ENERGY SECTOR: ISSUES & CONCERNS
Energy calls for accelerated, accurate and skillful handling
By AMANULLAH BASHAR
Mar 31 - Apr 06, 2003
Overwhelming majority of the world population, opposing the US-led war in Iraq, holds a strong opinion that it's a war for oil, which obviously does not beg for a question. The world opinion against war naturally is to avoid the ugly aftermath as war never leaves where it found a nation. It is not a one-way traffic as war is as much a punishment to the punisher as to the sufferer. As far as the suffering was concerned, it may have widespread fall out both politically as well as economically.
A sharp rise in international oil prices would however be a logical conclusion of war, if it prolongs and the oil wells were destroyed. This is certainly a serious concern perturbing the minds of the people not only in the developing but the developed economies also.
The government in Pakistan has taken precautionary measures by arranging stocks for 30 days, to ensure oil supplies without any disruption. Oil supplies from alternative sources could also be managed even after expiry of 30 days; however, the economy would inevitably suffer due to increase in international oil prices. The ministry of petroleum is likely to give a comprehensive presentation to Prime Minister Zafarullah Khan Jamali on petroleum products' strategic reserve position shortly, besides gas availability to industrial and domestic sectors in the wake of US war on Iraq. The presentation is believed to cover exploration activities in petroleum sector, local oil and gas production, marketing and supplies to the consumers, conversion of transport from petrol to CNG, LPG availability and impact of Middle East war on supply of oil to Pakistan. Pak-Afghan-Turkmenistan gas pipeline project will also come under discussion and its viability, availability of gas to industrial sector in general and to power generating sector in particular enabling the power sector to reduce its dependence on imported furnace oil. Petroleum's role as the catalyst for industrialization and growth of the economy universally recognized.
It is interesting to note that during past few years the petroleum sector has witnessed unprecedented fluctuations in crude oil prices dropping to less than $10 a barrel in 1998 and increasing over $32 barrels recently resulting in severe economic impact on a wide scale. Even though impact of increase in price of crude oil on the economy of the industrialized counties has been much publicized, however, for the less developed countries it has been catastrophic leading to severe economic downturn. It has very adverse effect on Pakistan as Pakistan's energy requirements are dependent upon oil and gas as primary energy sources. Although the share of the imported oil has been reduced significantly as a result of government's efforts to shift various energy consuming sectors from oil to natural gas and coal fired system, yet the limited production of natural gas is not allowing the country to fully quit from imported oil.
The Karachi Electric Supply Corporation (KESC) could be the best example of short supply of gas. According to Brig. Tariq Sadduzai, KESC engineers have converted all the six Bin Qasim units on natural gas system having capacity to produce 1260 MW, yet the corporation is unable to run them on gas due to short supply of natural gas. Contrary to the promised supply of 176 MMCFD from January this year, the SSGC is hardly supplying 80 MMCFD, had they supplied the promised quantity of gas, the corporation could easily save at least Rs25 million a day on account of fuel consumption. The exorbitant rise in oil prices is reflected in the fact that prices of fuel oil were Rs2,700 per ton in 1996 which have jumped to the tune of Rs14,295 per ton today. The SSGC has promised to meet its commitment for gas supply by June this year. One of the major reasons behind delayed gas supply is the planned 8 km gas pipeline from SSGC transmission terminal to Bin Qasim. Laying this promised pipeline on priority basis is the need of the hour to cut down generation cost as well as to ensure un-interrupted power supply to Karachi.
The impact of Iraq war is feared to offset the advantages earlier estimated on account of improved domestic energy resources and reduction in import of oil. Earlier, the petroleum sector had witnessed significant changes during the last few years. Despite a marked increase in the availability of petroleum and petroleum products in 2001 and 2002, consumption of oil was actually declined due to sluggish economic growth two years back. Provisional estimates for 2002 show that the consumption of petroleum products fell marginally to 17.1 million tons, compared to 17.6 million tons in 2001. In a remarkable development, since 2001, almost half of the country's demand for petroleum products is now met through local production: this is a sharp improvement from 2000 when local production of petroleum products was able to meet only 34 per cent of the country's demand. The increased domestic production of petroleum products reflects the commissioning of the 4.5 million tons Pak-Arab Refinery in September 2000.
As refining capacity increased, imports of petroleum products declined 8.9 per cent to 9.2 million tons during 2002, generating gross savings of $424 million. Low domestic demand and increased domestic production allowed exports to rise by 194.2 thousand tons, to approximately 600 million tons, in fact, the 2002 exports increase is more than total exports of petroleum products two years ago. These gains are expected to further consolidate with the commissioning of Bosicor Pakistan Refinery scheduled sometimes during the current year and much awaited Pak-Iran Refinery by 2005 with refining capacities of 1.4 and 6 million tons per year respectively.
