BR Energy Challenges by Business Recorder

FRIDAY, APRIL 27, 2012 | www.brecorder.com/ec

ENERGY CHALLENGES

ENERGY CHALLENGES | APRIL 27, 2012

CONTENTS FROM THE EDITOR’S DESK PAGE 3 MAXIMISING USE OF INDIGENOUS ENERGY RESOURCES ALI KHIZAR ASLAM PAGE 4 “WATER NEEDS TO BE PRICED PROPERLY” SHAKEEL DURRANI PAGE 6 ENERGY MIX AND GROWTH MOHAMMAD YOUNUS DAGHA PAGE 8 “CAPTIVE POWER HANDLING IS AN EVEN BIGGER SCAM” TABISH GAUHAR PAGE 12 “PSO TO BE A FULLY INTEGRATED COMPANY IN SIX YEARS” NAEEM YAHYA MIR PAGE 14 IP AND TAPI: WHERE ARE WE NOW? SIJAL FAWAD PAGE 16 “THAR COAL IS ESSENTIAL FOR ENERGY SECURITY” KHALID MANSOOR PAGE 17

“BRING DOMESTIC GAS PRICES TO INTERNATIONAL LEVEL” AZIM IQBAL PAGE 18

WITHDRAWN GAS HAS TO BE RETURNED TO POWER SECTOR ENGR. TAHIR BASHARAT CHEEMA PAGE 32

DON’T WASTE THIS PRECIOUS RESOURCE MUHAMMAD ZUHAIR ABBASI PAGE 20

REFINERIES CONUNDRUM HAMMAD HAIDER PAGE 34

“COUNTRY NEEDS AN INTEGRATED ENERGY BODY” SOHAIL WAJAHAT SIDDIQUI PAGE 22 “RAISE GAS PRICES BY 25 PERCENT EVERY YEAR” JAVED AKBAR PAGE 23 ENERGY SECTOR AT A GLANCE PAGE 24-25 “RESERVES ARE LIMITED; AND DEPLETING” BASHARAT MIRZA PAGE 26 ON E&P POLICY AND PRICING SIDRA FARRUKH PAGE 28 “CONCESSIONS LIMIT FURTHER INVESTMENT” ASIM MURTAZA KHAN PAGE 30

REVERSING THE PRECIPITOUS DECLINE IN ENERGY SECTOR ZIAD ALAHDAD PAGE 35-37 RENEWABLE ENERGY: DO IT BEFORE OPPORTUNITY EXPIRES MANAL IQBAL PAGE 40 THE WAY FORWARD DR. M. ASIF PAGE 43 ENERGY CHALLENGES: THE FIX FAROOQ REHMATULLAH PAGE 44

ENERGY WOES From Editor’s Desk

That energy deficit in Pakistan is persistent, widespread and has intensified to the point of crisis is a fact that hardly needs any explanation or elucidation. The macroeconomic implications of energy crisis are large and varied because energy is used to exploit and employ all other resources. Therefore, considering energy crisis as a mere sectorspecific transient phenomenon will be nothing but a profoundly dangerous folly because it is a multi-faceted challenge for any country requiring out- of-the-box thinking based on a holistic approach that fosters creative solutions. This crisis encompasses almost every area of human activity. Tense social relations have already been exacerbated by frequent power outages and shortages of gas across the country. Power protests, which often turn violent, have become a routine affair in major urban centers. It was perhaps for the first time in the history of the country that such protests were conceived, planned and executed by a provincial government against the federal government a few weeks ago. Who is responsible for this state of affairs? This is indeed a fascinating question because of a variety of factors. Primarily and most importantly, the Pervez Musharraf-Shaukat Aziz government has to be blamed for its miserable failure to do anything in this regard although the Economic Survey of Pakistan had as far back as FY2003-04 made it abundantly clear that electricity consumption in the country had increased by 8.6 percent of the first three quarters of the last fiscal year while WAPDA had reported that the demand had in fact risen as high as 13 percent in the last quarter of that fiscal year. By the middle of their tenure, many an energy expert had forecast that the country would be facing an energy crisis

by 2007 due to rising electricity demand following a huge surge in the sale of electrical and electronic appliances on lease finance during a period when the country’s economy was on a high growth trajectory. Unfortunately, however, nothing was done to forestall the fast-approaching crisis. Adding insult to the injury, the Musharraf-Aziz government bequeathed a large circular debt in the energy sector—so far intractable. It is a debt that has continued to compromise the sector’s capacity to pay for critical fuel, thereby operating well below the generation capacity leading to massive load-shedding. In its over four years’ rule so far, the PPP-led coalition government has only helped accentuate that crisis because of inept handling of the issue. A largely impotent moot on energy, presided over by Prime Minister Gilani and attended, among others, by the chief ministers of provinces and the prime minister of Azad Jammu and Kashmir, is a sardonic comment over the state of affairs. It would be instructive to recall that multilateral agencies have termed the current energy crisis main obstacle or impediment to country’s economic growth. For example, an Asian Development Bank report released recently has pointed out that losses arising from power and gas shortages held down GDP growth by 3 to 4 percentage points in both FY11 and FY12. According to it, improved management of power resources could ameliorate the predictability of load-shedding, allowing industry and commerce to better schedule their work and minimize costs.

THE TEAM 2

Massive load-shedding of electricity exists mainly because of falling water levels at the hydro power dams, shortage of fuel for thermal generation and a hefty circular debt. Increasing gas shortages are mainly due to depleting resources. The situation is not going to change anytime soon. This underscores the need for adoption of a strategy aimed at finding the most appropriate and realistic solution to the problem. Hence, the need for shaping up the contours of an ideal energy mix in accordance with country’s short-, mediumand long-term needs without any further loss of time. Through the publication of Energy Challenges, we seek to offer some suggestions—mid-term and long-term—with a view to providing a genuine basis for an informed dialogue among all stakeholders towards resolving this crisis in a manner that befits country’s present and future economic pursuits.

Editor

The share of oil in country’s energy’s mix is increasing consistently as energy mix continues to move from indigenous natural gas because of its shortage to costly imported oil. The rising gas shortages resulted in the government prioritizing domestic and transportation sectors at the expense of power sector. Increase in oil share in energy mix has led to

BR RESEARCH 1

a rise in oil imports. Not only does the current phenomenon constitute a strain on the country’s foreign reserves, inflationary pressures get a boost from the behavior of international oil prices. In recent days and weeks, however, there has been an alarming spate of disinvestment by foreign investors because of the galvanizing energy crisis.

CONTENT TEAM 1. 2. 3. 4. 5. 6. 7. 8. 9.

DESIGN TEAM 10. Murtaza Khaliq | Creative Head 11. Abdul Musawer Gulzar | Illustrator

ENERGY CHALLENGES | APRIL 27, 2012

Page 03

Maximising use of indigenous energy resources By Ali Khizar Aslam

Energy deﬁcit is one of the biggest impediments for promising demographics to reap economic dividend. Shortfall is a regional issue, but unlike our neighbours, poor management, bad governance and political compulsions are hampering our manufacturing competitiveness and worsening socioeconomic fundamentals.

The reliance on expensive fuel and poor governance is plaguing the economy through constant creation of circular debt. The power tariffs are kept on hiking, incentivizing marginal consumer to shirk – the gap between electricity consumed and payments is widening. While poor ﬁnancial management of discos is adding fuel to the ﬁre.

Wrong fuel choice has taken the economy to a critical junction. Share of furnace oil increased from a quarter to two ﬁfth in past two years. This has not only made the power expensive for a user but also increases the balance of Payment vulnerability – it’s a two double edged sword. The answer is simple – to rely more on indigenous energy resources; but it’s easier said than being done.

Then, few inefﬁcient government power producing units are working at approximately half of their nameplate capacity. Someone has to pay for the wastage of this fuel, and its none other than the tax payers. Rs15-20 billion per month leakages for the past four years is bleeding the economy. Every now and then government with the help of banks plugs in the holes for system to function at bare minimum. That’s not sustainable!

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It’s a zero sum game; one has to pay for the other. If a turbine is functioning at low efficiency the amount of fuel (gas or furnace oil) being wasted in air not only causing pollution but more importantly could have been used in efficient power generation, industry, transportation or at your home. Then those who are not paying bill of electricity they consume rest of nation is paying in terms load shedding, high unemployment, inflation and weaken currency. Then there is a dire need of prioritization of energy allocation, especially the natural gas, till the time we explore and produce more indigenous energy resources including coal and other hydrocarbon, hydel and alternate energy resources including wind, solar and biogas. Simultaneously, we shall expedite

the process of importing cheaper fuel options including LNG and coal – need is to build LNG terminal and conversion of inefficient power plants on imported coal till the time we start producing domestic coal. Natural gas comprises two fifth of Pakistan’s total energy consumption at present. Accelerated usage of this natural resource is quickly depleting national reserves and the increasing dependency of various sectors on the resource has pushed its demand significantly beyond its supply. The problem becomes more acute during winter months when the demand-supply gap rises as high as 1 billion cfd; a quarter of the country’s total gas supply. Given this deficit, revisiting the allocation of gas supplies between power, fertilizer,

ENERGY CHALLENGES | APRIL 27, 2012

There is a dire need of prioritization of energy allocation, especially the natural gas, till the time we explore and produce more indigenous energy resources including coal and other hydrocarbon, hydel and alternate energy resources including wind, solar and biogas. textiles and other industries, domestic consumers and transport sectors has become imperative. Efficient use of this fast depleting resource mandates that priority be awarded to those sectors that provide the highest economic benefit from its use, until the country attains gas sufficiency. Conversely, curtailment of gas supplies to certain sectors must be mindful of minimizing the economic cost of such measures. In short to medium term the pricing mechanism and government intervention is crucial. Let’s evaluate each and every sector in today’s condition. In fertilizer, urea manufacturing has no alternate to natural gas as a

raw material. Its shortage has doubled the urea prices in a year time. This is hampering the yield of crops by suboptimal use of fertilizers, and increasing import bill to meet the shortfall in domestic production. It puts more strain on fiscal deficit by allocating subsidy on expensive imported urea. The interrupted gas supply to Engro’s new urea plant is breaching the sovereign guarantee to over a billion dollar project and taking away the confidence of international investors. The other industries including textile shall be prioritized over the domestic consumers, as is the case in India. Argument is simple; industry provides employment, churn the wheel of economy – lower inflation and higher growth, better trade balance and so and so forth. This in turn improves the overall social fabric. In power sector, gas shall be provided to efficient combined cycle power plants, mostly are in the private sector, and shall move to furnace oil at the time of peak demand and lesser hydel availability. There is a great wastage of gas in the domestic sector, which is criminal. There shall be a mix of policies including rationalization of gas price to the domestic sector and availability of solar geysers, energy saver light bulbs and other appliances at a subsidized rate. Then there is a whole issue of increase in the CNG use which is hampering the gas availability to the more important sectors. Yes, CNG is environment friendly and a cheaper fuel option but at the cost of employment and higher inflation. Shall we go on with this trade-off; certainly not! Till the time we are gas sufficient CNG prices shall be at par to petrol to discourage its use in private transportation. Mind you, unlike common notion, CNG is not a poor man fuel – its mostly used in cars or commercial vehicles; while a poor chap drives motorbike on expensive petrol. These steps would reduce the gravity of energy deficit the country is facing today and help in reducing circular debt. To work more on the evil of energy debt, there is a case of dissolution of Pepco, corporatization, if not privatization, of Discos and allocation of power to discos in accordance to their recovery. Learn from the model of KESC in Karachi - reward areas with low theft with few hours of load shedding. There shall be conversion of inefficient turbines under Wapda to preferably from gas/furnace oil to coal as the tariff of coal based plant is roughly half of the furnace oil alternative. We shall rely on imported coal till the time we are self sufficient on domestic coal production. In the medium to long term, it’s to shift the energy mix back to cheap indigenous resources including coal, hydel, exploring untapped gas and crude oil, and alternate cleaner energy options – biomass, solar and wind.

ENERGY CHALLENGES | APRIL 27, 2012

World’s 7th largest coal reserves are in Thar Desert whose energy capacity is more than Saudi Arabia and Iranian oil reserves, and 68 times higher than Pakistan’s total gas reserves. What is stopping us benefiting from this black gold; is a million dollar question. Are we waiting for the world energy reserves to deplete and rule the tomorrow’s world? Sounds like a joke. Unlike common myth, the quality of our coal is better than many – high stripping ratio and better heating value with low sulphur content. Environmentally, it is better than furnace oil we import, and can produce it at half the price. This recognition is becoming a common sense, and few projects are at initiation stage including a joint venture of Engro and Sindh Government, and a Chinese venture. Concurrently, different provinces need to shed their ego and western interests for the betterment of Pakistan and work on major dams and reservoirs before water becomes too scarce. We shall also expedite the exploration and production of gas and crude oil. The success ratio of E&P sector in Pakistan is 1:3 versus 1:10 globally; this simply shows how much hydrocarbons are untapped in Pakistan. The need is to incentivize companies to enhance activities by better pricing and tax holidays to new entrants. Mind you, we need to pay premium to poor law and order situation in hydrocarbon rich areas of Baluchistan and KP. Then, government shall sit with owner of those lands and resolve their royalty issues and should have better definition of underground mineral rights. The petroleum policy drafts 2012 seemingly addressing the pricing issue but its benefits are yet to be seen.

Taking on green energy, Pakistan is amongst the lowest in emitting carbon foot prints. One third of our power is based on hydel; our production on coal is virtually none, and transportation is increasing its reliance on cleaner CNG. But that shouldn’t be our hallmark. Rather, we should work on both green and not so clean hydrocarbon but indigenous resources. There are few projects taking place on wind and biogas; but much more is required in research and development to work on biogas – we shall capitalize our agri byproducts to produce energy. Then, the houses in future shall have solar panels to conserve on system energy. The days of such activities are not far. For all those necessary steps to be taken, there is a need to stress on the importance of integrating the energy sector and having a central energy ministry, getting rid of the loopholes that the presence of so many ministries which are often carrying contrasting views.

