PAKISTAN: WOULD-BE SOUTH ASIA'S GATEWAY TO ENERGY PROSPERITY
SYED AMMAR SHAH
July 25 - 31, 2011
Pakistan's energy crisis was foreseen as early as 1995 when an agreement between Turkmenistan and Pakistan was signed. A preliminary gas supply agreement between Iran and Pakistan was also signed in the same year.
However, it turned out to be that what was foreseen 16 years ago was actually a prophecy destined to happen. Today, Pakistan's gas shortfall has increased up to 1,200 MMSCFD and electrical shortfall is touching the 5,000 MW mark. The government is preoccupied with keeping themselves in the government, and the situation in Afghanistan and anti-Iran US pressure does not go in favor of Pakistan as well.
But, Pakistan's oil & gas problems are more deep-rooted than the obvious lack of natural resources in the country, some of which shall be discussed herein.
The Pakistan's energy mix contains approximately:
- 47 per cent natural gas
- 30 per cent oil products
- 13 per cent hydropower
- 7.2 per cent coal
- 1.3 per cent nuclear
- And 0.6 per cent LPG
If this is compared with global economies, then the worldwide energy mix consists of
- 35 per cent oil
- 23 per cent coal
- 21 per cent gas
- 12 per cent renewable resources
- 7 per cent nuclear
- And 2 per cent hydropower
There are serious issues with the energy mix of Pakistan.
1. The total crude oil refining capacity in Pakistan is 13 million tons per annum. Of the 21.3 million tons of oil consumed in 2010, 18 million tons were imported. High cost of imported product has its economic implication to the Pakistan's economy. It is estimated that if sufficient gas is available to the power generation sector, monthly savings of up to Rs350 million can be realized due to using natural gas rather than the expensive and inefficient HFO.
2. Pakistan needs to focus on its renewable energy resources. Where the world is switching over to solar and wind (USD211 billion investments by USA, China, Middle East, India and Central Europe), mainly due to the rising prices of crude, Pakistan's imports of crude oil is increasing and a second oil jetty is being planned at FOTCO.
3. Coal comprises only 6 per cent of Pakistan's energy mix. This is shocking for a country with more than 184 billion tons of coal reserves. The current production of coal is 2.27 million tons while 4.8 million tons are imported to meet the total consumption of 7 million tons. The renowned Thar coal project has potential to fulfill the national energy demand for decades at relatively low unit cost.
4. Pakistan has one of the longest natural gas infrastructures in the world. The 10,667 km transmission and 95,866 km distribution network is something even many first world nations are enviable of. Nearly 50 per cent of the component of the energy mix is gas, which is depleting, widening the demand-supply gap. Pakistan's natural gas supply is expected to decline from four billion cubic feet per day (bcfd) in 2010 to less than two bcfd by 2020. International gas prices are approximately USD12/MMBTU whereas Pakistan's low gas prices of USD 4/mmbtu have allowed the plunder of our gold. The low gas price is proving to be a significant deterrent for attracting new gas supplies. Unless the gas prices increase up to 300 per cent, the low price will make any new gas exploration project, pipeline import or LNG import project commercially unviable.
5. The LPG market in Pakistan is unique, which is not driven by demand but by price. Given the condition of CNG load shedding which is adding onto the demand for LPG, average daily demand in the country is roughly 1600 MT/day. Of this, 1250 MT/day is produced locally whereas 7 per cent LPG is imported (88MT/day). A gap of 0.1 million tons of LPG exists per annum, which can easily be covered through LPG imports. However, due to price cap, unlike HSD, imported LPG is not at par with the locally produced and is more expensive, which enables the local producers to control the LPG market.
Pakistan with its ideal geographical location, in central Asia, next to the energizing Iran and landlocked Afghanistan, has the potential to be the regional gateway for energy. However, this dream requires a proactive role by the government which needs to shape up its policies keeping in mind the long term aspects of the energy resources globally.
1. The government should take the initiative by merging all of its energy sector functions under a single ministry. Effective governance will facilitate long term investments keeping in mind the bigger picture.
2. The government must eliminate subsidies to ensure that the forces of demand and supply come into action as per the natural prices. Any industry, which operates on subsidies, will only become an economic burden on the country and would never reach its true breakeven.
3. Gas pipeline projects are pending since the last decade. Although the government is giving fresh optimistic deadlines for the completion of the Iran-Pakistan gas pipeline, US political influence against Iran on this project is a barrier. These maybe the solution in the long run, however, short-term solution for the energy crisis for Pakistan is the floating LNG terminal solution. It has been five years since the introduction of Pakistan's LNG policy 2006, yet the government has not resolved the issue. Furthermore, Pakistan's current credit rating of below investment grade will pose significant challenges to secure long-term LNG contracts. In addition to this, as per some market analysis, the existing LNG surplus in the market will soon be converted into LNG shortfall due to rising LNG demands once Germany and Japan switch over from their nuclear plants to natural gas, therefore this is the only time for Pakistan to secure LNG contracts for the future. The government must modify its policies to facilitate the investor. This also requires active role of port authorities in upgrade of infrastructure and resolving any issue within time.
4. The government should provide special incentives for investments in the renewable energy sector such as interest free loans etc. Some areas receive on average 12 hours and up to 16 hours of sunlight throughout the year. Similarly, there are large areas of land with the potential to have wind farms installed. Such gifted resources must not go unutilized.
5. Measures must be taken to ensure power and gas transmission theft and losses. SSGC claims to suffer from 400 mmscfd gas loss due to leakages (50 per cent), theft, and slow meters. This has potential to generate 2000 MW of electricity. At the same time, government also has to ensure payment recoveries and those too on time; circular debt is an equivalent problem to have fuelled shortage.
6. Extraction of coal from Thar reserves should be made possible through appropriate policies. Infrastructure needs to be provided for the possible extraction and utilization of this coal and for power transmission from the region. This project might be the game changer for Pakistan.
7. Some studies show that the state-owned thermal plants (capacity of 5,000 MW) are less efficient than the privately owned. Privatization of such units should be considered.
8. The government should ensure parity between locally produced and imported LPG to give fair ground to all market players. This will likely improve LPG's percentage in Pakistan's energy mix and will work in the country's favor which is looking for natural gas alternatives. The government should also revisit its taxation policy for sales tax and the framework should monitor and cap the profits of local producers rather than capping the consumer price.
9. No major dam has been constructed over the last three decades. The country should learn from the flood 2010 , which according to UN Secretary, was worst than the Tsunami of Indonesia. Dams may be one of the most reliable and significant solution to Pakistan's energy crisis as well as environmental threats such as floods.
It is clear that a lot can be done to guide Pakistan away from this energy turbulence. The patience of the nation will be tested and counterweighed against the spirit of the government with which it moves to take Pakistan away from this crisis, all the way to becoming South Asia's gateway to energy prosperity. It will not be a question of how, but a question of when, if the government takes steps most appropriate with respect to the prevailing economic situation.
The writer is doing BE-Electrical from NUST.