Petroleum's role as the catalyst for industrialization and growth of the economy universally recognized. During the past few years, the petroleum sector has witnessed unprecedented fluctuations in crude oil prices sometimes dropping to less than $10 a barrel in 1998 and increasing over $32 barrel recently resulting in severe economic impact on a wide scale. The increase in cost of oil import is feared to add $1 billion to the earlier estimates of $3 billion import bill due to increase in oil prices on account of Iraq war. There has been much hue and cry over increase in price of crude oil by the industrialized countries, however, for the less developed countries it has been catastrophic leading to severe economic downturn. It has very adverse effect on Pakistan as Pakistan's energy requirements are dependent upon oil and gas as primary energy source.
Historically speaking, Pakistan has two large sedimentary basins, namely Indus and Balochistan, providing a sedimentary area of some 827,000 sq. km onshore and offshore. The first commercial oil discovery at Khaur in 1915, gave Potwar the significance of being classified as the first oil bearing province in the region. A world class good quality first gas discovery was made at Sui, Balochistan in 1952, with reserve of 8.7 trillion cubic feet of natural gas. Since this gas field has been the main source of supply for the entire gas distribution net work in the country, the major part of this gas fields has been consumed over the years, however, other major discoveries in Indus have been estimated to ensure supply for next 25 years. The discovery of oil in the Goru Formation of Cretaceous age at Khaskheli (Sindh) in 1981 was another milestone in the history of petroleum exploration, opening the second oil-bearing province in the country.
According to a survey, Pakistan's total sedimentary basinal area of 827,268 sq. km contains the potential ultimate recovery of 27 billion barrels of oil and 282 trillion cubic feet of natural gas, suggesting a split of 30 per cent oil and 70 per cent gas in the central and southern Indus, Balochistan and offshore areas. These are prognostic estimated basic on various assumptions. However, in view of vast sedimentary area, so far low exploration and drilling activity and large under explored and frontier regions good chances of finding significant oil and gas reserves do exist. The proven gas reserves of Pakistan area of great significance being very valuable asset. Optimum utilization of natural gas resources can provide ready substitution for oil and reduce the burden on oil imports as well as saving of foreign exchange. Natural gas is bound to be the fastest growing primary energy source in the world over in general and Pakistan in particular at least for the next two decades.
Besides being cost effective, the environmental advantages and reasonable reserve base are strong driving force for its growth in Pakistan. Pakistan's remaining gas reserves of over 25 trillion cubic feet will be sufficient to sustain the 7 per cent, 10 per cent and 12 per cent annual increase in gas consumption till 2011, 2013 and 2016. Apparently the situation seems to be satisfactory but in reality it is of great concern requiring intensive planning for increased exploration to discover additional reserves as the development of new discoveries can easily take 3-5 years.
Gas discoveries and the preference of use of gas over oil, for environment reasons, is bringing in opportunities in the countries which either did not have the gas resources or where the gas usage was in its initial stages. Global gas reserves have more than doubled over the past 20 years outpacing the 62 percent growth in oil reserves over the same period. Reserves have grown rapidly in former Soviet Union and in developing countries in the Middle East, South and Central America and the Asia-Pacific region. Our area of interest should be Middle East, UAE, Saudi Arabia, Africa and Central Asian States. Generally, the developed countries of the world, which have the mature gas industries, do not like to go into the downstream side of the industry as the investment levels are not sufficient.
Besides, the cost of experts from Europe and USA is getting prohibitively expensive, with the strength of international currencies, as compared to the currencies of developing countries, and due to the differential in their living standards. Pakistan having a large network of gas distribution and availability of a massive skilled man power in downstream gas industry can available the opportunity of exporting the man power in the countries which have launched plans for expansion of the downstream natural gas industries.
Saudi Arabia has already working on a $5 billion expansion project of the natural gas sector.
Since the introduction of the Power Policy of 1994, the electricity sector has undergone substantial structural changes. The Policy envisaged the participation of private sector in power generation through new projects as well as privatization of state-owned units. The policy succeeded in drawing substantial foreign investment in new power generation projects, largely addressing the power shortages in the country. As new power generation units were set up in both the public as well as private sector, the installed capacity of electricity generation increased from 13.0 Giga Watt in 1996 to 17.4 GW in 2000 and subsequently to 18 GW in 2002. The increase in the installed capacity of the country during the last two years was brought about by the addition of Chashma Nuclear Power Plant 325 Mega Watt, Chashma Hydropower Project 184 Mega Watt and Liberty power 235 Mega Watt. Besides, the addition in hydel and nuclear capacity, China has also joint hands in the coal-fired power generation under which two coal fired units of 350 Mega Watt each are also planned at Lakhra and Thar coal fields.
The addition of hydel, nuclear, coal and conversion on natural gas would bring some financial relief to the power producing companies as well as the consumers who are suffering unbearable cost of electricity mainly due to manifold increases in oil prices and of course due to cultural of power theft all over the country. As far as the power supply was concerned to the largest industrial city of Karachi called the hub of economic activity in Pakistan, the supply side is highly vulnerable.