The writer works as Head of Research at Business Recorder. He can be reached at alikhizar@gmail.com

Page 05

Water needs to be priced properly Shakeel Durrani – Chairman, Wapda BR Research: Tell us about the scope of the Water & Power Development Authority? SHAKEEL DURRANI: I have been serving in WAPDA for over four years now, so I take responsibility for wherever Wapda is at the moment. Wapda was bifurcated in October 2007, so we are only the water wing at the moment. We look after the existing damsMangla, Tarbela, Ghazi Barotha, Chashma, and the new dams including Neelam Jhelum, Diamer Basha. But we don’t deal with issues such as power billing, thermal power, and distribution and so on. We have no link with circular debt; its something related with PEPCO, we only generate hydel power and sell it to them and we sell it at Rs1.54 per unit. BRR: Is the cheap unit price irrespective of the generating source? SD: This is our average cost. Some dams produce electricity as cheap as Rs 0.3- 0.4 per unit. But if you consider the national grid’s average price today, it is around Rs9 per unit. But we sell it at Rs1.54 per unit. Pakistan produces around 100 billion units in a year, out of which Wapda’s share is one-third. But they do not pay us; in fact Pepco owes us about Rs68 billion. But since we are a government organ, it doesn’t affect us. BRR: But what is your obligation? Do you not have to pay to anyone in the chain? SD: We work in self-financed projects with the money we get. And since we don’t get paid, we are unable to indulge in new self-finance projects. If we had this money, then our projects would have been completed earlier. The Mangla raising project, Gomal Dam would have been completed; work on Neelam Jhelum would have been faster. Our cash flow has been adversely affected. BRR: What is the update on the Mangla raising project and what is its advantage in terms of hydel generation? SD: Power generation has increased by 700 million units. Capacity is still 1000MW, but the units (turbines) will be operational for a longer period of time, because the water level has increased by 2.88 million acre feet. This is the

Page 06

flood water that didn’t go through the turbines but used to get wasted. We are storing 3 million acre feet more water in Mangla. This will increase power generation and provide the much needed water for irrigation. BRR: Is the project operational yet? SD: Yes, it is. We did the test filling in September last year. Initially, it was 1203 feet, now it has been filled to 1210 feet and next year’s target is 1242 feet, which will generate an additional 644 million units. BRR: What is the progress on the Neelam Jhelum project?

We have Gomal Zaam in South Waziristan with a generation capacity of 17MW and will be starting generation by the middle of this year. But the real big one is Daimir Bhasha – it is a billion-dollar project. Government is very committed to it and Rs18 billion in the budget has been allotted to it this year, we have acquired some land for this project also, ADB is the lead donor, and we are going to hold three road shows in Europe, the Middle East and the Far East over the next ﬁve months. The capacity of this dam would be 4,500MW and it will produce 19 billion units. This will take around seven to eight years to become operational.

SD: Neelam’s generation capacity is 969MW, and we are making a tunnel system from Nowshera, which will open up in Kohala. The main power tunnel is 47 kilometers long; it also has side tunnels. We have spent Rs20 billion so far and the project shall reach completion in 2016.

We are also working on two more large dams, one is Dasu of 4,300MW and the other is Bunji of 7,100MW, but these are not going to be storage dams.

Once operational, it will generate 5.1 billion units a year. The revenue from electricity will be Rs45 billion on annual basis and it will cost Rs320 billion. So, the payback period is approximately seven years.

SD: You are right, as the water comes in for only four months. Even with these four months, just imagine the extent of savings from reduced imports of fuel. Our premium project is Tarbela 4 extension. Its detail engineering has been completed and ﬁnance is fully available from the World Bank.

BRR: How does Wapda plan to ﬁnance such a capital-intensive project? SD: Every consumer in Pakistan is paying 10 paisas per unit for the project, which means 50 percent of the cost is borne by the people of Pakistan. And the rest is loans from Islamic banks and funds from the Arab World and China. BRR: What are the other projects that have been undertaken by Wapda? SD: Design and detail engineering of Neelam Jehlum was completed in 2002. Then after the earthquake of 2005, we strengthened every component of the dam by 50 to 75 percent. So the cost escalated by Rs100 billion, climbing to Rs320 billion. To save time, we have purchased through International Competitive Bidding, we hope the tunnels will be completed 18 months before time. And if that happens, it generates 5 billion units a year, so we are gaining Rs65 billion by this acceleration.

BRR: So if they are run of the river projects, you are dependent on the climate and won’t be able to extract its potential?

BRR: What is the estimated cost for Bhasha dam and how are you going to finance this? SD: The cost is approximately $12 billion. We have started working on this project. The land cost was borne by the government and it has been very keen to pursue this project so far. The cost of the land was Rs41 billion. PSDP allocation is Rs18 billion for FY12. ADB is the lead donor, and then there are other multilateral and bilateral donors as we have received good response from the Middle East. BRR: Should we build large dams or the small ones? SD: Both. They have their own roles to play. BRR: In your existing system, are there any plants that are not running efficiently? SD: There are no inefficiencies in hydel plants. We routinely update and repair the equipment, but we are not like the GENCOs. Wapda has no inefficiencies.

BRR: Where do you see hydel generation in the future? SD: In the next 10 to 15 years, Pakistan should be having a hydel generation capacity of 25,000MW. BRR: Let’s talk about water losses. A lot of water gets wasted in the rivers and there are losses due to the lining of the canal. How do you see it? SD: The water that is absorbed in the ground is not wasted. It is recovered through tube wells. And the water that goes in the sea is also not wasted as we have to allow this for the survival of marine life and to maintain the ecosystem balance. BRR: But there still is wastage. Isn’t there? SD:Yes, that is why we are building storages now and this is the best you can do. Our reservoir storage is reducing due to siltation. Thirty percent of our capacity that was there after Tarbela in 1976 has been lost due to siltation. We need to build those dams just to retain that capacity also. And about water costing, I agree with you that the water costing system is not sustainable. If the water is not priced properly, there shall remain the incentive to misuse it. BRR: There are no properly deﬁned property rights on water. What is being done in this regard? SD: It is a very important issue. We are now extracting 51 million acre feet from the ground in Pakistan whereas the absorption is less than this amount. The people will have to pay more water tax to cover the irrigation system maintenance, canal networks and barrages. People don’t pay the right amount for drinking water. A well-drafted policy is being made by the ministry of water and power in which we have discussed how to deal with our drinking water, irrigation water, etc, keeping in mind the growing population and the needs of the industry.

interview by Ali Khizar & Ayesha Aftab

ENERGY CHALLENGES | APRIL 27, 2012

Energy mix and growth By Mohammad Younus Dagha

Pakistan is going through challenging times in terms of the low economic growth being faced by its economy. The low growth rates cannot be converted into higher ﬁgures in short term due to the current energy crisis. We had never predicted this before the oil price volatility that hit us in 2007 and we had to seek IMF facility on tough conditions, just to prevent drying up of our foreign exchange reserves which had diminished in oil payments of only a few months.

India too has been very conservative in use of oil, which contributes only 1% of its electricity generation.

INDIA’S ENERGY MIX OF ELECTRICITY Others 7% Biomass 1%

Though it is always easier to be wiser in hindsight, but couldn’t we really prevent such a dramatic derailment of the economy from the path of almost being a G-20 member?

Nuclear 9%

Our high dependence on oil imports was always a very clear sign of vulnerability which we never tried to preempt. Was it a case of helplessness and lack of viable options? It was deﬁnitely not a case of lack of options but that of lack of vision. The policy makers could not come to grips with the challenge of self-reliance and never tried to gather some wisdom from the emerging models of successful economies, if creating a homegrown solution was not possible for them. Malaysia’s policy of improving its energy mix and its successful implementation was always there since 1980, only to be followed. Pakistan has greater energy resources than Malaysia and could have done a better job and with greater ease.

Gas 12%

Malaysian planners had developed a four-fuel diversiﬁcation strategy in 1980, learning from the oil crisis and oil price shocks of 1973 and 1979. Malaysia had a much greater dependency on oil which constituted 88% of the energy mix of Malaysia and the share of coal was only 2%. With deliberate and consistent policy and its effective implementation, oil’s share was reduced to a mere 2% and that of coal increased to almost 35% which is planned to be increased further. The following table shows the progress:

Coal 58%

Hydro 11% Oil 1% Source: India Energy Handbook 2011

MALAYSIA’S ENERGY MIX Hydro 4% Coal 2% Gas 6%

Others 5%

Despite India’s steady progress in renewable energy sources, especially wind energy, it has no plans to reduce its dependence on the coal based power. In fact, its long term plans suggest an increasing share of coal (almost three times by 2030) in its fuel mix. Above is a chart of India’s future plans (as given in India Energy Handbook 2011).

Oil 2%

ELECTRICITY GENERATION MIX 2005-2030 Coal 35%

Gas 45%

COAL

TWh

OTHER RENEWABLES

1200

1000 Oil 88%

Year 1980

Hydro 13%

Year 2012

Data Source: Abdul Rahman Mohamed* and Lee Keat Teong, Energy Policy for Sustainable Development in Malaysia, The Joint International Conference on “Sustainable Energy and Environment (SEE)”1-3 December 2004, Hua Hin, Thailand

Malaysia has very limited coal reserves i.e. only 1.72 billion tons; only a small fraction as compared to 185 billion tons of reserves found in Pakistan. But this did not deter them from successfully pursuing the policy of shifting to a more viable energy mix. No wonder Malaysia has been able to provide electricity to 98% of their population.

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800 600 400 200 0 -200

OTHER RENEWABLES

OIL COAL

NUCLEAR GAS

BIOMASS HYDRO

2005-2015

NUCLEAR OIL

BIOMASS GAS HYDRO

2015-2030

SOURCE: IEA, WORLD ENERGY OUTLOOK (2007)

ENERGY CHALLENGES | APRIL 27, 2012

As compared to Malaysia’s 2% and India’s 1% use of oil in electricity generation, lets see what we have been doing and continue to do with our foreign exchange resources, in importing oil for our electricity. The following chart shows Pakistan’s energy mix:

PAKISTAN’S ENERGY MIX OF ELECTRICITY

It was a terrible policy failure resulting in huge economic losses. Any further delay in utilization of Thar coal would certainly amount to reinforcing that failure.

WORDS AND DEEDS OF PLANNING IN PAKISTAN

Coal 0%

Hydel 36%

Nuclear 3%

oil based power, the loss of billions of dollars of foreign exchange on oil imports, the resultant circular debt, the energy crisis and the lost economic growth. The volatility of oil prices in 2007 made our economy near bankrupt forcing us to seek IMF ﬁnances on tough conditions.

Oil 35%

There was a realization to ﬁnd some way out of our present energy crises in 2009 and the Economic Advisory Council set up by the Government of Pakistan including highly respected names from various sectors of the economy and society with four cabinet members and headed by the then Advisor on Finance Mr. Shaukat Tareen, constituted an Energy Expert Group consisting of renowned experts from various areas of energy sector. This well selected group of experts, after putting in a lot of hard work, presented a workable Integrated Energy Plan 2009-2022 to provide for a short, medium and long term strategy.

Gas 26%

Source: NEPRA, State of Industry Report 2011

OIL – THE POISON FOR PAKISTAN’S ECONOMY: Imported oil is a poison that we are ceaselessly injecting into our economy and are still hoping it will not die! What options we had after 1970s, when countries all over the world had started working on reducing oil-dependency, and what we did to preempt oil related disaster which ultimately hit us in 2007? We deﬁnitely had many options since 1970s. Coal was always a cheaper fuel and used worldwide as the major source for power generation. Even when Thar coal was not discovered in 1970s, we could have at least shifted from imported oil to imported coal and save our consumers at least 50% in power tariff payments. What made us pay twice the tariff to oil-based power plants and now produce 35% of our electricity on oil and almost none on coal, when the rest of the world is producing 40% of its electricity from coal and only 7% from oil? After discovery of Thar Coal in 1993 by Geological Survey of Pakistan in collaboration with US Geological Survey and pre-feasibility report by John T Boyd (a renowned US coal consulting ﬁrm) in 1995, we were pretty sure of the size of the resource and its usefulness for our energy needs. Why did we delay its use when we had such a huge resource and also had investors interested?

Some of their main recommendations were:

Integrated Energy Plan has been designed on the premise that coal will be the next dominant indigenous resource in this country’s future energy mix, especially for power generation. Though Gas will remain a major part of Pakistan’s energy mix it is critical that Coal, Hydro and Alternative and Renewable sources of energy be developed vigorously by 2022. Energy through Coal should be consideredas the next primary source of energy for power generation for our country. Induct a minimal of 10,000 MW power generation on local coal by 2020 for base load plants thru public & private partnership. On the issue of Transmission System, it proposed:

To develop a transmission system which will facilitate power transportation efficiently from the new generating stations to the load centers in the middle of the country. The main outlay will be on the transmission system for dispersal of power from large hydro power stations on upper Indus and for coal & renewable in the south. All very pertinent suggestions, but then how much of this hard work on planning recommendations actually went into implementation and what are the results? A review of the Public Sector Development Plan allocations since past ﬁve years shows no structural change in allocations since the making of the Integrated Energy Plan 2009-2022:

The power riots of 2012 have their genesis in the harmful decisions of 2005 when the then WAPDA administration refused the offer by the Chinese conglomerate M/s Shenhua Corporation to supply electricity, generated from Thar coal, to the national grid at the rate of US cents 5.6 per kwH. M/s Shenhua Corporation, one of the world’s coal mining and power technology leaders, had spent two years in the then inaccessible parts of Thar desert, after establishing a tent village for 136 engineers and technicians enduring the harsh desert weather. They carried out several tests and produced world class reports to ascertain viability of Thar coal for commercial mining and power generation.

PSDP ALLOCATION FOR POWER INFRASTRUCTURE

It might be difﬁcult to predict the electricity shortage for the team of energy policy makers who could not predict the shortage of natural gas as well. However, even an ordinary accountant could have told them that the offer of producing electricity @ 5.6 US cents per kwH on local coal was deﬁnitely an attractive offer when compared with the cost of imported Furnace oil based plants which, at that time, were supplying electricity @ 11 US cents per kwH. The savings in power tariff and foreign exchange spending were ignored by the then decision makers. Had that decision been taken in favour of the option of electricity from Thar lignite coal, our people and the national economy could have been saved from the current energy shortages and the loss of economic growth. The cost we all paid over the years and are still paying in the form of higher tariffs for

Year

Total Allocation

For Coal

2007-08 2008-09 2009-10 2010-11 2011-12

93.44 67.68 139.3 118.34 115.25

0 0 0.06 0.035 0.01

ENERGY CHALLENGES | APRIL 27, 2012

Rupees in billions

Source: Planning Commission website

Page 09

The primary emphasis in the Integrated Energy Plan 2009-2022 on coal to become a major source of energy by 2020, does not reﬂect in the above mentioned allocations. Has the Integrated Energy Plan 2009-2022 been shelved? Are we working on some other plan? Is there any plan at all?

