The impact on Pakistan's economy
By AMANULLAH BASHAR
Sep 06 - 12, 2004
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 industries.
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 procedure.
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 years:
*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 in prices.
*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 producing.
*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 Petroleum.
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 cycle.
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 world.
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 India.
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 quality."
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 oil.
"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 ethanol production.
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 exported.
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 simple sugars.
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.