VIABILITY OF THAR COAL MINING COMPANY

ENGR HUSSAIN AHMAD SIDDIQUI
Apr 07 - 13, 2008

On February 8, President Pervez Musharraf has given afresh go-ahead signal to embark upon the initiation of work on exploiting potential of huge Thar coal (lignite) resources for power generation, this time taking the Government of Sindh on board on the issue of tariff. Under the new strategy, the government-owned Thar Coal Mining Company (TCMC) has been activated for the purpose of supplying coal to the prospective Independent Power Producers (IPPs).

One recalls that the government had decided, as early as in April 2006, to unbundle Thar coal integrated projects into mining and power generation, and to set up a coal mining company in the public sector. The formal approval to form the company, at a cost of Rs 260.70 million, was however accorded in September/October 2006. But it was only in February 2007 that an initial paid up capital of Rs 250 million was approved for the TCMC. There was no progress achieved for another year and the government announced the company formation again in July 2007 for which fund allocation of Rs 241 million was made in October 2007. Sadly, the TCMC is still on papers and nothing concrete has been done to launch the company. The government is yet to finalize company's financial and administrative structure and appoint its chief executive officer.

The proposed company will be responsible for coal mining, handling, transportation and introducing advanced coal mining and refining technology on the basis of the comprehensive mining study carried out in 2004 by Rheinbraun Engineering of Germany on a block of 100 square kilometer of Thar coalfields. In the first phase, one modern mine with an annual output of six million tons of coal would be developed to cater to fuel requirement of a 1,000 MW power plant. The capital cost of developing such a mine is estimated to be around one billion dollars, whereas total investment of $ 4 billion is required to undertake full-scale coal mining at Thar. Nonetheless, the TCMC is being established with an investment of $ 500 million, possibly with public and private shareholding, government's share of equity being even less than $ 70 million.

The government is setting up the coal mining company on the premise that an integrated mining-cum-power generation project, of the size of 1,000 MW capacity, involves major investment (in the range of $ 1.50 billion) that may not attract the potential IPPs. The fact however is that the concept of integrated mining-cum-power generation project has already been gained response pursuant to the Power Policy 2002. The Chinese and the American investors were interested to make investments of this size and both made reasonable expenditure to undertake studies and due diligence, though the respective integrated projects of 600 MW and 1,000 MW did not materialize eventually. Lately, two integrated projects, each of 1,000 MW capacity, have been sanctioned and mining lease granted to Pakistani sponsors who are seeking partnership with foreign investors and coal mining companies, while another couple of projects are in pipeline.

MINING-CUM-POWER GENERATION PROJECT IS COMPLEX

Indeed, the development of an integrated mining-cum-power generation project is a complex and arduous process posing a number of implementation issues and technical problems. But establishing Thar Coal Mining Company may not be the solution, due to a variety of reasons. First, to start operations, the Company immediately needs capital that may not be made available under the present circumstances, as the government is facing financial burden and unable to keep development budget to the required size. Total PSDP allocation for 2007-08 to the projects of the Ministry of Petroleum and Natural Resources is said to be Rs 928.10 million. Government of Sindh will have minor share holding in the venture.

Funds from the international donor agencies will not be forth-coming soon either, as efforts have not been made to seek funds for which lot of preparatory work is needed on the part of the government and process is time-consuming. China was offered in November 2006 to become equity partner in the TCMC, but there has been no positive response so far. The government also had plans to induct the private sector that has not yet come forward to invest in this venture primarily due to peculiar characteristics of the project and risks involved in coal mining. Furthermore, the National Coal Policy is not yet in place, which would govern investment and technology transfer in the coal-mining sector. The policy is under compilation and to be launched earliest by December 2008. Under the circumstances the government may resort to raising loans, but then the Company will kick-start with weak financial health and would not be able to deliver.

Second, the Company would have to build management and technical capacity and capability over a period of time if international mining companies are not engaged as partners from the inception, as originally conceived. Reportedly, the National Logistics Corporation (NLC) will now be a major stakeholder in the TCMC, which in turn will appoint coal geology and mining specialist companies to manage the TCMC. The Company is thus likely to prove to be a non-starter since the NLC has no experience, expertise or qualification in the field. The country has no experience of employing advanced mechanized coal mining and lacks human resources.