PAKISTAN INTEGRATED ENERGY MODEL – 2011:

PRIMARY ENERGY SUPPLY COAL

2007

2030

PAKISTAN WORLD AVERAGE

0.42 1.82

0.77

The task for the Group was to generate various scenarios for the future of Pakistan’s energy sector and the possible policy decisions.

100

To sustain economic growth corresponding to 5.6% average GDP between now and 2030 will require a:

Four-fold increase in electricity generation – 94,000 GWh to 410,000 GWh 82,000¬ MW of new power generation capacity additions Three-fold increase in consumption of high value petroleum products – 6.2 Mtoe to 18 Mtoe Pakistan Integrated Energy Model ADB TA No. 4982-PAK Pak-IEM Final Report Volume II – Policy Analysis Page 2

RENEWABLE

m toe

200

Scenario – Pakistan on medium growth path till 2030

OIL

NUCLEAR

NATURAL GAS

Per Capita Primary Commercial Energy Use (TOE/capita)

In 2011, a study was sponsored by the Asian Development Bank and Ministry of Planning and Development which was conducted by M/s International Resources Group which submitted its report in August 2011.

The report presented the following scenarios of energy demand and the implications, if the current conditions continue:

HYDROELECTRIC

150

50 0

2007

2010

REFERENCE

2015

2020

2025

2030

PRIMARY ENERGY SUPPLY - REFERENCE SCENARIO

The report projects almost 50% of all energy investments in coal based power generation starting from the year 2013. The following are the projections of capacity increments and the share of coal based power plants:

POWER PLANT ANNUAL NEW CAPACITY ADDITIONS HYDRO PLANTS GAS FIRED POWER PLANTS DIESEL GENERATORS NUCLEAR POWER PLANTS DUAL FIRED POWER PLANTS COAL FIRED POWER PLANTS OIL FIRED POWER PLANTS RENEWABLES (NON-HYDRO)

Total installed capacity by 2030 OIL & GAS NUCLEAR

6 GW 5 GW

82 GW HYDRO COAL

28 GW 39 GW

RENEWABLES 2.9 GW

Scenario – with present energy mix Without (quick) government action it will be difﬁcult to avert a looming Energy Security crisis where, by 2030:

Under current practices and policies proven conventional natural gas reserves will be depleted

6.0 5.0 4.0 3.0 2.0 1.0 0.0

Required $17 Billion

2010 REFERENCE

2011

2012

2013

2014

2015

2020

2025

2030

ANNUAL ADDITIONS TO POWER GENERATING CAPACITY REFERENCE SCENARIO

Energy imports jump from 27% to over 45% of total supply Delays in moving on critical energy projects will further exasperate the situation Pakistan Integrated Energy Model ADB TA No. 4982-PAK Pak-IEM Final Report Volume II – Policy Analysis Page 2

The report further proceeds to paint a possible scenario of energy mix where the inclusion of Coal to the energy mix provides the following projections in which coal assumes a proportion of 30% of total energy mix by 2030, with very high increments from 2015 onwards:

Page 10

FRAMEWORK FOR ECONOMIC GROWTH 2011 – ENERGY RELATED ISSUES: The Planning Commission’s new “Framework for Economic Growth” came in the same year as the above discussed “Pakistan Integrated Energy Model”. However there seems to be very little connection between the Framework for Economic Growth with the Integrated Energy Model 2011 of Planning Commission or the earlier Integrated Energy Plan of 2009. The Framework takes the following view of the Energy crisis:

ENERGY CHALLENGES | APRIL 27, 2012

The issues faced by the energy sector are not related primarily to capacity—i.e. implying a need to expand the infrastructure—but to management and organisational difficulties that result in cash flow constraints. Hence the framework does not find any problems with the current precarious energy mix which has crumbled the economy and is a structural issue and a management problem. However, it recognises the need for inve stment in future expansion and says:

Both Ministry of Water and Power & Petroleum and Natural Resources will fast track the ongoing public sector investments in the energy sector. Further investments will however be fostered primarily through the private sector by an enabling environment and market oriented tariffs and deregulation of the sector. It is estimated that the Energy Sector alone requires an investment of over $35 billion in the next ﬁve years. Demand is expected to increase to 25,000 MW by 2014-15. The state cannot ﬁnance these investment requirements and therefore the private sector must be provided the environment whereby these investments can be forthcoming. There can be no second opinion that the private investment in the energy sector can be the only long term strategy for the energy sector. However, in the present scenario, one may raise the question as to why we are leaving such a burning issue at the whims of the private sector which might be working on a risk aversion option for the time being, in view of the challenging circumstances. If the private sector companies postpone their decision to invest for a couple of years, are we ready to pay the economic price of delays? Private interests may not always coincide with the national interests and the role of the State cannot be abdicated in a crisis situation. Leaving the job of investment in energy sector to the private sector may be a good policy option in normal circumstances but not in the face of the urgency looming on the

ENERGY CHALLENGES | APRIL 27, 2012

economic horizon. The public sector needs to lead from the front, even if it requires investment from the public sector development resources, keeping other developmental expenditure (except that on education) on the back burner for a couple of years. Once out of the urgency mode, the government may privatise its units and invest in other sectors.

ECONOMIC GROWTH – THE IMPACT OF ENERGY MIX During the high economic growth period from 2001-2007, we saw that our policy of inaction i.e. doing nothing about a precarious energy mix, led us to a situation when that rare economic opportunity of a few years of healthy economic growth was wasted in a few months of oil price volatility. In the present scenario, our aims for a high economic growth rate cannot be achieved without ensuring investments in the energy sector, both from public and private sectors. Even if we achieve required expansion in the electricity generation to match the requirements of a growing economy, we would not be able to sustain it for long, if we fail to focus on a change in the energy mix. Pursuing both Coal, for the base load, and Hydroelectricity, during its seasonal availability, is the only available strategic option in order to comie out of the present crisis and sustain our future growth.

The writer is a senior bureaucrat working for the Government of Sindh and has extensive experience in Thar Coal Project.

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CAPTIVE POWER HANDLING IS AN EVEN BIGGER SCAM Tabish Gauhar, CEO, KESC BR Research: Take us through a brief journey of KESC post privatisation.

peak load, which is 2500-2700MW, the addition of nearly 1000 MW is a signiﬁcant achievement.

Tabish Gauhar: KESC is a private business entity but with a public service which makes it a tough challenge for us. If you put on your commercial hat and think, we shouldn’t be doing a lot of things that we are. But often we have to put the social or the political hat on, and the thought process and things-to-do- list changes drastically. It is a very tough thing balancing the priorities.

BRR: How responsive has KESC been to the customers’ complaints and suggestions?

KESC has a lot of stakeholders – the investors, the lenders, foreign and local, local and foreign suppliers, company employees, media, political parties and the public at large. All have their own views and more often than not the views of the stakeholders are contrasting. Our job as the management is to balance the act every time. KESC was privatised in November 2005 under Musharraf’s regime. Siemens was appointed to run KESC affairs, but Siemens could not do it for a variety of reasons. Siemens are great at what they do, that is technology and hardware manufacturing, but did they have the experience to run a utility company in distress, to turn it around in one of the toughest place on the map? Things did not turn out well for Siemens and they eventually let go of their hold of KESC. We (Abraj Capital) were approached by Al-Juma and NIG in November 2008. They had invested $360 million in KESC, out of which $270 were the privatisation proceeds that went to the government’s kitty. We put our conditions before venturing into the deal. We told them that we will match them dollar to dollar and will invest $360 million – but that investment will be made in KESC. Secondly, we told that that we would take complete control of KESC’s management and also asked for the principal investors’ guarantee that they would keep their investment intact. We have put in nearly a billion dollar of debt and equity financing in this period through injections from ourselves, government’s subscription to right issues and loans from international and local finance institutions. BRR: How much capacity has KESC added under its new management? TG: Through this financing, we have added almost 813 MW of incremental capacity over three years. Another 2000 MW will be fully commissioned by May 2012, formalities are being finalised for a combined cycle power plant at Bin Qasim. If you look it in the context of our summer

Page 12

TG: We have also launched a state-of-the art call centre as customer service sits top on our priority list. We have increased our call centre strength from 70 to 350 people serving our customers. It is the largest call centre in the country and we should take pride in it. Our customers service ratings have undoubtedly improved – this is not to say that we have eradicated all complains, but still our response ratio is refreshingly improved from the previous years. BRR: KESC is often criticised for discriminatory load-shedding attitude? How do you defend that? TG: We were the ﬁrst utility company in Pakistan to take two very important strategic decisions. First one was to exempt the industrial zones of Karachi from scheduled load-shedding. This is the difference between us and any

At present, almost 25 percent of Karachi’s residential areas are facing zero load-shedding which is a just reward for their good behaviour. But a large numbers of areas still face extended load-shedding as they either don’t pay their bills or are indulging in electricity theft

state owned distribution company. We are doing the right thing for the country as they are the ones contributing the most towards economy. Unfortunately, however, we cannot shut electricity by customer; we have to do it by feeder. We have 1300 feeders in our system and we have divided them in four categories namely, low-loss, medium-loss, high-loss and very-high loss. By loss we mean both the theft and technical losses and the loss in billing collection ratio, which gives a holistic view of things. At present, almost 25 percent of Karachi’s residential areas are facing zero load-shedding which is a just reward for their good behaviour. But a large numbers of areas still face extended load-shedding as they either don’t pay their bills or are indulged in electricity theft – we dearly want to exempt some poorer areas from load-shedding, but as they say, old habits die hard. I count this segregation as one of our achievements. Now you may see a lot of other companies following our example. Secondly, we have been able to improve our financial performance significantly from previous years, though I confess, it still remains way below what we want to achieve. We expect to make profits from the next year, and we are eying break-even for the running year. Sixteen out of 28 business centres of KESC are now under 20 percent T&D loss. Just three years ago, the T&D losses were as high as 40 percent in most of the areas. The real problem lies with the remaining 12 centres, which give us the real headache as the losses range between 40 and 50 percent high and the collection ratio is dismal at 60-70 percent. This is why the end up being on the receiving end of load shedding. Nearly all industries are good payers – our collection ratio for industries is above 98 percent and the losses are hardly 8-9 percent, which is why they are exempt from the load shedding. Firstly, the more money we have, the more money we can spend on buying the fuel to run our plant s and buying electricity from other IPPs and Wapda. Second issue is that of fuel mix, which needs to be corrected if we are to provide uninterrupted power supply. KESC only has two fuel sources – gas and furnace oil. We used to get 250 mmcfd of natural gas three years back, which was reduced to 190 mmcfd the very next year, further reduced to 150 mmcfd last year and today we are only getting around 120 mmcfd.

ENERGY CHALLENGES | APRIL 27, 2012

The policy clearly states that gas will only be supplied to captive power plants only when the needs of Wapda and KESC have been served, which is clearly not the case at present. Previous year, we burnt almost 1 million ton of furnace oil which is equivalent to Rs50 billion. Two years back, we had burnt furnace oil of Rs25 billion. The price of furnace oil in the last two years has doubled and that of gas has also increased. You have to remember the more expensive our input, higher will be the power tariffs. BRR: How has the emergence of captive power plants affected KESC’s operation? TG: The dilemma is that the captive power producers in Karachi are getting 180 mmcfd currently, whereas KESC being the utility company of the city is receiving only 120 mmcfd. There is efficiency loss in this distribution of gas, as KESC could have generated 800 MW from the same amount of gas, whereas the captive power producers are not generating more than 600 MW. We guarantee uninterrupted power supply, if given this gas which is going to the captive power plants and being burnt inefficiently. The gas allocation policy of 2005 is being blatantly violated to facilitate the captive power plants. The policy clearly states that gas will only be supplied to captive power plants only when the needs of Wapda and KESC have been served, which is clearly not the case at present. People talk about CNG licences and all, but if you sit back and analyse the captive power handling, this is an even bigger scam that took place. The gas allocation should be prioritised in such a way that the power sector should sit second on the priority list following the domestic sector. Power generated through gas is at least four times cheaper than furnace oil – and it is no rocket science for the government to understand that. We should not be last on the priority list, when it comes to gas allocation. It will not only result in cheaper electricity, better fuel mix, a lot less burden in the form of fuel surcharge and it will ease the fiscal side for the government as the pressure form subsidies will subside. IMF’s pressure will eventually result on the phasing out of subsidy which will put added pressure on the industrial and middle class consumers. And going with the same fuel mix for power generation, will be catastrophic for the customers’ economy. Reduction in cost of generation should be the focal point of the power generation policy. If the government provides us the promised 276 mmcfd gas, our tariff differential claims would be negligible –which would benefit the entire chain and circular debt will ease off. This will bring in efficiency to the overall system and we would even be able to reduce the load-shedding in the high loss areas, when we have the liquidity which is possible only when the overall generation cost comes down.

