AFFLICTIONS OF ENERGY SECTOR

SHABBI H. KAZMI
(feedback@pgeconomist.com)
Oct 24 - 30, 20
11

Experts are of the considered opinion that Pakistan's energy crisis is the outcome of gross mismanagement, blatant violation of good governance and failure of the successive governments to understand the gravity of the situation.

Inter corporate debt has plagued the entire energy chain only because of the massive theft of electricity and gas. As a result, indigenous production of oil and gas has fallen short of demand adding to oil import bill of the country, eroding the country's foreign exchange reserves. It is feared that many of the independent power plants will be forced to completely shut down their operations due to severe liquidity crunch.

A closer look at the recently released statistics shows that the oil import bill exceeded US$3.82 billion during first quarter of the current financial year from $2.356 billion for the corresponding period. This was due to hike in international oil prices as well as increase in quantity. Import of crude oil almost doubled to $2.506 billion as against $1.259 billion for the same period last year. The quantity of crude oil imported also surged 47 per cent during this period driven by higher oil consumption by the power sector. Import of petroleum products reached $1.321 billion from $1.096 billion.

According to a report, drilling activity remained subdued during FY11. Against a target of 80 wells, only 49 wells could be drilled, meeting around 60 per cent of the target. Of the total wells drilled, 15 were exploratory and 34 development/appraisal wells, indicating that the focus in FY11 was on enhancing production from existing fields rather than drilling more wells.

Performance of private sector companies remained subdued as they drilled only 25 wells out of planned 51. In the public sector, only Pakistan Petroleum was able to surpass its target as it drilled four wells against a target of three. OGDC also accelerated its drilling efforts and managed to drill 20 wells against a target 26. Out of total 10 exploratory wells planned by OGDC, only six could be drilled that too in the last quarter of the financial year 2010-11.

The failure in meeting the target can be attributed to circular debt as well as following the policy of distribution of colossal dividend by the public sector companies, particularly PPL, OGDC, and PSO.

Experts say that these companies distribute higher dividend to help the government overcome shortfall in FBR related revenue collection. It is on record that PPL announced interim divided a few days before the close of financial year. Payment of colossal dividend does not allow the exploration and production companies to expedite activities that result in increase in oil import bill.

At present, Pakistan faces 1000mmcfd shortfall of gas. This can be attributed to higher UFG and failure to commence production from already discovered fields. Hike in UFG is due to 1) massive theft and 2) inability of gas distribution companies to replace depleted transmission and distribution lines. It is on record that UFG of SSGC and SNGPL is far higher than the benchmark fixed by the oil and gas regulatory authority.

This issue can be best understood by examining operations of the Sui twins. SNGPL faces theft of around 200mmcfd by the CNG stations alone. KESC owes over Rs30 billion to SSGC and also fails in paying the current bills accruing to the gas utility. As a result, SSGC is forced to either borrow more to revamp and expand its transmission and distribution network or face reduced earnings due to increasing leakages and declining net operating assets. The profitability of gas distribution companies is linked with their net operating assets.

The current shortfall of 1000mmcfd can be met if production from some of the recently discovered mega fields starts. Production from these fields has not started because of ongoing litigation. Added to this is precarious law and order situation in Balochistan and Khyber Pakhtunkhwha provinces. As a result, exploration and production activities could only be undertaken in Sindh and Punjab.

Over the years, Sindh has emerged as the largest gas producing province. According to the constitution, the province has full right on the gas produced. Sindh draws less than its right but still manages to avoid load shedding of gas, which is not liked by other provinces, particularly Punjab facing extensive load shedding of gas.

However, those demanding load shedding of gas in Sindh must keep two points in their minds 1) in Punjab hundreds of permissions for setting up CNG has been given in gross violation of the rules and 2) theft in SNGPL franchised area is too high.

Curtailing gas supply of fertilizer plants is a breach of contract. These plants have been set up only after the government allocated them the specific quantities. First came the reduction in supply during winter and the present situation is mandatory closure of plants for minimum 45 days and curtailing gas supply by 20 per cent. The worst victim of government's policy of diverting more gas to power plants is Engro's recently established plant capable of producing 1.3 million tons urea.

Thanks to Sindh High Court ordering full supply for the plant. As against an agreement to supply 100mmcfd, SNGPL was supplying only 50mmcfd till the court order.

Pakistan has attained the capacity to produce nearly half a million ton exportable surplus urea but diverting gas to power plants has made the country net importer of urea. A point that policy planners fail to understand is that power plants can be run on alternate fuels but curtailment of gas reduces availability of basic raw material, which reduces production and increases cost of production.

However, the real issue is that import of urea erodes foreign exchange reserves and also forces the government to bear the differential in the cost of imported and locally produced urea. The cost of imported urea is three times higher than the locally produces one. Lately, fertilizer plants had agreed to bear the difference between the cost of gas and furnace oil but government didn't accept the offer.