The pressure which was mounting in August on the
world economies including Pakistan due to abnormal surge in oil prices
has started subsiding as the oil prices are returning to normalcy, yet
the unpredictable oil situation demands a precautionary approach as
the saying goes "forewarned is the forearmed" to face such
eventualities in future.
Pakistan had to pay approximately $3 billion on
account of import of oil and according to an estimate the cost of oil
is going to be around $4 billion at the end of the current financial
year 2004-05. If this estimate was true it portends expenditure, which
is obviously beyond our means.
Currently, the bulk of oil is used by two major
sectors i.e. power generating especially by the Independent Power
Plants which are producing a cumulative 5500 MW and the other sector
is the transportation besides some large scale manufacturing
In this backdrop, the situation calls for immediate
development of sustainable alternative energy resources to get rid of
the unbearable cost of oil imports. Nature is kind enough to have
bestowed Pakistan with plenty of alternative energy resources such as
huge reserves of natural gas, coal, strong wind in some parts of Sindh
and Balochistan, hilly terrains with gushing currents of water already
helping to generate more than 50 percent of the total electricity,
nuclear capability for power generating, and now things are moving to
use the sugar industry of producing industrial alcohol to use as
alternative fuel for transportation sector.
Despite having a strong energy base especially in
the field of natural gas, yet the growing consumption of gas in the
industrial sectors like Fertilizer Industry, Power Generation and
Transportation, the existing supplies may not be sufficient if the
source of supplies was not reinforced either within the country or by
importing gas the country would be facing serious shortfall in gas
supplies in the years to come.
The Minister for Petroleum and Natural Resources,
Ch. Nouraiz Shakoor has, however, said the government would finalize
at least one natural gas import pipeline project by end of this year
to cater the future demand.
CONCERN OVER FUEL PRICING
It was indeed giant step of the present government
to deregulate petroleum prices in Pakistan. Announcement to this
effect was made during the address to the nation on December 15, 1999.
The intention was good but what went on surfaced by advent of Pakistan
Oil and Gas Sector Review October 2003, by World Bank three year
later. The review concluded, "The price fixation by Oil Companies
Advisory Council (OCAC) is not transparent and in most of the
countries the practice adopted of beneficiary setting the prices would
have been termed illegal".
The World Bank by mentioning this cannot be termed,
as not a player to this affair will be wrong. Firstly, it always
furthered the idea of deregulation in every report, further as they
could not have missed this massive graft with the kind of monitoring
they enjoyed in financial affairs of Pakistan during these years. The
good intentions of the government were cleverly maneuvered by powerful
lobby having vested interests and on very onset to share the plunder
of people of Pakistan.
Instead of forming/structuring an independent
regulatory authority as approved, they upgraded one of data processing
organization OCAC to regulatory authority having a right to fix the
prices for 15 days. They kept on sending feelers around through media
that they are fixing the prices adhering to mechanism evolved by
government. Now OCAC had members from four refineries four Oil
Marketing Companies (OMCs) two pipeline companies, over whelming
majority of its members did not qualify being beneficiaries as per
international law/standards or business ethics. After this move one of
multinational companies started to replace MDs of public sector with
its own employees. For instance a manager level person replaced MD NRL
and the other replaced as MD of OMC, a permanent employee took over
Secretary General OCAC. Present Secretary General OCAC is a full time
employee of Shell who has been appointed irregularly without proper
He is reportedly the son of a former PSO MD. B Com
qualification was considered enough to appoint him as DMD NRL after
creating a position without necessary approvals in pubic sector.
In a matter of six months OCAC was ready to plunder
the people of Pakistan to the tune of Rs 30 billion per year, to date
this exercise continues. The trumpet of transparency alone cannot be
justified the mechanism is flawed especially the body authorized to
set prices is not fit to do so as most of the members gain from higher
prices. Following are the basic flaws and deviations from guidelines
issued, these were very glaring and Ministry of Petroleum could have
easily identified and rectified but they choose not for good three
*In early 2001 one can initially find tenders
floated for the import of finished products later this activity
vanished as Shell awarded its entire diesel and furnace oil tenders in
favor of Shell International. This paved way for transfer of jacked up
element out of the country. Pakistan consumes 180 Cst furnace oil
which as per Platts (reference journal to set up prices) is not a
premium product altogether. The price C&F set by OMCs for furnace
oil in June 2001 was Rs 13600 per ton. FOB AG the main cost element
during this period was US $ 125 per ton. At present FOB AG for the
same is US $ 185 per ton still the price is Rs 13800 per ton, with $/Rs
parity at same level the jack up was of US $ 60 per ton. Pakistan
demand is 7 million tons a year therefore the annual jack up in 2001
was to the tune of US $ 420 million. These figures can be verified
from Pakistan Energy Year Book published by Government of Pakistan.