ENERGY CHALLENGES | APRIL 27, 2012

BRR: What is the main problem that Pakistan’s energy sector faces? TG: The problem in the energy sector is that an integrated energy plan has never been put in place. The basic reason for this failure in my view is that we have too many cooks looking after the energy sector. The common ground is missing, as the number of ministries is a lot more than what is desirable. Every country has a ministry of energy which will bring synergies and efficiencies in the system. The regulators should be independent and not under the political administrative influence – merge them in one entity and make them competent. BRR: What needs to be done in medium to long term? TG: In the long run, exploiting Thar coal, generating hydel electricity, focussing on energy conservation and efficiency are absolutely must. The efficiencies of a number of domestic appliances are absolutely pathetic, it is bordering to the criminal. We can save thousands of MW through better implementation of conservation and efficiency reforms. God willing, we will put up a coal based power plant in Thar and we are very serious about it. We have done a feasibility study with Oracle and from the techno-economic angle, they have declared it viable. We will get cheap electricity from Thar, the initial plan is to commence with 300 MW. It will help a great deal in balancing the mix and reducing our reliance on thermal production and will free gas for industrial usage. Another thing that we are doing is that we plan to convert our oil-fired unit into coal-fired ones. We have engaged with a world renowned US firm for facilitation in conversion. Electricity produced from coal will be around Rs6-7 per unit, which would still be significantly lesser than FO based power generation. We are in the detailed engineering process and the conversion will take 18 to 24 months. We are taking the lead, and once we do it, others will definitely follow us. You have to have the right people at the right place. Political interference from the energy sector has to end. This is why we are not in the good books of many a people because our job is to focus on our core business and not to entertain political hiring. We have worked very hard and we have to fight for it every day to be independent form political pressure. BRR: KESC enjoys monopoly in Karachi. Is there any chance new players can enter the field to bring in more competition? TG: We encourage competition. Maybe five years from today, you will see more companies distributing power in the city. We will pioneer competition in the city by unbun-

dling KESC. There is already an understanding with the government that the KESC will be unbundled like Wapda, into several generation, one transmission and several distribution companies. Once you do that, KESC will be very incentivised to either sell the company to distribution parties or offer the management to third parties. I would love to offer the more troubled areas to the government or other interested parties. I would offer a simple deal, I would not want to make money out of those areas, I’d rather cover the fuel cost and stop making losses. Once deregulated, consumers can also have choices to use electricity from any distribution company of their choice which would further invite competition. Legally, no one can touch our license, we were offered the license as a monopoly, so in effect, we will break our own monopoly. BRR: What are your views on LNG and its potential in Pakistan? TG: LNG is expensive at the moment, but with US now in surplus, the equilibrium price will come down to $8-9 in five years time. We are in active discussion with Shell, Vitol and Fauji consortium for the infrastructure development of LNG terminal. We will facilitate the process and we will take 40 percent from that facility. When the LNG is in the system, the government should introduce a weighted average gas price. We are even willing to put in equity in the LNG project, if that helps fast-tracking the project. Import facility is very important – pipeline gas import may disrupt should a crisis erupt. BRR: What are your suggestions to reform the distribution companies in Pakistan? TG: There are two types of distribution companies – the good ones and the not so good ones. Whether you privatise the good one first or the bad one is the million dollar question. If you privatise the good one, it will set the example, but the upside for the investors may not be that lucrative, The bleeding discos should be the first ones to be privatised. If I were the decision maker, I would sell them for free to at least get the burden off my back. You have to spin off the loss making discos first. Take KESC for example, before privatisation, the government used to fund the loss of KESC. Now whatever loss we make, it is funded from within, which is a multi billion rupees relief to the government. The mindset has to change – electricity has to be prices accordingly and certain standards have to be followed. At the end of the day, it is a utility service, therefore affordability issue cannot be overlooked completely either. Privatisation is the key in the longer run, but I fear that nothing will happen soon, elections being so close.

BR interview by Ali Khizar & Zuhair Abbasi

Page 13

PSO TO BE A FULLY INTEGRATED COMPANY IN SIX YEARS Naeem Yahya Mir – MD, Pakistan State Oil BR Research: What is your vision for PSO?

BRR: Tell us a little about the oil business.

NAEEM YAHYA: My vision and philosophy is that a lot of things can be integrated; you cannot run companies on a stand-alone basis. My idea is to look at other state oil companies, which are my reference.

NY: Oil production is the most lucrative part of the business. The operating cost in the Middle East is less than $1 per barrel. And they sell crude for $120.

PSO may appear very big, but actually we are only distributing, buying and selling fuel at the retail level. In the present century, this is not going to work as far as the energy sector is concerned. The dynamics of alternate energy should also be kept in mind. You need technologies and infrastructure in place according to how you want to change some projects to a particular economic alternative. When I joined, my vision was that we have to be the best company in Pakistan in two years, in the region in four years and a Fortune 500 company in six years. I believed that this was achievable. Similar state owned oil companies in the world, like Petronas of Malaysia, Petrobras of Brazil, Petrochina, IOC of India, are doing so well. But why are we a failure? The difference is they are all integrated oil companies. When I say integrated I mean, they are crude producers, gas producers. For example, the Malaysian company owns drilling technologies, they’re into exploration, not only in Malaysia, but also elsewhere in the world. They are also exploring gas because today gas is a very important fuel/energy source, being less expensive and more environment friendly than oil. They own reﬁneries, oils ships, LNG ships, crude ships etc., as well as distribution and retail stations. BRR: How would you explain the energy scenario in Pakistan today? NY: My quick analysis of Pakistan is that we are a country of lost opportunities. We don’t take decisions at the right time. That is why there are so many power cuts, because the energy sector did not foresee the situation 10 years ago. Strategies need to be set before time, as well as the supply and demand, economics, and other multiple factors that affect the future. You have to plan in advance for growing energy needs.

Page 14

Starting from oil, actually who uses oil in the end is the retail sector – transport owners or power stations. Any point from production to shipping, to refinery to retail, you are called middlemen. Each time you buy at the second stage, for example, I have the refinery and I buy the crude. I am already paying 60 percent of the profit to someone who is producing. And I am buying at a high price, so I have less margins left. If I were to produce oil, I would make a lot more than by just selling it. This shows how the second stage counts. Now, let us assume we are on the second stage. The refineries will make a profit. Refineries are capital-intensive. Then comes the third stage, the in-between stage – shipping either the refined product or whatever depending where you are. So shipping also takes its profits. And then we, PSO, buy the oil. And you can see how many stages we lose. So my vision when coming here was to link our stream, link to the refineries, shipping, production, whether in-house here or later even outside the countries. If you don’t connect this, then even if I make PSO the best company in the world, I am playing with very narrow margins. I can minimize the costs but at the same time, I have to expand the business upstream, to make me cost effective. BRR: When you talk about refineries, you say that they are capital-intensive. How do you say you can manage that in three years? NY: You have to understand the dynamics. Refineries are capital-intensive. But the models done in Pakistan are stopping at the first step. A hydro-skipping refinery is a negative investment – you spend more money and you get less. I bring the expertise to the business, what to add and what to subtract to make it profitable, and that can change the whole scenario. There are many ways in which you can make an upgraded refinery. To start off, sulphur-heavy crude costs much less

than the discounted price. Our refineries are bringing in the most low-sulphur-content crude and they don’t upgrade. Imposing deemed duty just masking your losses which makes a company appear profitable when in reality it’s not. The whole process is wrong. Either the refiner has to upgrade or they should close down. BRR: About integration, would you go for refinery integration first or exploration? NY: I don’t believe in going in series; I believe in going parallel with multiple ideas working at the same time. My dream is for the government to make one holding company merging gas, OGDC and PSO like Petronas. Then we will grow very fast. But if that is not possible, I will go for anything because I would know that anything I am producing is going to cut down the supply cost. BRR: PSO is looked upon as the country’s energy bank. Pakistan has to move beyond its reliance on furnace oil. If we look at PSO as being in the energy business, what is PSO planning to do for the future to bring down furnace oil dependence? NY: That is a very good question. When I joined, we had long-term contracts on fuel oil. I don’t think fuel oil is the future fuel for Pakistan, and it is also a killer. All power plants in the world use 380 centistoke fuel, while we import 180 centistokes. The quality is the same but you just have to burn more. If I convert the power station to 380, I save at least $20 a ton. But I am tied with many problems here. The contracts were made way back on too many stringent conditions with sovereign guarantees to power stations. Second, my strategic vision for a five-year plan includes a freeze on any thermal plant where we secure fuel oil. So, I am not getting into any agreement for any power station. But, at the same time, one has to think of many dimensions. I will prepare alternative fuel, necessary skills and develop the economics of how we’ll do it, and then move fuel oil further down.

ENERGY CHALLENGES | APRIL 27, 2012

BRR: How realistic are your goals? NY: Very realistic, as long as I don’t get outside interference. We are changing everything, including the working environment and the results will follow. BRR: Have you thought of an internal whistle blower program? NY: We have that program. I want to bring people inside motivation. Programs such as audits, audits over audits, committees, etc don’t work. I think inner motivation works. So, in summary, I would say we have to start everything together. BRR: What needs to be done about the circular debt? NY: To be honest, it has nothing to do with PSO because we are sometimes taking steps more than a commercial company, sometimes supplying fuel when the other party is not even paying. But we do this for the sake of the state. We have to balance many things. I believe now there is a serious realization in the government and the ministry of petroleum. BRR: But realization is one thing, implementation is quite another. NY: If you want to do something in Pakistan, in the start you have to go against the stream. My ideas to solve the problem are coming out of the box.

ENERGY CHALLENGES | APRIL 27, 2012

But remember, the biggest problem of Pakistan is the consumer of electricity, big or small, not paying back. BRR: Isn’t that partly because of the inefficiencies of the companies? NY: Inefficiencies are in the range of 2-3 percent, not more. There is a huge leakage and that has to be taken care of or the government has to give subsidy. So the government is trying and its not an easy feat. It’s very delicate as well; when you want to recover the money you gave to raise tariffs, it results in theft. BRR: Wont we have to revise the fuel mix, as the tariff will go down if we use less costly fuel? NY: No, I don’t think so. Energy mix is one factor but theft is a big factor. BRR: But if we have an energy mix with which the electricity unit cost 5 rupees, won’t there be less theft? NY: We depend on imported fuels and this will continue for a long period of time. The greater the consumption, the more the imported fuel. We don’t produce the fuel, so you are importing while the world price of energy is going high. So you have to be efficient, as well as theft has to be controlled. In other countries like Canada, Kuwait, there is no question of leakage. We need to control that and also work on efficiency and reduce costs. The pipelines don’t have leakage issues, it is only theft that is the real problem.

BRR: Your lube business has to be the leader in that, doesn’t it? NY: Not necessarily, but it should be promoted. We are already looking for ways of doing that. Our lube is not OEM certiﬁed and we are losing 80 percent of the market because of this. BRR: Now that we are talking about implementation, are there any feasibilities being prepared in that regard or is it just a vision at the moment? NY: I don’t believe in long feasibilities. We should not start form the bottom, we should learn from other countries and start from there. I will change what is happening at the moment, I will not waste time on studies, paper work, hiring consultants etc. we should copy-paste what the Indians are doing. This will reduce the time wastage and can be implemented in less time. For as long as I am in power, I will implement things I think are proﬁtable, and try to turnaround the company. In one month, I have introduced 10-20 innovative projects, and given this progress, I will see a lot of change in the one year. BRR: When can we expect PSO evolve in a completely integrated company? NY: In six years. And I hope I have the support to see that day, because it is not my personal issue; it involves the whole country.

interview by Zuhair Abbasi & Mobin Nasir

Page 15

TAPI

IP AND TAPI: Where we are now? Illustration by Abdul Musawer Gulzar

By Sijal Fawad Pakistan’s evident energy shortfall is as common knowledge today as is the country’s pervasive corruption. And, therefore, moots over solutions to the problem, such as the oft-discussed Iran-Pakistan gas pipeline, are nothing new for policymakers. Initially, the project was an almost 2700 kilometer pipeline starting from Iran’s South Pars fields in the Persian Gulf, through major cities in Pakistan such as Karachi and Multan, uptil Delhi in India. However, 2009 saw India withdrawing from the project under the pretext that gas prices quoted by Iran were too high. It is widely alleged that the real r+eason for India’s abandonment of the deal was pressure from the government of the United States of America, which is loathe to any prospective deals between Iran and other countries that could benefit the former. Needless to say, the resistance rides at the back of US suspicions over Iran’s involvement in developing nuclear weapons – a cause of persistent political strife between the two countries. And Pakistan has also faced its share of pressure from the White House. The super power has been explicit in expressing its disapproval over any prospective involvement of either India or Pakistan with the Iranian pipeline. Naturally, for Pakistan, which has traditionally been dependent on the US for military and economic aid, the superpower’s antagonism against the project is a key bottleneck. Yet, the Pakistani government appears to be adamant about going forward with the project, with key government officials claiming that work on the pipeline will be commenced despite international pressure. Iran has already constructed 900 kilometers of the 1100 kilometer pipeline within its borders while the one thousand kilometer stretch of pipeline in Pakistan, awaits construction. The pipeline is likely to cost the energy-deficient country $1.25 billion, and will initially bring around 22 million cubic meters of gas to the country daily, which will be gradually increased to over 50 million cubic meters. However, it is the hefty bill of over a billion dollars that may be putting Pakistani officials’ apparent resoluteness regarding the project’s implementation to test. After all, in a country which has lately become notorious for missing its fiscal deficit

Page 16

targets by substantial amounts, raising an amount of this magnitude will not be a breeze. The situation becomes even more complex when the displeasure of the US and the consequent slimmed chances of financial help from the White House, or from US-backed institutions such as the IMF or the World Bank, are brought into the picture. The project is envisaged to be financed via a debt to equity ratio of 70:30, with public sector enterprises, the government and private investors contributing to equity, while a consortium of multilateral financial institutions, banks and other long-term non-bank financial institutions is expected to be brought together for raising the debt portion.

and finally to India. It also has the stamp of approval of the US which means financing options may be easier for Pakistan, with minimal international hindrance. However, because of the sensitive security situation in Afghanistan and Balochistan, one wonders how feasible will TAPI be as an alternative. In fact, no official agreements regarding the provision of security for the pipeline have made the rounds, with some experts claiming that the cost of providing security to the pipeline may be greater than the cost of constructing the pipeline itself. The cost to Pakistan of buying gas from either supplier has not been worked out yet, which might have made the feasibility of either option clearer for the country. However, in the absence of a price analogy, the apparent glitches in both projects make one wonder over the feasibility of each.

However, because of the sensitive security situation in Afghanistan and Balochistan, one wonders how feasible will TAPI be as an alternative

While IP is mired with the disapproval of the US, a country that has traditionally been a key inﬂuencer of domestic political and economic decisions taken by Pakistan, TAPI has the disadvantage of being riddled with many security concerns. Needless to say, project ﬁnancing also remains a crucial concern, more so for IP than for TAPI.

While the ﬁnancial health of PSEs such as SSGCL and SNGPL is anybody’s guess, the possible strife with the US is also likely to keep potential investors and lenders at bay.

In the face of the situation as it stands right now, perhaps pipelines should not be on the agenda of Pakistan’s policymakers; unless, of course, the pipeline goes through La La Land in a La La world where no international pressures could hinder a decision as crucial as this.

