HOW LONG CAN WE LIVE WITH HIGH ENERGY COSTS?

The planners must revisit Power and Petroleum policies

By SHABBIR H. KAZMI
 Oct 10 - 16, 2005

Couple of years back when some of the energy sector experts warned that crude oil prices may touch US$ 100 a barrel, most of the economists did not agree with them. They had reasons to refute this because crude oil prices were hovering around US$ 50 a barrel at that time. They were also insisting that the price would settle around US$ 30-40 a barrel. However, when price touched almost US$ 70 per barrel, even the conservative economists were forced to change their opinion.

However, the general consensus is that the recent surge in crude oil prices is not due to demand but entry of speculators into the oil trade. The presence of speculators is often evident from the divergent movement of prices. One such evidence was when hurricanes were considered a threat for offshore drilling rigs in the US the prices moved in the opposite direction. Many analysts are of the view that the speculators often create a hype, which leads to hike in price but very soon profit taking becomes name of the game. Saying this, energy sector also say that gone are the days when crude oil used to sell at less US$ 20 a barrel. They also say that people must remain ready to see price touching US$ 100 a barrel over the next couple of years or may be earlier.

Analysts also say, "Normally the price of a commodity is driven by its demand. However, in case of crude oil supply seems to be driving the price." One often reads in newspapers oil price going up due to either political uncertainty in the Middle East or strikes in one of the oil producing countries. But rarely rising demand is termed a factor responsible for price hike. Similarly, there is always pressure on oil producing countries to increase daily output but developed countries are hardly to curtail their POL consumption.

Interestingly a number of arguments is put forward in favour of raising daily crude output, but least is said about the global refining capacity. Some of the analysts are of the view that shrinking surplus refining capacity has become a serious impediment. Even if crude oil production is increased the refineries would not be able to process it. The refining capacity needs a quantum jump to meet the growing demand for POL products, particularly higher distillates. However, the laws pertaining to environment are forcing closure of refineries in the developed countries, which are also the biggest consumers of POL products.

The objective behind exploring the prevailing and the emerging global scenario is to help Pakistan's policy planners and the industries to prepare a strategy to minimize the shock to the economy due to hike in POL prices. The country faces a number of potential threats, which include decline in foreign exchange reserves, pressure on exchange rate, rising inflation rate and eroding purchasing power of the masses. All these threats can derail the process of economic development.

The first and the most important issue is that Pakistan's economy is highly dependent on oil and the economic managers have been failing in exploiting alternate sources of energy. On top of this power plants and industries also suffer from poor efficiency levels. Despite having trillions of tons of coal its use has remained negligible, only because the country has not been able to exploit it. Whatever quantity of coal is used in the country bulk of it is imported.

Electricity is considered the most important source of energy. In the past bulk of electricity in Pakistan was produced at hydro power plants but its share in the total generation has reduced very substantially. Two factors are responsible for this 1) inability of the country to build new hydro power plants and 2) establishment of more and more thermal power plants to meet the growing demand for electricity. One may say that output of hydro plants is dependent on availability of water and the country has been suffering from acute shortage of water. Therefore, its dependence on thermal generation has been high. However, many sector experts say, "We have opted for an easy solution. We have been establishing thermal power plants and ignoring an option which can help in achieving twin objectives, enhancing water availability and reducing cost of electricity".

It is often said that Pakistan being deficient in fossil oil has to face the adverse impact of its rising price. It may be partly correct but reality is that for decades the country did not pay much attention to enhancing oil output in the country. It was only recently that the government started offering incentives to exploration companies. However, the country has not succeeded in attracting the desired level of investment. Bulk of the oil and gas is being produced by the companies like PPL, OGDC, POL, which have been operating in the country since long. The new entrants have yet to make any significant contribution.

Some of the critics of present Petroleum Policy say that in an attempt to attract foreign investors (exploration and production companies) the government has offered incentives, which could have serious repercussions. The incentives may help in attracting the investment but it would also lead to very high cost of oil and gas for Pakistan and huge repatriation of profit by the investors. They also term the situation similar to the one being faced in the power sector. Offer of all the possible incentives did help in establishment of independent power plants but consumers of electricity are paying the cost through their noses now. The losses of state owned transmission and distribution companies have gone up due to purchase of electricity from the IPPs. The supporters of Power Policy may say that had the IPPs not established the situation would have been even worst. They may be right but can they refute that the government offered a tariff which was exceptionally high and also undertook all the risks, sponsors were kept immune from all types of the risks.