*Pakistan product price mechanism is based on
import parity i.e. FOB AG plus the incidentals incurred to effect it.
Platts Oil gram started publishing 95 RON Gasoline FOB price from
January, 2002 but OCAC continued to adopt old formula Naphtha price
plus US $ 60 which resulted in US $ 50 per ton compared to direct
method of assessing import parity on basis of published 95 RON price
with RON adjustment to 90 RON gasoline. Pakistan consumes 450,000 tons
of gasoline and one can easily estimate the quantum of jack up.
Platts started to publish premiums of AG way back
in June 2001 and till June 2003 no product in Pakistan was considered
as premium product but continuously OCAC cooked up a premium figure
ranging from US $ 1.67 per barrel to US $ 2.6 per barrel. Conversion
factors for HSD (Gas oil) and gasoline are 7.5 and 8.5 per ton
therefore level of jack up can be quantified whereas to build import
parity only freight should have been of suffice. The freight remained
in vicinity of 6 US $ per ton during this period. OCAC issued two
premiums one for black products and one for white products and gave no
basis of its estimation. As Platts given figures were certainly not
adhered to then most probably the figures in tenders in favor of their
mother companies were used to arrive at the premium figures. In turn
the award of tenders was not transparent and void of any competitive
bidding this all exercise levied an un-necessary extra artificial lift
*Pakistan started to import 0.5% Sulfur HSD (Gas
oil) from June, 2003 this product is a premium product but as per
Platts the premiums ranged from 0.8-1.3 US $ per barrel. In Pakistan
none of refineries produce 0.5% Sulfur HSD but all through this period
continued to extract premiums of product they were incapable of
*The plunder it seems was not enough for this lobby
due to connections was successful in imposing 6% regulatory duty on
other products and 11% on HSD in June 2002. The duties benefited
Pakistan on 50% HSD quantity, which truly was imported. By definition
refineries were benefited to the tune of Rs 47 billion (WB report), as
duties were included in price setting mechanism. As the products such
as JP-1, kerosene, gasoline etc. That were not imported the imposition
of duties yielded not a single rupee benefit to Pakistan but extracted
billions from the masses.
*The practice of dumping kerosene into HSD which
was under law a punishable offence was legitimized this gave added
advantage of Rs 2-2.5 per liter of kerosene dumped and lots of smoke
for the public to inhale. All these artificial lifts boosted the EPS
say of NRL from Rs 4 in 1998 to Rs 23 in 2003-04 despite the fact
commercial auditor reported Rs 2.5 billion crude un-accounted for.
*Oil Marketing Companies (OMCs) prior to October
1999 were getting fixed margins ranging from Rs 0.22-0.55 per liter
initially. Initially they pegged it to 2% of CIF then increased it to
3% but that on retail price. This increased their margins by up to
300%. For example the margin on gasoline, which stood at Rs 0.52, has
after the changes increased to Rs 1.89 per liter. These can be
examined in Pakistan Energy Year Book published by Ministry of
DUTY ON EXPLORATION EQUIPMENT
Pakistan has recently imposed a 5 percent import
duty on equipment used in exploration and production of hydrocarbons
in the country. Earlier there was a zero rated duty at the time of
exploration and 3 percent duty on equipment used in the production
With the recent decision of levying a 5 percent
across-the-board duty on equipment used in exploration and production,
the local oil exploring companies may pass on the cost to the market.
It is said that the new duty structure will be effective with
immediate effect has been adopted with the consent of industry
players. "The change is in line with the government policy of
having one tariff rate," said Abdullah Yusuf, chairman Pakistan's
Central Board of Revenue.