And guess who appears as a ray of hope when the pipeline appears to be a distant dream at best? Dear old China. The country expressed interest in joining the project back in 2010 in order to extend the project into its terrain. Expectations of support of the red back are an added cherry on top in this scenario. And Pakistan may also beneﬁt from transit fees from China if gas is routed through its lands to the Oriental giant. However, going ahead with the project when Washington is clearly against it will be more than a tough call for the Pakistani government, especially since the US has proposed the Turkmenistan-Afghanistan-Pakistan-India (TAPI). TAPI, $7.6 billion, 1700 km pipeline, passes through the heart of Afghanistan, through Zhob and Chaman in Balochistan,

And Pakistan is nowhere close to ﬁnding a sustainable solution to its energy crisis, nor has it shown the political will to put its foot down and take a call regarding any option or alternative for that matter.

The writer is a Research Analyst at Business Recorder. She can be reached at sijal.fawad@br-mail.com

ENERGY CHALLENGES | APRIL 27, 2012

THAR COAL IS ESSENTIAL FOR ENERGY SECURITY Khalid Mansoor– CEO, Engro Fertilizer BR Research: Engro has been a classic example of being at the receiving end of the ongoing energy crisis in Pakistan. What’s your take on that? Khalid Mansoor: Natural gas is a precious resource and we should use it judicially.You have to maintain your supply and demand in the country. If you want to distribute it judicially, then you must have an eye on the supply side as well.You have choked the supply side for a variety of reasons. First, people occupied the areas where the gas ﬁelds were located. Secondly, the petroleum policy needed review - if you don’t incentivize the companies then how will you maintain the supply side? Thirdly, investment fell due to the law and order situation. Fourthly, when political governments came, you generously said that we will provide gas to everyone for everyday use - how can you do that at the cost of depriving the industries of this energy source they depend on? More than half a billion of the current gas produced is unaccounted for. Gas is being used in transport - in cars (where people can afford petrol) and not in motorcycles (that is owned by the less affording class). Then, at homes, we are running geysers on 20 percent efﬁciency. Our gas policy still states that the number one priority users are domestic. The users are domestic, then textile, then general industry and then fertilizer. It makes sense for equitable distribution.

For just power generation, $4 billion worth of oil is imported in Pakistan. And if it goes on like this line, it will cross $8 billion by 2020. If you transfer those inefficient furnace oil plants to coal, imported coal to begin with, then your tariff is reduced by half. This is the only visible solution to bring energy security in the country. BRR: Engro has long been working on Thar coal powerproject. What is the current status? KM: We are trying to develop the Thar project since 2009. We hired international consultants, did all the planning work, and for the first time we have demonstrated that the Thar proposition is technically, socially, economically and financially viable. We have even purchased construction bids from China. We have to now embark on the financing activity. There are two issues. On the one hand we are saying that if we have to solve the countries’ energy crisis, Thar is the only solution. Next is that if you want to execute the project, you need a financing of $3 billion. Now if we go to the lenders, they will tell us what happened to their previous investment. Then if you take out coal and generate power, to whom will you sell? It will be sold to the national grid. With the circular debt issue - who will come forward and want to invest? We made a forum in Pakistan Business Council. We gave a comprehensive plan to deal with circular debt.

BRR: How would the situation improve?

BRR: What needs to be done in the short-term as Thar is deﬁnitely a long–term solution?

KM: For Pakistan’s energy revival, we need thermal power plants for base load and renewable for peaking. Peaking is whenever you have a renewable energy resource and you can have cheaper electricity produced, for example hydel, which is available when there is water.

KM: At any point in time, 3000 MW is sitting idle; you need to transfer it on coal. In the short term you have to go for multiple strategies. There are hardly any wind projects n in the country. Although it is a drop in the ocean but we say there is a potential of 50,000 MW.

Hydel capacity is 6500 MW. If there is low water level, it may fall down to less than 1000 MW. Then you need thermal plants for base load.

BRR: What is the gas potential, do we have more gas? What are the major issues?

Thermal works with three things – the fuel mix will revolve around gas, furnace oil or coal. You don’t have gas and if you import it, it will cost $16 /mmbtu. You have to look at the price in Europe and the US. Gas price in the US after discovery of shale gas has fallen to $3.5/mmbtu. The other option is to run it on RFO. If I tell you the ﬁgures of 2009-2010 and 2010-2011, it will show that our dependence on furnace oil is 25 percent. That means you have to import more oil. Thermal power plants are a must if we want to bridge the gap between supply and demand. One solution that seems feasible and is not vulnerable to the changing crude oil price, is coal.

ENERGY CHALLENGES | APRIL 27, 2012

KM: The petroleum policy needs to be re-addressed. On the bright side, Pakistan is considered one of the very few countries where the E&P success rate is outstanding. There are two views there - we have already plucked the low hanging gas fruits and now there is only the distant fruit which is tight and shale gas, that has some potential but it is an expensive proposition. BRR: What is the rationale behind that? KM: It is the lack of political will. We gave a documented plan of how to get out of this mess. And we didn’t just talk about energy, we also stressed on education as the intellectual capacity is also lacking. But there is no political will.

A country that doesn’t have energy security has nothing. And if we want to achieve that security in this country, then Thar is the only solution. BRR: Tell us more about Thar coal and its potential? KM: 185 billion tons are the total coal reserves in Pakistan, of which 175 billion is in Thar. This is more than 50 billion tons of oil equivalent, which is more than Iran and Saudi oil put together. It is equivalent to more than 2000 trillion cubic feet of gas. This is more than 68 times, all the reserves discovered in Pakistan. Our joint venture with the government is in Block 2, which we got through an International Competitive Bidding. We were told that the block has 1.6 billion tons of coal. When we did additional geological survey and additional drilling, we confirmed 200 billion tons from just that block, which is more than what was earlier estimated. That is just 1 percent of the total reserves and it can generate 5000 MW power. Not only will it meet the current demand, it is 25 percent of our current installed capacity. All this requires an investment of around $3 billion. 100,000 MW electricity for 200 years can be generated if we use the full Thar. BRR: By when should we expect That coal power generation to be operational? KM: The project needs time to develop. Its tariff is going to be competitive with imported coal and LNG. We are just getting ready to start exploring the financing of the project. We have three limitations. One, as part of the joint venture agreement, government has to bring the infrastructure at the same readiness level on which we have worked. In that, four infrastructures components are critical. Water supply, toxation line, disposal system and road network. Of these, the government has been very cooperative with us on three. A very attractive fiscal package has been approved by the government. 20 percent dollar IRR has been approved in mining and exploration. The government has to bring the infrastructure at readiness level, solve the Engro gas problem and resolve the circular debt because otherwise the financial close is not possible. The good news is that we will get some financing from China. Chinese PM signed an MoU with the PM Gilani when he came here in 2010. In that, they made a joint energy working group. In that group, Thar is a flagship project. So before the financing activity starts, you have to resolve these issues to avoid any hurdles in the process.

interview by Ali Khizar and Zuhair Abbasi

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BRING DOMESTIC GAS PRICES TO INTERNATIONAL LEVEL Azim Iqbal – MD, SSGC BR Research: Despite managing onefourth of the country’s gas supply, SSGC’s gas sales are declining. Why is that? Azim Iqbal: SSGC is a transmission and distribution company that sells gas to customers. It is not into exploration and production. We do not explore or produce gas, rather we buy it. Our gas sales have declined because the production of the Badin gas field fell from about 170 mmcfd to about 80 mmcfd. Secondly, Sui Northern actually looks after around 70 percent of the population of the country which includes Punjab and Khyber Pakhtunkhwa, while SSGC looks after 19 percent of the population of the country which resides in Sindh along with another seven percent in Balochistan. So SNGPL gets more gas than we do. Our largest load centre is Karachi which consumes about 700-750 mmcfd, which is roughly about 75 percent of the total of SSGC’s sales. Fields that are commercially ready have to be integrated into our system to increase gas supply. Recently we integrated the Kunar-Pashaki gas field that is currently producing around 100 mmcfd and this will go up to about 280 mmcfd. We will be sharing this field on a 50-50 basis with SNGPL. Kunar Pashaki field was integrated in less than a month. The whole structure of close to 30 kilometers of pipelines which included about 49 crossings is comparatively much more difficult than laying a straight pipeline. We are now looking at alternatives such as getting about 100 mmcfd of synthetic gas into the system by next year. Synthetic gas is basically LPG mixed with air. There are countries in the world that do this on a regular basis for peak load management and for base load management. US and Argentina do it on a regular basis. So the next winters should be comparatively better. Even during this winter we have been able to manage our load much better than SNGPL. BRR: What about the pricing of this synthetic gas and how viable is it?

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AI: It has to be the weighted average cost of gas. Otherwise people would not buy it. The current cost of natural gas is about $4 per mmbtu while the cost of synthetic gas is about $18 per mmbtu. It is almost four times more expensive. However, it is financially viable because the cost will be spread over 4 bcf of gas and the total impact will not be in dollars. We are also trying to get LNG and Progas. We bought the crude gas facility in Bin Qasim area with the intent to increase LPG share in the energy mix. The current energy mix is totally skewed towards gas with 50 percent natural gas and only a fraction in coal, whereas coal contributes more in the energy mix for countries such as USA, China and India. BRR: What are the main impediments towards increasing reliance on coal reserves in Pakistan? AI: In terms of BTU, coal reserves of Pakistan are more than Iran’s and Saudi Arabia’s reserves put together. But the world has plenty of coal and our coal is lignite which cannot be transported over long distances. It has high sulphur content and needs to be consumed right there. However, there is huge potential of getting synthetic gas by setting up coal gasification units at the mouth of the mines. BRR: What does SSGC plan to do and what has it done so far about LNG and Progas development? AI: In the Mashal Gas Project, SSGC was facilitating development with government support. We were a natural choice for the government because of our technical capabilities and our strategic location close to the two ports where LNG terminals were to be located. We were doing pretty well until the court thing happened. Mashal project is more or less suspended and I am not sure about it until relevant authorities come to some solution. But we are now trying to retrofit our Progas facility for LNG facility on a fast track basis. The quantity might be less but this will be an

induction to the system to reduce the pressure in the coming winter season.

BRR: What is the update on the LNG terminal project?

BRR: Tell us about the pricing and cost of Progas? What is the rationale for LNG import and the expected impact on prices?

AI: We have just tendered the retroﬁt of Progas. Our initial studies, researches and experts suggest that this can be done as it is being done all over the world. If it all works out well, we are aiming to bring LNG into our systems by the middle of 2013. However, there are studies to be conducted and permissions to be obtained from the regulators of Bin Qasim.

AI: The cost of gas purchases is fixed on the basis of petroleum policies that the government signs with producers. Ninety two percent of our total revenue requirement is this cost of gas. So we have to work with around 8 percent for payment of salaries, improvement in the distribution and transmission systems, meter reads and other expenses and still make a profit. Comparing our transportation cost per mmbtu, we are 75 percent less than any oil company. If you compare our losses with power companies, we are still efficient where our losses are 8 percent while those of power companies are hovering at 40 percent. We are over 55-year old and a lot of our pipelines need replacement. Thirty percent of our pipelines are 30 years old. We are negotiating a loan with World Bank of about $2 billion. LNG pricing will definitely be more expensive. For instance, if we take 500 mmcf into our system; the cost is likely to increase by Rs150 per mmbtu. The present cost is Rs400 per mmbtu, and the budgeted cost would become Rs550 per mmbtu. So it is expensive and will be determined by international prices.

BRR: Why are you demanding a revision in the UFG benchmark? AI: Internationally, there are two reasons for UFG: leakages in the system and measurement errors. In our case we have a third reason for UFG: third party damages signified by unauthorized construction, terrorism elements and gas thefts. We will keep facing these challenges until the Gas Theft Act is implemented. Last year, UFG was 9.23 percent for SSGC while this year we averaged around 9 percent. For reasons mentioned before, we have been demanding a more realistic benchmark because anything beyond 7 percent is taken away from our profits. The previous benchmark of 5 percent has bogged down our profits. Additionally, our non-operating income was being classified as regulated income which helped keep gas prices low but was ruining the company at the same time. To be able to function, utilities all around the world are propped up by the governments.

Although this will raise gas prices for the domestic users, it will still be around $2 cheaper than furnace oil.

BRR: What is the level of transmission losses?

However, Japan, after its nuclear accident, is now moving away from indigenous nuclear energy to importing LNG which will raise prices in the international markets. Since America will be exporting gas now, we could still get good prices. Simply put, there are many factors inﬂuencing the prices of gas imports.

AI: We are meeting world standards with transmission losses under 0.5 percent. We have a right of way within 40 feet of anywhere that our pipelines are installed. We also have high transmission lines with pressure of about 1,100 psig so we cannot afford any leaks. We face distribution losses because we have tremendous amount of third party damages.

ENERGY CHALLENGES | APRIL 27, 2012

BRR: What do you say about the recovery problem? AI: In the industrial sector, apart from KESC, we are doing pretty well. Out of our total monthly bills of Rs10 billion plus, the industrial sector outstanding is only Rs78 million. Right now domestic is 19 percent in our distribution mix, commercial is 3 percent, power is 30 percent, CNG is 10 percent, captive power is 17 percent, textile is 8 percent, general industry is 3 percent, fertilizer is 7 percent, Pakistan Steel is 3 percent. BRR: How do you price these various sectors? AI: Domestic has four slabs. The ﬁrst two are subsidized slabs of Rs122 and Rs245 per mmbtu respectively. Then there is a jump to Rs1,035 per mmbtu. The rate for power stations, IPPs and general industry is the same at Rs507.86 per mmbtu while that for CNG is Rs691 per mmbtu. Cement is Rs674.2 per mmbtu; Fauji Fertilizer is Rs313 per mmbtu. Commercial gets it at Rs600 per mmbtu. These prices are not set by us. We tell the regulator our total revenue requirement and

T&D costs. We also inform them at what price we purchase the gas from the ﬁelds and what volumes we are going to sell to different categories of customers. The regulator then prices it in such a manner that we get our required revenue. BRR: How cheap is CNG at Rs600 per mmbtu compared to other fuels for transportation? AI: It is 40 percent cheaper. The sector earns higher margins because all it has to do is compress their share of natural gas. Moreover, their selling price is not regulated. This has resulted in the multiplication of CNG stations nationwide. BRR: How can we incentivise the domestic and foreign E&P companies to extract more gas? AI: Bring domestic gas prices at par with international prices. You need a pricing regime that will attract big players to take bigger risks as the conventional gas reserves are depleting. Prices proposed by the latest Petroleum Policy are slightly better but they are still 25-30 percent lesser than what may be considered attractive by bigger players.

