Accounting operations with Zambia Consolidated Copper Mines Limited, Zambia whose share in the country's economy is around 85 per cent of GDP.