The peak demand in KESC licensed area is estimated to be 2000 Mega Watt during this summer as compared to 1800 Mega Watt last summer. As against the installed capacity of 1756 KESC the firm capacity is claimed around 1430 Mega Watt which seems doubtful in view of the outlived power stations mostly established more than 30 years ago. Korangi Thermal Power station was established in 1965, with two units of 66 MW each. One unit of 125 MW was added in 1970. The fourth unit of 125 MW was added in 1977. Other small gas turbine stations were set up at SITE industrial area and Korangi in 1978 and 1979. Although the KESC engineers are maintaining these outlived units running almost half of the capacity but they need to be replaced as early as possible to avert heavy cost of generation and interrupted power supplies.
In order to meet the demand of the city, the corporation has no option but to live on borrowed power. KESC has to purchase power from private sector power producers as well as from WAPDA to bridge the shortfall. Under this arrangement KESC has to purchase 120 MW from Tapal Energy, 126 from Gul Ahmed Energy, 70 from KANUUP, 10 from Pakistan Steel and 100-500 Megawatt from WAPDA. This is highly vulnerable arrangement especially the bulk supply from WAPDA is not certain because WAPDA has the priority to serve its own customers than supply to the KESC. It is because of the uncertain supplies that a large size of industrial consumers opted for self-generation and is producing over 400 Mega Watt to be self-sufficient in power supply. Demand for another 500 MW especially from the industrial sector is pending for quite some times. On one side, the demand for electricity is growing at 4 per cent per annum in Karachi, while on the other side there is a cap on establishment of new plants for power generation in KESC.
The demand and supply gap calls for immediate step to avoid chaos in near future on account of overloading, load shedding and tripping of the system. The viable option to address the issue is to expedite the proposed KESC-HUBCO direct linked which would place over 1200 Mega Watt of power at the disposal of the KESC. This project of which PC-1 has already been approved lying pending over a period of time for want of interest as well as funds for installation of grid-station and the transmission line from HUBCO into KESC system.
Independent Power Plants (IPPs) since commencing operations in 1997, the share of IPPs in total thermal electricity generation has raised from nil in 1996 to 50 per cent in 2001. This rapid growth of share of IPPs in thermal generation has, however, getting on the decline because of priorities of the government for cheaper source of power generation such as hydel, coal or nuclear.
The privatization of various state-owned entities in the energy sector is on the card. Some of the organization like Pakistan State Oil (PSO) Pakistan Petroleum Limited (PPL) are called as the gold mines and have attracted the interest of the investors at a massive scale. The change of hands in these organizations may take place in the days to come. However, as far as the power generating sector was concerned, it has become a hard nut to crack. The financial liabilities mainly on account of line losses, eroded distribution, transmission systems created a negative impression about profitability of the utility company, hence keeping the buyers away from these organizations. Though the privatization commission took all initiatives to get rid off the KESC yet all efforts proved in vain and it seems that the government has put off the idea of privatization of the KESC for the time being.
Another way out reducing the public sector stake in the KESC, there are two options for the authorities. One is to divide the huge organization into three or four companies as done in case of WAPDA or to place its shares through the capital market. Let us see which way the wind blows, the fact, however, remains that KESC as a particular case is entangled with a difficult situation due to financial constraints and lack of coordination within various public sector bulk consumers. It is interesting to note that the Karachi Water and Sewerage Board (KWSB), a bulk consumer of electricity pays only half of its electricity bills every month. According to Managing Director KESC the monthly bills of KWSB comes to around Rs120 million but pay only Rs60 million while remaining amount is deferred which is piling up the backlog. Despite negotiations, meetings and assurances, the bills are pending creating financial liquidity for the KESC.
Another interesting side of the KESC operations pointed out by KESC chief was the attitude of the City Government towards the payment of the electricity bills. Under the city government program the entire city has been illuminated through street lights, but the electricity charges are not being paid by the city government. After all electricity is consumed who so ever the consumer and one has to bear the cost. All these issues have created a complex situation in KESC operations and the ultimate sufferers would be the common consumers as the power utility companies would ultimately pass on the expenses to the available genuine consumers.
Energy sector being the most active player of the economy is the combination of oil, gas, coal and electricity. All these resources call for accurate and skillful handling to produce desired results in accordance with the needs of all the economic segments of the country as well as of the people. Despite being the most vibrant segment of the economy, the price factor has adversely affected the cost of production of the manufacturing sector in Pakistan. There is an immediate need to improve the indigenous energy resources to get rid of the costly imported oil.
The cement industry has set an example for other industrial sectors to follow suit. A cut in energy cost is the need of the hour so that the prices could bring into line with the average income group which is very close to the poverty line. People are looking forward to some relief and they deserve for that.