ENERGY CHALLENGES | APRIL 27, 2012

BRR: What are the untapped potential reser ves of hydrocarbons in Pakistan?

few discoverers. These reserves are in Sui, Dadu and Badin, Sui being the greatest potential.

AI: Those would be about 90 trillion, while we have exploited about 30 trillion. In terms of ﬁelds, we have around 16 in SIndh and Balochistan, and 7-8 in Punjab and KPK. There are about 24 to 25 other small ﬁelds.

BRR: Does the future of gas seem bright?

BRR: How much gas are we getting from each province? AI: Sindh produces about 69 percent of gas and consumes 43 percent. Punjab produces only 5 percent but consumes 46 percent. KPK produces 9 percent and consumes 4 percent. Balochistan produces 18 percent, consuming only 7 percent. BRR: How ﬁnancially viable is tight gas in Pakistan? AI: It is promising which is why there is a policy for it, though the range of 30-90 trillion cubic feet of tight gas reserves is quite broad. It requires costlier technology and thus the gas will be expensive. Also the prices recommended are much higher, which is being called a bonanza for the ﬁrst

AI: There is potential in the country that can be exploited. The probable has to be proven. The good thing is that the Ministry pf Petroleum and Natural Resources is pushing ahead on this front. Under the assumption that the existing fields keep depleting and new fields come on the map as per our expectations, our total production will be 1.3 bcf in FY13 while constrained demand will be 1.5 bcf. In FY14, supply from SSGC will improve to 1.4 bcf and demand will meet supply. Trouble starts from FY17 when our supply will fall short of demand and this gap will widen further. These estimates are based on current production and future projections. Things would change dramatically if we find a new Sui.

interview by Ali Khizar, Zuhair Abbasi & Sidra Farrukh

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CNG TILE ABC TEX

FILLING STATION

MILL CNG

CNG

Don’t waste this precious resource By Muhammad Zuhair Abbasi Natural gas comprises nearly half (48 percent) of Pakistan’s total energy consumption and the bitter truth is that the indigenous natural resource is depleting at a brisk rate. Lack of foresight in the yesteryears has augmented the crisis that deepens every year especially during the winters when the demand-supply gap even touches 1.5 billion cfd (35 percent of the total gas supply). Keeping the policy failures aside, the bitter truth is that the country faces acute gas shortage and it needs efficient prioritisation of usage to yield better productivity for the country. A closer look at the sectoral usage of natural gas reveals that the priorities have not been set right in the past many years and there is no major shift in reprioritising gas for different sectors despite muted production growth and addition of new users in the gas mix. Domestic sector continues to enjoy the top priority in gas distribution at concessional rates to most of the other users. While, it is essential to provide households with natural gas on prioritised basis, it is the abuse of the precious resource to domestic level which leads to inefficient use of gas. The domestic sector captures a sizeable share of 19 percent in the total gas consumption pie –which has grown slowly and steadily in the past five years. Subsidised pricing is the single most important factor that acts as an incentive for the domestic sector leading to wastage of huge proportions. While there is a need to discourage the consumption at the domestic level through higher pricing there is also a dire need to restrict the usage for cooking purposes only. Geysers and heaters which are abundantly used in a large part of the country need

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to be discouraged to help divert the gas to sources which have the potential to provide better yields. Power sector, is the largest user of the natural gas, with a 27 percent share. Being low on priority, the sector’s share has taken the biggest dip in the past five years, as it enjoyed 39 percent share back in 2006. Reasons to this significant decline are many, the most important of which is the circular debt, which has made the gas suppliers reluctant to supply gas to power producers. This has resulted in the use of alternate fuel, furnace oil, which has a strain not only on the import bill but also on the tariff structure, as furnace oil is considerably costlier than natural gas. Experts argue that power sector should sit top on the priority list, as the base load generation in Pakistan is mainly thermal. Electricity generation from imported oil puts a huge strain, not only on the balance of payments but also on the electricity tariffs, which results in inter-corporate circular debt. Since, gas demand exceeds supply, there is a need that gas be provided to the power sector on top priority, in order to reduce load- shedding and increase efficiency in the system. General industries, excluding the fertiliser sector, have the second largest consumption share of 23 percent, which has remained steady over five years. Textile industry, the largest foreign exchange earner of Pakistan, is the most vital user in this category. The industry, through its strong presence in Pakistan and strong media support has always argued that it should be the first recipient of natural gas being the backbone of country’s economy.

However, the textile industry lacks argument when it calls for more equitable gas distribution asking for top most priority. Natural gas is not the raw material for textile manufacturers, it is just a fuel source, which has ready alternates available. There is no denying that the alternate source which in this case, is furnace oil, costs significantly more than natural gas, but by no means does it threaten to lead to industry closure as portrayed by the industry. Interestingly, fuel and power cost constitutes of hardly 8~9 percent of the overall cost of sales for the textile manufacturers, which could be verified from the accounts. It is difficult to fathom that an increase in one-tenth portion of the manufacturing cost could lead to a complete closure of production. More evidence could be tracked from the textile players’ annual accounts and the production numbers released by the PBS. The textile industry does get affected, but the impact is best assessed when seen in relative terms. Another major user of natural gas in Pakistan is the fertiliser industry, which has gone through tough times in the past two years. Fertiliser sector’s share in the total consumption pie is nearly 18 percent, of which 14 percent is the feedstock gas, which acts as the raw material. It is therefore, the only industry, which uses the resource as raw material and faces complete halt of production should the raw material supply get disrupted. As the country faces acute gas shortage and there is inequitable gas distribution prioritisation, the fertiliser production has greatly suffered in the past two years. The industry is operating well below optimum efficiency,

ENERGY CHALLENGES | APRIL 27, 2012

as the world’s single largest urea plant s deprived of the feedstock gas for most part of the year. Not only does it hurt the industry’s confidence, it does worse to the farmers in the form of increased input prices. The gravity of the issue is such that urea prices in 2011 almost doubled to that of 2010, hence increased input cost for the farmers, which could either mean increased output prices leading to inflation, or worse-off farmers in case they are unable to pass on the impact. Some circles argue that the gas given to the fertiliser industry should instead be given to the textile industry. The argument that urea could instead be imported to compensate for the production loss and to ensure textile production lacks weight as the fertiliser industry needs natural gas as the raw material unlike the textile industry. Moreover, the economic cost-benefit analysis of gas supply to the two industries also tilts in favour of the fertiliser industry. If the industries are forced to switch to alterative furnace oil, the cost would be nearly $22/mmbtu. Conversely, if gas stoppage results in urea imports, it would cost $41/mmbtu, of which $29/mmbtu would be the direct import cost and the rest would be paid by the government in form of subsidy to equate prices to the local market. It is no rocket science to judge which one is the better option as importing furnace oil would be less of a burden on the foreign exchange than imputing urea. Being the recipient of raw material, fertiliser sector should ideally get the preference over other general industries which have other alternative fuels available for production. Another area of concern is the massive abuse of natural gas in the transport sector in the form of CNG. CNG’s share in the consumption pie has crossed 9 percent. Lack of foresight in the years gone by has resulted in CNG being the preferred fuel amongst the commuters, making Pakistan the country with the most numbers of vehicles on CNG. It is no rocket science that it is the most inefficient use of natural gas and it deprives other productive sectors of the much needed fuel at the expense of production and huge dent to the BoP, both in terms of imports and exports. Energy experts have long argued for the closure of CNG industries. It is rationally the right thing to do but lacks practicality. A middle ground has to be found and that could be done by discouraging the CNG use through narrowing the price difference between CNG and its alternate fuel, petrol and diesel. Efforts have been made of late, to bridge the gap, but it still a road less travelled, and the incentive still remains to opt for CNG. The natural gas prioritisation should be done in the best national interest, which calls for a higher position for power and fertiliser sector on the priority list. The domestic sector should continue to be top on the priority list, but that should only be restricted for cooking purpose. Next in line should be power and fertiliser companies for feedstock purpose. General industries should follow, once the requirements of the others mentioned have been met. The CNG sector needs to be on the bottom and efforts should be made to gradually replace it with LPG.

The writer is a Research Analyst at Business Recorder. He can be reached at zuhair.abbasi@br-mail.com

ENERGY CHALLENGES | APRIL 27, 2012

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COUNTRY NEEDS AN INTEGRATED ENERGY BODY Sohail Wajahat Siddiqui – Energy Expert - Chairman PSO “For the economy to be back on track you have to address two issues - energy and policing. And you will be surprised to know that there will be no money required to resurrect the energy sector” In a recent interview with BR Research, the energy expert stressed that the prerequisite for meeting the country’s energy needs is creativity, not big bucks. “Corruption has to be replaced with lawful incentives. In today’s world, if you have to destroy a country, just destroy its police and energy and this is what has been done to Pakistan over the years” he opines. “LNG imports must come online within six months. On the other hand, exploration activities must be expedited for the long term” says Wajahat. But he is adamant that “nothing will ever happen until all the energy bodies are brought under a single unified ministry”. He laments that politicking over prospective energy solutions has incited ill-informed and irrelevant debates. “Ninety percent of the people do not even know where the Kalabagh Dam is supposed to be constructed. This dam would have protected against floods and improved water and energy supply, but these important benefits have been lost in diatribes,” he says. Wajahat insists that no new investments are needed to resurrect existing idle capacity at power plants: “A new plant would take three years whereas revamping an existing plant can be completed in six months. If you build a new plant of 1000 MW, it would cost $1 billion. On the other hand, resurrecting 1000 MW from an existing plant will cost a lot lesser”. Highlighting that the energy shortfall costs the country at least 2.5 percent of GDP, the expert states that “there are too many cooks in the energy sector.You cannot synchronise the energy sector with so many people involved”. “Establishing a National Energy Authority is the need of the hour, the more you delay it the longer it will take the energy crisis to be resolved”, he argues adding that a centralized authority will be better poised to prioritize much-needed incentives and slash redundancies in the system.

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Energy mix The current energy mix warrants immediate attention, according to Wajahat, who stresses that “unlike the current state of affairs, hydel power should cater the lion’s share of our energy needs”. He laments that alternative energy sources such as solar and wind have received more attention than hydel power in recent debate regarding solutions for the energy conundrum. “Our hydel power potential is up to 100,000 MW and we are not even tapping 10 percent of it, which is a shame. It is so cheap and carries such high returns that ﬁnancing will never be an issue and the electricity will be available at very affordable rates to the nation. Had we spent the same amount of money on hydel that we spent on IPPs, we would have been much better off today, but our focus was never there” he states. “Some circles contend that the quality of the coal in Thar is not good enough but the reality is that this coal is even better than the varieties currently in use in Greece and Germany” says Wajahat. “The Thar reserves are enough to last for 200 years, producing no less than 100,000 MW which is way more than our requirements. The opportunity is immense and no more time should be wasted:, he stresses.

Circular debt & losses The plethora of unaccounted for gas (UFG) losses, ‘kunda’ connections and rampant non-payment of energy bills manifest in the form of a dismal 60 percent payment against total energy supplied. “Essentially we are creating Rs55 of circular debt on every Rs100 worth of power supplied” says Wajahat, giving perspective to the extent of leakages in the energy chain.

According to him, eradicating inter-corporate debt from the energy sector is possible if older power plants are resurrected and combined cycle power plants are encouraged so power tariffs can fall, in turn encouraging the payment of dues by users. He also stressed that pricing incentives must be provided to exploration and distribution companies so that new discoveries can be made and added to the energy infrastructure, soon. “The power sector should be accorded the highest priority in gas allocation and CNG should either be abolished or priced at par with petrol, to discourage its use in vehicles”, he contends. The collection mechanism for the power sector can be revamped such that supplies are contingent on advanced payments, suggests the energy expert arguing that this would encourage conservation and ensure timely payments.

Political will: the missing ingredient “Count the number of Prados zipping around in Islamabad to get a sense of the priorities of policymakers” suggests Sohail Wajahat. He contends that at least three network studies can be funded for the cost of one of these luxury cars. “In Karachi, removing all illegal connections and installing new meters will cost a total of $40 million. That’s not a huge amount for a city like Karachi, but the focus is missing” says the PSO chairman. Refuting the common assertion that such a drive requires political stability and a restoration of law and order to the metropolis, Wajahat argues, “When there is power to run their factories, shops and places of business, the security situation will also improve”.

interview by Ali Khizar and Zuhair Abbasi

ENERGY CHALLENGES | APRIL 27, 2012

RAISE GAS PRICES BY 25 PERCENT EVERY YEAR Javed Akbar, Energy Expert BR Research: You have worked with Engro Vopak on the LNG terminal. Tell us about LNG’s viability and the cost-benefit it brings to the energy mix. Javed Akbar: We have been getting LPG for the past 12 years there, if there was any security risk, LPG is a much more dangerous fuel than LNG, because LNG is lighter than air-it goes up. LPG is heavier than air, it can explode. In 2004 when we were looking at it, the market was 150 million tons, now it is over 200 million tons. If we had the permission, we would have been at 7 million tons right now. If we were to import more, we would have been able to revert the extra gas through the SSCG system, elsewhere in Karachi. The risk was that if Pakistan has a cheap gas pipeline, from Turkey, Iran, Turkmenistan and Qatar, from a risk point of view our model was to bring in a floating storage ( that makes gas out of liquid). Land based is not only risky but also costs twice as much so floating based is the best option for Pakistan. We had a project with partnership from South Korea which has surplus LNG in summers. We even got to the point where we made LNG receiving terminals in Pakistan in 2006. We made agreements and financial models, but it was all sabotaged.

We have a 1.5 bcf shortfall in Pakistan which is equal to IP gas pipeline plus two terminals. If four terminals are set up then you will be sufﬁcient enough to meet the local demand. I think the gas price in Pakistan is too low. We have to make sure the affording customers are paying the due price of gas. Government made a committee of energy experts, I gave a proposal to increase the gas price by 25 percent each year on a compounded basis. India has a policy of bringing the natural gas price to the furnace oil price. Pakistan has no such policy BRR: What is your take on renewable energy’s potential and future in Pakistan? JA: I have installed a wind turbine and a solar panel from an experimental point of view to see how it works on a small scale. Solar photo voltage-producing energy from sunlight is evolving very fast. Solar price was $4/kw a couple of years back. It has now come down to just $1/kw. So solar panels above your home will be cheaper as the grid tariffs continue to escalate. BRR: what is its capital cost? JA: It is falling very rapidly, from Rs30 per unit two years ago, it has come down to Rs15 a unit at present.