The industry executives, however, feel that oil and
gas exploration companies working in the country by import majority of
their equipment from abroad. This new duty structure, according to an
estimate can increase exploration cost by 10 percent to 15 percent.
Despite the fact that oil and gas sector was still
dominated by the two public sector entities i.e. Pakistan Oil &
Gas Development Co. (OGDC) and Pakistan Petroleum Ltd (PPL), yet the
attractive incentives offered under the energy policy has made this
sector the most vibrant segment of the economy which attracted the
largest chunk of the foreign investment in Pakistan. Since it is the
human psyche to dislike taxation in any form, the foreign investors
are raising eyebrows on the increase.
The deadline for submission of proposals for 450 MW
Lakhra Coal Mine and Power Generation Project, earlier advertised by
PPIB, has now been extended to 31st October 2004.
The Security Documents comprising of the
Implementation Agreement, Power Purchase Agreement and the Water Use
Agreement, for 79 MW New Bong Escape Hydropower Project, the first
hydropower project being developed in the private sector in AJK,
signed on April 16, 2004.
PPIB has issued Letter of Interest (LOI) to AMZO
Corporation of USA on 11th May 2004 for building 740 MW MUNDA DAM
MULTIPURPOSE PROJECT in NWFP. PPIB has issued Letter of Interest (LOI)
for 97 MW Kotli Hydropower Project.
PPIB has issued Letters of Interest (LOIs) to five
thermal projects with cumulative capacity of 973 MW.
Currently, the government is working on three major
projects to meet the increasing demand of gas in future. These include
Turkmenistan-Afghanistan-Pakistan pipeline, Qatar-Pakistan and
Iran-Pakistan-India gas pipeline project.
According to Nouraiz Shakoor Minister for
Petroleum, the government would decide in December this year that
which pipeline is suitable and the priority chart would be presented
in the Federal Cabinet for approval. About the progress on Pakistan,
Turkmenistan and Afghanistan (TAP) gas pipeline project, he informed
that next meeting of Ministerial Steering Committee of the $ 3.2
billion project is likely to be held in a few weeks. The proposed 1460
km pipeline would bring gas to Pakistan via Afghanistan from the
Dauletabad gas fields in Turkmenistan — the fifth largest in the
The Asian Development Bank (ADB) has funded the
feasibility study of the project, which was completed in June last
year by Brown and Roots consultants. The engineering work and
feasibility study of $ 3 billion Pakistan-Qatar gas pipelines has
already been completed with the cost of $ 30 million. A Memorandum of
Understanding (MoU) with the government of Pakistan has been signed
for import of up to 1.6 billion cubic feet of gas per day from Qatar
starting from year 2010. Initially, the project is to supply 1.6
billion cubic feet of gas per day and is ultimately raised up to 3.5
billion cubic feet per day.
The capital cost of the project is estimated to US
$ 1.8 billion. As per discussion going on with the sponsors, Pakistan
would not require to make any investment at the initial stage.
However, it has to ensure provision of infrastructure for distribution
of gas and sustainable demand for gas consumption.
The third proposed project under discussion is a
pipeline that would extend from Iran to Pakistan and could go onto
The Ethanol (alcohol) is yet another substitution
of petroleum in the form of gasohol which has gained universal
recognition. Authorities in Pakistan are also considering putting this
technology in vogue, which might also address the problem of the
surplus production by the sugar industry in Sindh.
The federal government, in order to save foreign
exchange on import of oil and to reduce its import bill under this
head, is exploring possibility of the use of ethanol as fuel in
Pakistan as an alternative to gasoline in automobiles.
Currently, the proposal was being considered and
reviewed by the concerned ministries and departments to recommend
their views on the proposal, it is being contemplated that study may
be commissioned in this regard with funding from some donor agencies.
The Industries and Production Ministries have
supported the idea of using ethanol as a fuel in automotive sector and
can replace higher-octane base component (HOBC) in motor spirit for
producing premier gasoline.
According to a report, the industries ministry has
said that gasohol can be used in ordinary automobiles without any
modifications in the engine. It can improve the car performance
through engine starting combustion and emission quality and no change
in mileage efficiency will occur, apart from the fact that it would
help save foreign exchange on import of oil.