Third, the Company has to provide guarantees to the IPPs for regular and continuous supply of coal. This can not be done unless the Company starts its commercial operations that were originally scheduled by 2012. Consequently, the coal supply agreements between the TCMC and the IPPs can not be concluded until then. The most critical aspect of the option will be that of the government or the power purchaser would have to pick-up the risk and consequences of failure in coal supply to the IPPs at any given time, as applicable in case of gas- or oil-based thermal power plants. Ironically, on one hand, the government is privatizing the state-owned gas and petroleum companies and, on the other, it is promoting a mega coal-supply company in public sector. In case the Company takes off as planned, it will also have negative impact on the on-going progress of the two integrated projects already sanctioned. Obviously, the respective sponsors of these projects would like to wait and see what would be most attractive option for them---to develop an integrated project or only a power generation project---depending on price at which the TCMC would market coal. In any case, tariff issue will come up once again. The end result will therefore be further delay in harnessing the Thar coal potential.

It is pertinent here to mention that experience of setting up a coal mining company has not been successful in recent past. Lakhra Coal Development Company Limited (LCDC) was established in 1990, with paid up capital of Rs 50 million, as a joint venture of the Pakistan Mineral Development Corporation, WAPDA and the Government of Sindh, to develop Lakhra coalfields and to supply coal to 150 MW coal-fired power plant at Khanot, District Dadu. After 17 years of its operations the LCDC could develop only 43 coal producing mines out of a total of 149 mines that cover, in total, an area of over 32 square kilometer (sq. km.) with proven coal reserves of 40 million tons. Support infrastructure including water, electricity, rail/road networks and telecommunication is available in the area since long, and a large number of foreign consultants and agencies were contracted, from time to time, to carry out feasibility studies for mining and/or power generation at Lakhra. The long list of world-reputed consultants includes the Chinese, the Polish, John T. Boyd & Co, Gilbert Commonwealth International Inc, JICA, USAID and others, who produced voluminous bankable documents.

Yet the company meets optimally 60% of the total current requirements of coal for the power plant that too has been operating at much below its installed capacity. According to the mine design and plan prepared by the LCDC it was to produce and supply 750,000 tons of coal annually, whereas it produced in recent years a maximum of 273,303 tons (in 2001-02) and a minimum of 166,330 tons (in 2006-07). LCDC is already on the active privatisation list and likely to be divested along with WAPDA's power station as a package. Lakhra coalfields cover total area of 67-sq. km., has total indicated coal reserves of 1,328 million tons and total mine-able coal reserves of 305 million tons. In contrast, Thar coalfields are about 9,000-sq. km. and have coal reserves of 175.50 billion tons, including 2.70 billion tons of measured reserves. If the LCDC at much smaller scale could not achieve its objectives, how can one reassure the investors that the super mega TCMC would meet their coal requirements fully and timely?

In final analysis, instead of going for a mining company, it becomes imperative for the government to qualify sponsors with strong technical and financial credentials to develop integrated mine-cum-power generation projects, ensuring economy of scale, mine efficiency and safety, operational reliability, pollution control and advanced mining and clean coal technology. The key world-players like Mitsui & Co of Japan and AES Corporation of the USA are willing to invest to the tune of over one billion dollars each in Pakistan to set up the respective 1,000-1,200 MW integrated power plants based on imported coal and developing its related infrastructure. Why then should it not be possible to attract foreign investors to develop integrated power plants based on indigenous coal, which are technically and financially feasible?

The exploitation of immense wealth of Thar coal resources, which may last for centuries, will remain a distant reality if the present pace of work on the Thar Coal Mining Company is any indication. National Energy Security Plan has set a target of adding 19,910 MW coal-based power generation capacity to the existing installed total capacity by the year 2030. In the first phase, coal-based power generation of 900 MW was to be attained by 2010, to be followed by an additional 3,000 MW by 2015. Given the present conditions, achieving these targets seems unrealistic.

(Engr Hussain Ahmad Siddiqui, a consulting engineer, is Director of NESPAK Board)