BRR: What are the major hindering factors towards LNG import?

BRR: Isn’t the capital cost still on the higher side? Does it make commercial sense even with the reduced cost?

JA: The LNG price is all over the place. The US imports very little LNG as it produces its own gas. Price in the US is $3-4/mmbtu, $8 in Europe and $16 in Japan. Pakistan cannot pay this increase as the income level has not increased anywhere close to Japan’s.. Europe and the US don’t benchmark with crude oil -they go and negotiate directly.

JA: It does make sense and I will tell you how. KESC has different slab rates. And with the solar panel, I am saving the Rs15 per unit tariff and not the Re1 per unit. So as long as KESC has the same tariff structure, it is viable. Solar panels should not be used for your total electricity requirement. It should be used for the incremental slab. And you can use it during the day time. In fact the good thing is that during the daytime, you are producing and consuming at the same time. So you don’t need storage.

In the US, natural gas is one-quarter the price of crude oil. In two years, the US will be exporting gas causing its internal price to go up. The spillover will be felt in Asia as well and the world price will get to a reasonable level. Pakistan has to make sure we don’t get stuck in a pricing formula that we cannot get out of. So my recommendation to the people is: let us put up an LNG terminal, we can have 50 percent of our quantity that we will benchmark with crude oil. Just to get the business going. And the rest of it we should get from the spot market. Pakistan will not be able to do what the Europeans are doing, we will be stuck with the crude oil benchmark. The government has not yet come up with a deﬁnitive pricing formula, but it has to be based on weighted average.

ENERGY CHALLENGES | APRIL 27, 2012

BRR: So you are suggesting that people should have these panels installed? JA: What people do is that they have a small generator that costs 40 rupees per unit. Instead of doing this, they should put up a solar panel and save on this monetary loss. So you spend on its installation cost but save the operating cost. The life of a solar panel is 20 years and it carries zero maintenance cost. There is a new technology. The current solar cells are made of silicone which is very expensive. The new technology is not using silicone. It’s a plastic sheet on which you emboss

metals which is printed on the plastic sheet. Five years down the line, it will become extremely cheap and every house should have one. They are working to increase the life of this sheet as the polymer degrades in sunlight over a period of time, so once it is successful and out in the market, it is going to be feasible for every household. The main thing that I want to point out is that the fall in the price of the solar panel is just like that of the LCD. Now in Pakistan we have spent a lot on the infrastructure only to find out that it’s better to have your own power. My vision of Pakistan is that every house should become a mini power station. We have the perfect weather for this technology and we don’t need KESC and WAPDA for electricity generation. And this will start happening in five years and it will be so fast that you will not realize it. Also, when there is awareness among people about such technology like the solar panels, there is a change in behavior. Agreed there is a lot of capital investment, but let us look at it on a realistic basis. A person who can pay Rs80 million to buy a house can afford another Rs20 million to setup the solar panel. So when someone is building a house, it’s an insignificant cost. The government needs to bring in a legislation, like in China where the installation of such panels before the building is a must.

interview by Ali Khizar & Zuhair Abbasi

Page 23

ENERGY SECTOR

Primary Energy Supplies Oil Gas LPG Coal Hydro & Nuclear Electricity 100%

7,994 4,050

8,214 4,427

7,634 5,784

7,072 4,733

7,456 4,622

8,409 4,351

29,203

29,324

29,875

30,256

30,809

30,683

20%

16,412

18,188

19,206

20,103

19,806

20,675

FY06

FY07

FY08

FY09

FY10

FY11

80% 60% 40%

AT A GLANCE

Source: Pakistan Energy Yearbook 2011

Energy Consumption by Sector Domestic

Commercial

Industrial

Agriculture

Transport

Refineries' production

Other (000 tons)

FY11

FY06

12000 11000

22%

10000

21%

31%

9000

28% 4%

8000

FY06

FY07

FY08

FY09

FY10

FY11

Petroleum imports

Crude Oil

39%

43%

Petroleum Products

(000 tons)

14,000 12,000 10,000

Petroleum Products Consumption by Sector Domestic

Industrial

Agriculture

Transport

Power

8,000 6,000

Other

4,000

FY11 2%

FY06

7% 0%

29%

43%

48%

Page 24

FY06

FY07

FY08

FY09

FY10

FY11

Natural Gas Production

11% 1% mn cft

56%

1,500,000 1,480,000 1,460,000 1,440,000 1,420,000 1,400,000 1,380,000 1,360,000 1,340,000

FY06

FY07

FY08

FY09

FY10

FY11

ENERGY CHALLENGES | APRIL 27, 2012

Gas Consumption by Sector Domestic Commercial Fertilizer (Fuel) Power

FY11 1%

Coal Production and Imports

Industries Fertilizer (Feedstock) CNG Others

Coal Production 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0

FY06 2%

19%

14% 2%

27%

40%

FY06

12%

Exploratory

Pak Steel

Power

FY11

FY 06

FY06

FY 07 6%

FY 08 FY 09

39%

FY 10

36%

FY 11

55%

54%

Domestic

Thermal (KESC)

FY11

Development

26 16

42 34

General industry

Captive

CNG

Fertilizer

Power

(Rs/mmbtu)

600

500

25,000

400

20,000

300

15,000

200

10,000

100

5,000 0

FY10

Natural Gas Consumer Prices

Electricity Installed Capacity Hydel Thermal (Wapda) Thermal (IPPs) Nuclear

FY09

Exploratory & Development Wells Drilled

Coal Consumption by Sector Cement

FY08

24%

23%

Brick-Klin

FY07

Coal Imports

0 FY06

FY07

FY08

FY09

ENERGY CHALLENGES | APRIL 27, 2012

FY10

FY11

Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan 06 06 07 07 08 08 09 09 10 10 11 11 12 Page 25

THE RESERVES ARE LIMITED AND ARE DEPLETING WITH TIME Basharat Mirza – MD, OGDCL

BR Research: The success ratio in Pakistan’s E&P sector is 1:4, while the global success ratio is 1:8, indicating there is a lot of untapped potential. Why has the exploration process been so slow for the past few years?

risk at a signiﬁcantly high cost. And this has been the case all over the world, especially in offshore. So when you talk about the issue of economic viability, all I can say is that we don’t know yet.

Basharat Mirza: There are a few things. Firstly, most of the potential is in Baluchistan, KPK, and off-shore areas. Baluchistan and KPK have a considerably high security risks, while offshore exploration is very expensive. Also, the reserves are limited and they are reducing at a brisk apce with the passage of time.

BRR: What are your offshore plans in coming years? Shall we expect offshore activities anytime soon?

Besides, after the 18th Amendment, there are issues with certain blocks that need to be sorted before more activity can take place. As per the Amendment, 50 percent power resides with the province and the rest with the federal government, so of all exploration activities in future, 50 percent share will be for province and the other 50 percent for the federal government. Before this, 100 percent was with the federal government. This needs to be sorted out. Because of this unsorted state, new bidding cannot take place, which is hindering the development process. BRR: When do you think will this issue with the 18th Amendment be resolved? BM: The newspapers say very soon. A lot of time has passed, so I think it should be done soon now before it gets too late. More than 30 blocks are ready to be offered. But oil and gas exploration is a slow business. The impact of one action continues for two years. Even if we get the area this year, there maybe no impact on the number of wells immediately because we first have to do sizing. BRR: Tell us more about offshore exploration. Is it financially viable? BM: Something may be financially viable but I don’t have the money for investment. A well costs about $70-80 million, which is a huge amount of investment. There are around 15 wells in Pakistan in offshore so far, and there has not been economic recovery from even one of them. So there is high

Page 26

BM: It takes 4-5 years for executing the investment plan, besides being cost-intensive. And in Pakistan, it takes a year or two longer than elsewhere to plan and execute. There are no security issues, but weather is a very important factor; we need a calm sea for survey and drilling.

FC is on our side and it is because of their support that we have been able to move to the next rig. BRR: Has your company been a victim of any terrorist activities of late? BM: In the past 4-5 months, they attacked and focused on FC. The last attack on us was attack on the line pipe in Pir Koh. There have been a few blasts in our working areas as well. It is tough to keep going, but we are still very determined to do well even in such conditions. BRR: Where are you operating in Baluchistan?

Paras ﬁeld, which we are pretty hopeful about, is shared by Iran and Qatar. But it needs technology, and with the huge amount of investment required, there needs to be a certain expectation that there will be enough returns.

BM: We are operating in Baluchistan on ﬁve different locations. In Uch and Zin, we are in the drilling process. Production is from three sides: Pir Koh, Loti and Uch.

BRR: Have you estimated the price of the produce if it is explored and sold?

BRR: How do you generally go about the drilling and exploration process?

BM: You will get the price in the petroleum policy. If the price is low but the reservoir is large, then it may be viable. On the other hand, if the price is high but the reservoir is small, it may not be viable.

BM: We have to do an assessment, and then start drilling. And we have to drill multiple wells for assessment purposes. We get blocks on a commitment based on how much drilling we will do. Then we are allotted an area. We get a license for three years to work on the area.

But we are surely working offshore. We were working with BP, but are now changing partners joining with UEP. We are going to do the drilling, we have 25 percent share even with the new set of partners. BRR: Please elaborate on the issues related to KPK and Balochistan. How does the security situation hamper the E&P activities in these areas? BM: There are a lot of security issues in these two regions, in areas where we are working, to be precise. Despite that, we are working there. We have drilled a well already. But it’s all over the news that militants have changed their targets and are focused on FC security forces. BRR: Are you saying it’s a war-like situation there? BM: I am just saying there are forces that are a formidable hurdle in our work and there are security issues there. But

Take the example of Zin. We had one well there. When it was complete, we did an initial assessment and now are on the second well there. What I am trying to tell you is that everything depends on the outcome of the next drill; whether we need to drill further wells or two are enough. So far, in Zin, it is low btu 0.5 trillion recoverable gas, based on one well. BRR: Do you think the area carries potential to meet current demand, provided security issues are addressed? BM: I think there is plenty of hope if those areas are cleared. We, being the local company, have to set an example for other companies to follow; we have to move ﬁrst to such areas and let others follow. We want to lead by example and show all others that it could be done.

ENERGY CHALLENGES | APRIL 27, 2012

BRR: What about the problems in KPK? BM: Problems have surfaced recently in KPK. People get active when there is a discovery; this wasn’t the reaction in the past. There are issues there but our work is going on. The tribal area is unexplored. The system is there but we will have to penetrate that area too.

BRR: What do you think are the Baluch people demanding from the authorities? BM: I personally think, certain Nawabs and Sardars in Baluchistan are misguiding the common man there. They don’t want development there. It’s not that we are giving them a lower royalty than what we are giving in Punjab.

BRR: Tell us about the national petroleum policy. Does it offer better rates than the previous policies?

BRR: Do you think increasing the royalty will bring any smoothness in the system?

BM: The price in 2012 is very good. It’s between $6-7.3 per mmbtu and has been approved informally so far. The average has stayed below $4 per mmbtu previously.

BM: Increasing it is not important; what is important is that it reaches the right and deserving people. We give it to the provinces, but that is not passed on to the speciﬁc district we are extracting from.

There are a lot of security issues in these two regions, in areas where we are working, to be precise. Despite that, we are working there. We have drilled a well already. But it’s all over the news that terrorists have changed their targets and are focused on FC security forces. BRR: What’s the situation internationally? BM: In Pakistan and Europe we deal with crude gas, so prices are higher here. This is not the case in the US where gas is not linked with crude, it has its own system. America is going towards export of shale and tight gas. LNG is in abundance there. They are setting up plants there and even $4/mmbtu is feasible for them. They are targeting European and Asian markets, especially Poland,China and Japan. BRR: Prices in Europe are around $7 and they are double in Japan, India, etc. What is the reason behind this difference? BM: Mainly transportation cost and also machinery cost. There is also an element of ‘ﬁnding’ cost. In Europe and Asia, prices are linked with crude prices, which impacts the prices of gas. BRR: We give 11-12 percent royalty. What is it in other countries? BM: 12.5 percent.

BRR: Has OGDC ever thought of going international? BM: We tried but it was not successful. Big players come in and pay a bulk bonus to the government, so we have not been able to penetrate anywhere. BRR: What are your views on tight gas? BM: Pakistan has reserves of tight gas. Its price is also good. In the past, we didn’t focus on it because it requires deeper drilling and is costly. But now, if we find it, we will exploit it. We are 50 percent partners with ENI which is exploring and working on it. BRR: Please update us on your projects in Qadirpur, Thar, Uch, Sinjhuro and Kunhaar. What are the issues and how are you addressing them? BM: The ideal concept is to give the project to someone on “theka”. But there were litigation problems so we were not successful in that. Now we are working on the strategy of doing everything on our own. Problems are here as well, but so far, we have been successful in running the system this way. Kunhaar has given 100-110 cubic feet of gas in the first phase; in the second phase, another 175 cubic feet is expected. This will take another year or so. Sinjhuro will come in June; Ouch equipment orders will be placed by the end of the next month. BRR: What are the positives that have come in the recent petroleum policy and what are your suggestions for the future ones? BM: It has been cleared and approved by the Counsel of Common Interests. Now it will go to the cabinet and will then be finally implemented. The price in this policy is good. In the 2009 policy, zones were removed. This affected the exploration activity.

ENERGY CHALLENGES | APRIL 27, 2012

interview by Ali Khizar and Hammad Haider

Page 27

On E&P Policy and Pricing By Sidra Farrukh When it comes to oil and gas laws, the

petroleum world has seen all sorts of developments. From setting royalties to pricing regimes, E&P countries and regulators are running amok to design a sound policy and framework. As a basis, the mineral ownership plays an initial factor in setting policy grounds for any E&P sector. In most countries of the world, resources such as oil and gas belong to the government. Whereas, some countries such as the US and Russia, follow private ownership rules for oil and gas resources. Fiscal risk of any E&P sector is totally linked to its petroleum ﬁscal regime. In essence, the E&P country aims for a policy that maximizes its share of the non-renewable energy resources while maintaining the glitters that attract investors. On the other hand, investors are drawn to regimes that offer congenial terms, high returns and lower rigidity.