Some of the critics question even the basic premise of the Power Policy, allowing establishment of power plants in the private sector and keeping state owned utilities responsible for transmission of distribution. They say, "It is true that state owned power plants are inefficient but the real cause of the ailment of state owned utilities are huge transmission losses. In fact the private sector should have been asked to takeover transmission and distribution business, which also needed huge investment. To substantiate their argument they refer to KESC. It is on record that the number of units billed during a year is often less than number of units dispatched. This means that whatever the KESC is spending on purchase of electricity from IPPs does not generate even one rupee revenue for the company".

Lately, the mechanism followed for fixing fortnightly prices of POL products is also being questioned. Though, Oil Companies Advisory Committee (OCAC) is often held responsible for the price hike, one has reasons to believe that it revises prices in the light of guidelines provided by the government. It was also said that OCAC enjoys advantage because it has no representation from the government as well as the general public. However, it is not the composition but the guidelines, which are responsible for price hike.

Historically, the government has been relying on collection of the petroleum development surcharge as a toll to bridge the gap between revenue and expenditure. Some of the critics say that the policy is still being followed and in an attempt to save the face a number of taxes have been camouflaged under the cost of products. Whatever may be the fact it is extremely necessary to rationalize the retail prices, which is hurting the economy as well as the government. Based on the existing formula the government is paying billions of rupees subsidies to the oil marketing companies. While these companies are benefiting from the subsidy consumers as well as the government are suffering.

Lately, the government has been following the policy of switching over of power plants from furnace oil to gas in an attempt to bring down the cost of generation. However, analysts question the rationale as they believe that it would neither help in bringing down the electricity tariff nor the country. They say burning gas at the power plants is like cooking food by burning dollars. They also say that if rest of the world can use coal in power plants why Pakistan can't do the same. They have only found an easy solution rather than taking pain of developing mining and processing of coal. In this effort they are depleting gas resources at a much faster pace.

Some of the supporters of use of gas in power generation say that if the country faces shortage it can rely on other gas producing countries. The effort has already started in the shape of three gas pipeline projects. However, the outlook of these pipelines remains uncertain. Iran-Pakistan-India pipeline project faces pressure from the US. While both India and Pakistan claim of not facing any pressure and also claim to decide the fate keeping their interest in mind, the probability of delay is high. Outlook for Turkmenistan-Afghanistan-Pakistan pipeline seems bright due to the US support but a lot depends on the situation in Afghanistan. The allied forces have not succeeded as yet in restoring peace in Afghanistan.

Keeping in view the ground realities the practical approach should be to develop alternate energy resources. Out of these the most important is construction of mega dams in the country as it will help in construction of water reservoirs as well as generating low cost electricity. A lot of time and money has been wasted on unfruitful debate on Kalabagh dam. If it is not acceptable to all the four provinces some alternate site has to be agreed upon at the earliest.

Developing consensus on a new site may take some time. Therefore, the policy planners should follow two pronged policy - installation of windmills in the coastal areas and development of coal mines on war footings. Coastal areas of Sindh (including Karachi) and Balochistan are ideal for installation of windmills. Karachi faces acute shortage of electricity and KESC suffers from high cost of generation. Therefore, installation of windmills will help in overcoming both the problems.

The latest attempt to privatize KESC has fizzled out, technically. The efforts are going on to convince the second highest bidder to takeover its control. It is necessary to reiterate that instead of selling it at a throwaway price to private sector the government should split it into five smaller sizes as manageable entities and then try to sell it. The government must also explore the option of allowing the private sector to set up integrated utilities in SITE and Landhi industrial areas to meet the electricity demand of industries and confine KESC to supply electricity to commercial and domestic consumers.

While deciding about new generation capacity the fact should be kept in mind that WAPDA will also face the shortage in the near future. It would not be able to meet Karachi's electricity requirement. Karachi's peak electricity demand has exceeded 2000MW and the combined capacity of KESC and the two IPPs operating in its franchise is not sufficient to meet this. If part of electricity produced at HUBCO is diverted to Karachi this may help in meeting Karachi's requirement but it would also lead to a shortfall for WAPDA.

The country has to increase production of oil and gas as well as develop alternate sources of energy. Self sufficiency of energy products at affordable prices is a must to sustain economic development. The planners must revisit Power and Petroleum policies. While the effort should be to attract the maximum investment the affordability factor should not be overlooked. They have ignored the affordability factor in the past and the same mistake should not be repeated. The prevailing situation is alarming and the solution has to be found at the earliest, don't wait until dark.