NATURAL GAS: THE ULTIMATE FUEL

IPI,TAPI PIPELINES TO HELP IN OPTIMIZING GAS SUPPLY AND BRING DOWN PRICES TO AN AFFORDABLE LEVEL

SHABBIR H. KAZMI
June 16 - 22, 2008

Pakistan is world's sixth most populous country and faces serious energy crisis. The current power shortfall is largely due to the country's booming economy and rising industrialization. Demand has been particularly robust in the residential sector, thanks in part to recent subsidized sales of millions of domestic electric appliances. The shortfall is partly due to dry weather, which is reducing hydropower output. But it is also due to poor planning. Pakistan has a huge capacity for hydropower and large deposits of coal, but it has been slow to exploit those resources.

In recent years, the combination of rising oil consumption and flat oil production in Pakistan has led to rising oil imports from Middle East exporters. In addition, the lack of refining capacity leaves Pakistan heavily dependent on petroleum product imports.

Natural gas accounts for the largest share of Pakistan's energy use, amounting to about 50 percent of total energy consumption. Pakistan currently consumes all of its domestic natural gas production, but without higher production Pakistan will need to become a natural gas importer. As a result, Pakistan is exploring several pipeline and LNG import options to meet the expected growth in natural gas demand. Pakistan's electricity demand is rising rapidly. According to Pakistani government estimates, generating capacity needs to grow by 50 percent by 2010 in order to meet expected demand.

The recent developments in the proposed Iran-Pakistan-India (IPI) and Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline projects offer new hopes for the two countries. These projects will help in optimizing gas supply and bringing down prices to an affordable level for key consumers i.e. industrial and power generators, currently using costly liquid fuels. Both the countries have moved on to a high-growth trajectory. But maintaining the momentum remains a challenge due to emerging energy crisis.

Pakistan is heavily dependent on furnace oil for running its power plants to meet the energy requirements of the country. The power sector is the largest consumer of primary sources of energy. There is an urgent need for replacing furnace oil with cleaner and environment-friendly natural gas. Since the country also faces fast depletion of gas reserves it has to explore options like import of gas through pipelines or in the form of LNG. Gas-fired power plants are also best-suited to meet peak-hour requirements. According to energy experts, if gas-based power plants are set up along the trunk gas pipelines near point of consumption, they can supply electricity at a competitive tariff. The current domestic gas production is not sufficient to meet the demand. This gap is projected to widen further in the years ahead as domestic production will be unable to keep up with the energy demand of a surging economy.

Since pipeline projects may take slightly longer time Pakistan is also working on project to meet the demand-supply mismatch to some extent through LNG imports. But with the continuing uptrend in the crude oil markets, tying up long-term LNG supplies is getting increasingly difficult as producers are insisting on linking pricing formula more closely to crude oil benchmark prices.

Meanwhile, global supplies are also projected to tighten in the medium term due to delays facing LNG liquefaction projects in countries like Australia, Nigeria, Iran and Qatar, in the wake of an abnormal rise in input costs. In contrast, delivered cost of piped gas from Turkmenistan and Iran is expected to be $ 6-7 per mmbtu, a price range within affordable reach of most of the bulk natural gas consumers. Prices of piped gas will also be less susceptible to volatility in the global oil crude markets and help in the maturing of the gas market by stimulating the development of required physical infrastructure like long-distance pipelines and CNG stations.

Natural gas demand is being driven by environmental concern and high oil prices. The bulk of additional demand is coming from power sector, industries and transportation.

However, the government needs to further liberalize its gas pricing regime. One of the main users of natural gas in the country is fertilizer industry. The larger part of the gas consumed goes towards feedstock and remaining goes towards fuel. With the constant increase in gas price prices of urea and DAP are also on the rise. This is adversely affecting Pakistan's agriculture sector. Lately Pakistan has become net importer of urea mainly because government failed in assuring gas supply and committing prices for longer term.

A closer look at Pakistan's energy demand and supply shows that the country's the policy planners have failed in understanding the dynamics of these sectors. Keeping in view rising demand appropriate policy measures are taken to facilitate creation of additional power generation and also ensure enhanced production of gas, POL products and also the infrastructure for the distribution o these products.

Energy crisis cannot be resolved without understanding its dynamics. Prices of all the energy products are going up. This is part of multi tier strategy of the developed countries. International funds are buying each and every drop of oil for subsequently selling at inflated prices. The worst hit is the countries, which do not produce oil and/or gas, Pakistan cannot be an exception.

Pakistan faces a double-edge sword; it is not capable of meeting its energy requirements from indigenous production. It is heavily dependent on gas but gas reserves are depleting fast. The country produces bulk of its electricity through thermal power plants running mostly on gas and furnace oil. Therefore, the switch over from gas to furnace oil would further increase the cost of generation.

The rampant and indiscriminate use of gas in cement plants, power generation and vehicles is depleting gas reserves at a very fast rate. This necessitates import of gas either through pipeline in liquefied form (LNG). Both the options are capital intensive and long drawn process. Import of gas through pipeline is relatively cheaper.