"Given that a major constraint on the use of
ethanol as an alternative fuel, and as an oxygenate, is its high
price, ethanol has not been competitive with gasoline as a fuel,"
the official said and added: "However, present increase in
gasoline prices has made ethanol more attractive and apart from
economy, one of the main motivations for ethanol use is improved air
The source said that experts have said that use of
ethanol has advantages like it is renewable, it provides cleaner
environment, cleaner burning engines, lower net carbon dioxide
emissions, and ultimately less depend lance on imported light crude
"India is initiating the use of ethanol as an
automotive fuel, and a move has been made by distilleries in India to
use surplus alcohol as a blending agent or an oxygenate in gasoline
and based on experiments by the Indian Institute of Petroleum, a 10
percent ethanol blend with gasoline and a 15 percent ethanol blend
with diesel are being considered for use in vehicles in at least one
state," the source said.
The ministry of petroleum had said that absolute
alcohol (ethanol) can be used as an octane booster and fuel extender
with gasoline, called gasohol, and it is sold as a standard product in
many developed countries containing 10 percent and 15 percent mixture
of ethanol in gasoline. The petroleum ministry in its report said
Brazil is one of the leading countries using pure ethanol as motor
fuel. Modern fermentation technologies are reducing the unit cost of
The petroleum ministry, however, looks a little bit
disturb over the idea of using ethanol as a fuel alternative.
According to informed sources the ministry has come out with the views
that the economics of the ethanol production however would depend on
local socio-economic conditions and crop patterns. It must be realized
that sugar cane is a water intensive crop and production of ethanol
from molasses is an energy intensive process.
Pakistan has a strong industrial base for sugar
industry. At present some 71-sugar mills are operative but running
half of the capacity, said industry sources. Despite operating at 50
percent capacity the sugar industry produced about 2 million tonnes of
molasses during 2002-2003, out of which 1.27 million tonnes has been
The use of ethanol as a transport fuel could be a
viable option provided sugar industry conducts necessary feasibility
study and advice ministry of petroleum at what price absolute alcohol
would be available on per liter basis. Molasses and ethanol can also
find their market as cattle feed, feedstock for ethylene, solvent,
vinegar, acetic acid, ethyl acetate and other chemicals.
At present motor gasoline (petrol) production is
sufficient to cater to the requirement of the country. With the
introduction of ethanol-blended petrol, more motor gasoline will be
surplus, resulting either production from refineries would have to be
reduced thereby impacting availability of other products in the
country or surplus motor gasoline has to be exported. The government
is also promoting CNG as an alternate fuel as replacement of gasoline
and policy is under consideration for diesel replacement as well.
Ethanol (ethyl alcohol, grain alcohol) is a
colorless liquid with an agreeable smell. In purer forms, it can also
be used as alternative to gasoline in automobiles designed for its
use. Production of Ethanol goes back in the past history through a
process of fermentation of the sugar.
All beverages are ethanol based and more than half
of industrial ethanol is still made by this process. "Simple
sugars are the raw material. Starches from potatoes, corn, wheat and
other plants can also be used in the production of ethanol by
fermentation, however, the starches must first be broken down into
Fuel ethanol (or gasohol) is a high octane,
water-free alcohol produced from the fermentation of sugar or
converted starch. It is traditionally used as a blending ingredient at
5 percent to 10 percent concentrations (termed E5 or E10,
respectively) in gasoline or as a raw material to produce high-octane
fuel ether additives. Ethanol is made primarily from grains or other
renewable agricultural and agro forestry feed stocks.
CONSOLIDATION OF ALTERNATIVE RESOURCES
In view of the unpredictable oil situation
especially in the backdrop of increasing oil demand in the United
States, China and India besides volatile political conditions in Iraq
and Afghanistan, it is the high time for concrete steps for
consolidation of alternative energy resource available within the
country. Shaukat Aziz, newly elected Prime Minister of Pakistan is
taking keen interest in economic uplift of Thar through exploiting the
mineral resources especially coal for power generation. Chinese
companies have already been granted license to develop coal-based
power generating plants. It is hoped that Thar would become a major
contributor towards alternative energy resources in Pakistan.