Pakistan Policy Evolution For a country like Pakistan which is falling rapidly into a gasless pit, a well drafted policy is a crucial factor that could make or break the sector. When the journey ﬁrst started in 1991, the ministry of petroleum could not bring much to the E&P map as the elementary nature of the policy did little to attract foreign investors. The successive policies of 1994 and 1997 where the gas pricing was linked to crude with proportionate discounting factors to the three zones, and offshore package was announced respectively, stirred massive exploration and drilling activity in the sector. Changing the gas pricing regime where gas was capped at $36 per barrel, did little for the E&P sector as the journey downhill had already begun. The policy efforts taken later also proved futile with 2007 and 2009 strategies.

sharing agreements, royalty/tax regimes or concessions and risk service contracts. However, within these arrangements, there many variations that are being adopted with respect to ﬁscal systems. One such case is that of Pakistan which does not follows a purely production sharing system like that in China that has a ﬁscal regime consisting of Production Sharing Contracts (PSC) and windfall levies, royalties, corporate income tax and bonuses. Neither does it correspond completely to a tax/royalty system like that in UK which has a concessionary system involving income taxes and supplementary charges. In Pakistan, where onshore operations have production concession arrangements in respect of exploration licenses, offshore exploration and development activities have production sharing agreements.

Recent policy initiatives in comparison to the world Whether states lower royalties to attract investment like that in UK or raise them to seize a bigger share of the exploration and production pie like Canada, royalties have evolved from one-size-for-all to a more ﬂexible one. Typically around 12.5 percent worldwide, some regimes have royalty rates higher than

country, received a lot of fizzle after the 18th amendment to the constitution. After a series of row between the provinces and the centre, the decision on royalty collection was restored to the federal government. In light of the 18th amendment, the new petroleum policy set off with the concept of one zone. However, visualizing the differences between geographies coupled with pressures from the provinces, the four-zone setting made to the finalizing of the policy. Although many fiscal regimes adopt direct government participation in the E&P sector, as in the case of China and Algeria, direct involvement of the state reduces the investors’ revenue. In the onshore operations in Pakistan, the government acts as a working interest partner to make up for the balance of required minimum Pakistani working interest for exploration expenditure in a joint venture between local and foreign E&P. Latest policy initiatives allow for the renewal of expired lease but with signature bonus of 15 percent of well head prices. On the flip side, this participation gives government the right to exploit the resources to their maximum for the citizens. This is mostly done through government taxes and levies which play a very crucial role for the fiscal system of an oil and gas

Where oil and gas producing countries aim to maximize their share of the country's non-renewable resources while maintaining the glitters that attract investments, investors are drawn to congenial terms, high return and low rigidity. 15 percent. Unlike the ﬂat royalty rates that are deducted directly from the gross revenues for onshore licenses in Pakistan, the offshore royalties under PSAs are levied on sliding scale based on the commercial production.

sector. Generally, the taxes have increased over a period of 5-6 years due to extravagant rise in oil prices and a scarcity of available acreage for E&P.

Type of Contracts

The investors and the upstream sector are likely to enjoy some relief in offshore operations as the royalties under PSA do not affect their cash ﬂows directly, unlike the royalty affecting onshore activities. But little to no offshore drilling and production in the region keeps these beneﬁts afar.

To capture high volatility in oil prices, many regimes tax additional profits. The incidence of additional profit taxation, such as the windfall levy in Pakistan and China, can however render previously profitable projects uneconomic or at least trivial.

Generally, the globe follows three types of petroleum arrangements: production

Royalty, which has the history of being collected by the federal government in the

And now when the energy situation in the country has reached the precipice of collapse, the much awaited and much delayed petroleum policy 2012 emerges through choppy recessionary waters. The attractiveness the ﬁscal regime and hence the investment in the upstream sector rests on realistic yet lucrative arrangements.

Page 28

With that said, the ministry of petroleum and natural resources of Pakistan has reduced the windfall levy from 50 to 40

percent and base price with a ceiling of $110 per barrel replacing $100 per barrel in the recent petroleum policy as an incentive for the companies. The bureaucratic nature of policy formation and implementation in the country is an undeniable issue. However, in view of signiﬁcant fall in the exploration and drilling activities, the new policy has reduced the period of exploration license from 9 to 7 years. Likewise, the renewal of appraisal has also been slashed from 2 to 1 year.

Gas Pricing and Policy Issues Since Pakistan is highly dependent on natural gas, gas pricing has always attracted precedence, especially at a time when the country is going through a massive shortage of energy. Gas pricing under the petroleum policy of 2009, which indexes the gas price to crude oil at $100 per barrel, has not been attractive as evident from triﬂing investment landing on the upstream map. $4-4.5 per barrel might fetch handsome investments for a country that has a gas glut but certainly not for a country that has poor law and order situation in a greater part of it gas rich land. Also the regulators have had a tough time raising the gas prices amid the subsidized rate for domestic consumers, fertilizer sector and other industries. With some signs of hope, the recent prices of $6-9 per barrel announced after much delay are at least in par with global gas prices. Tight gas and shale gas reserves, pricing of which still hanging in limbo, are one immediate source. But from the looks of it, the government is ready to pay higher for gas acquired through expensive alternatives like pipelines (IP, TAPI) and LNG imports. With the new policy superseding the previous, one issue that remains is the automatic conversion of exploration license to a development and production lease that would rid the exploration company to go through the hassle of yet another tedious process. Moreover, even though the new policy allows conversion of all exploration wells drilled and spudded after the petroleum policy of 2007 and have not yet declared commerciality, the older block that are producing and operating run the disadvantage of low gas prices.

ENERGY CHALLENGES | APRIL 27, 2012

OIL AND GAS FISCAL REGIMES Country Fiscal Model

Pakistan

China

India

Russia

Suadi Arabia

Hybrid

Production Sharing Contract PSC

Hybrid

Concession

Oil & Gas Ownership

Income Tax

Bonuses

E&P Incentives

40%

Onshore 12.5% Offshore 0-12.5% (sliding scale based on production)

Varied amounts, linked with the levelof commercial production

1. E&P Co can operate exploration blocks with100% ownership 2.In JVs, local E&Ps have a working interest of 20% which is otherwise to made up by GHPL/provicial govt. 3. E&P entitled to 100% foreign exchange for expenses before commercial discovery, and 30% after comm. discovery

State/ Central Government

25%

Crude oil 0-12.5% Gas 0-3% (based on production slabs)

Lump-sum deﬁned in the PSC based on the volume of petroleum resources and the economic value of the ﬁeld

1. Qualiﬁed R&D exp deductible at 150% 2. Customs duty andVAT exemptions on import of qualiﬁed equipment and materials

State/ Central Government

Foreign Co: 40% Local Co: 30% Add surcharge 7.5% and 2.5% resp for income above INR 10m

Crude: 12.5% Gas: 10 % Shallow offshore crude and Gas: 10% Deep offshore 5-10%

20% Federal: 2% Regional: 18%

Mineral Extraction Tax (MET): Crude 419 rubles per tonne Gas: 237 rubles per 1,000 cubic meters Gas Condensate: 17.5% of wellhead price

Oil Production: 85% N.Gas Investment ﬁelds: 30%

Royalties stipulated in respective PCA

30% ring fencing rate*

12.5% abolished since January 2003

State/ Central Government

Private Ownership

State/ Kingdom

Crown/ Govt. for coal, oil, gas, gold and silver only.

Royalty

35%

Onshore: 12.5-30% Offshore: 12.5-18.75%

1. A seven-year tax holiday equal to 100% of taxable proﬁts 2. Carryforward losses for 8 yrs 3. R&D incentives 4. Deduction for site restoration expenses

Speciﬁed in the license with min rates not less than 10% of MET

1. Losses carried fwd for 10 yrs 2. Tax holiday of 10 and 15 years in respect of MET 3. Special export duty for oilﬁelds in East Siberia and Caspian Sea 4. Zero export duty for LNG

Losses can be carried forward indeﬁnately, no provision for carryback losses

1. Ring fence losses can be carried forward indeﬁnately 2. R&D allowances Onshore: negotiated or bid with mineral ownerOffshore: competitive bid process

1. Income tax losses carried forward for 20 years 2. Tax incentive of 30% for integrated E&P companies 3. R&D incentives

USA

Concession

Private Ownership

UAE

Concession

State/ Kingdom

Taxes paid on case to case basis

Royalties on production basis

1. The possibilityof 100% foreign ownership 2. Tax incentives and exemptions

Concession

Crown/ Government

Federal: 2011-6.5% 2012-15% Prov: 10- 16%

Crown Royalty : 10-45% Freehold Royalty: lease to lease

1. Atlantic investment tax credits (ITC) of 10-20% 2.Scientiﬁc research and experimental development (SR&ED)

Australia Concession

Crown/ Government

30%

Royalty 0-12.5%

1. Loss carried fwd indeﬁnately 2. Investment allowance 3. Regional incentives 4. R&D tax concessions

Canada

ENERGY CHALLENGES | APRIL 27, 2012

What now By far, the aim of any oil or gas producing country is to pull investors, increase indigenous reserves and make upstream sector worthwhile. This is primarily due to the fact that government budgets are highly reliant on the returns from the sector. However, one of the most tormenting issues for Pakistan’s energy sector is the low purchasing power of the consumers that has led to subsidization of power and gas consumer prices. For now the pricing of gas producer prices seem pretty reasonable. The situation calls for pragmatic implementation of policy initiatives and faster award and bidding process, the result of which should be an increase in the indigenous gas reserves, and expeditious and economic E&P activities that bring foreign bucks into the local soils.

The writer works as Research Analyst at Business Recorder. She can be reached at sidra.farrukh@br-mail.com

Page 29

CONCESSIONS LIMIT FURTHER INVESTMENT Asim Murtaza Khan – MD, PPL BR Research: What are the major issues being faced by the E&P sector currently? ASIM MURTAZA: There are several challenges if we look at it from the upstream perspective. The licensing round has been poor relative to the desires of investors. There may be various political or commercial reasons presenting the portfolio for bidding. The last round was in 2009 which was one of the largest bidding rounds. Another round was postponed due to the 18th amendment, as the provinces had to be taken on board in that process otherwise we would have seen another round where 18 blocks would have been on offer. The acreage now available in the country for exploration is not of prime quality because the easy acreages have already been awarded. Exploration is in quite advanced stage in the Indus Basin and Potohar area which is very mature in terms of exploration. The areas which are now open are in the Baluchistan basin, but there have been some issues in terms of geological prospective. We are only looking at the complexity of operations. The structures that could exist, the cost of exploration and the relief that one could expect, they are difﬁcult and they require many studies and surveys such as 3D sideway surveys, we can’t rely on 2D. The 2D survey is all done; that was the easy part. The frequency of bidding rounds should increase, which is also a policy the government is now pursuing. The revised policy brought forth in 2012 contains more incentives compared to the 2009 policy. Still there is a strong case for the deployment of more technology in the process. But in that case, current prices may not be adequately attractive for new entrants, especially international companies. We have to offer some additional perks to counter negative perceptions over geopolitical conditions and commercial terms. The provinces also have a key role to play in the process. BRR: What are the salient features of the 2009 policy? AM: Licensing regime has been made more transparent. Many questions had arisen over the extensions offered on licenses. Previously there were many concessions and delays by the companies but the 2009 policy presented a better regime in terms of how licenses will be managed by companies. The key policy features were: • Introduction of system of work units which was considered to be fair and no company had complaints about discretion • Any company was free to bid in terms of work unit

Page 30

• Freedom of repatriating revenues • Standard area of 2500 square kilometers was allotted for exploration blocks • Initial grants were available • In terms of commercial incentive, pricing was much improved BRR: What is the impact of oil prices on gas wellhead prices? Does the volatility impact your pricing requirements?

BRR: Being the second biggest company, what are your plans of investing in better technology? AM: We have deployed special services for the ﬁrst time in Pakistan. We are struggling hard for approvals of proprietary technology. We have initiated all these activities and we are interacting with our joint venture partners, (foreign companies) which are OMV and ENI. They have faster access to technology as they exist abroad, so that’s a great way of channelizing technology to local companies.

AM: Oil prices hit their peak in 2008 and then dropped to an average of about $100 per barrel. We are quoting $6/mmbtu in anticipation of an average oil price of $110 per barrel going forward.

These companies are partners in our existing blocks and these partners are not to just invest in equity, they actively participate in all technical matters.

BRR: If you get $6/mmbtu what kind of activity do you expect regarding exploration, discovery and success ratio? How much more gas may be available in the system over the next three years?

BRR: Tell us about the potential of shale gas and tight gas in Pakistan?

AM: Well it’s a very subjective answer, as exploration is always a risky business and one cannot predict a certain range. However, the ratio which has been maintained in past is around 1:2 or 1:3 as compared to international 1:10 ratio , so it’s a big challenge to maintain that ratio. BRR: What kind of success ratio do you foresee in the future? AM: Over the long term our ratio will not decline. We will maintain it around current levels by exploring not just new areas but also by opening up the potential of exploration in existing areas. Concessions keep prices low and limit further investment. If price improve, there will be incremental activity and that incentive encourages us to apply technology. Even if we find smaller volume that is sufficient because of presence of infrastructure, we don’t need economic threshold, because we already have complete plant, facilities, pipelines and everything. So increased price resulting in incremental change makes a lot of sense and many companies including PPL are looking forward to it. This method will result in quicker production than full fledge exploration. That’s an add-on and will be helpful in improving the discovery ratio. If we go in different horizons there may be new discoveries. In the late 1950s, low BTU gas was discovered but no technology was there to convert it and use it at the time. But now we have access to the requisite technology. So these are the factors and as I keep emphasizing technology will play a key role worldwide, not only in Pakistan.

AM: Tight gas has already been discovered, we already have a block which is operated by a Polish oil and gas company. There is a policy regarding tight gas as well. There are certain processes which require certification through consultants. This certification informs the government about the characteristics of reservoirs. Many companies have initiated this process but no company in Pakistan has passed through the entire certification process yet. Once the certifications are handed out, which is expected shortly; the development phase will begin. Tight gas can only be commercially produced by fracturing reservoirs. BRR: Would you shed some more light on fracturing? AM: The porosity is not that much good in a normal reservoir so you have to open it up. Fracturing makes micro cracks in reservoirs and reservoirs start production. It is not an easy task as it requires advanced technology, a lot of computer simulation is required so the crack doesn’t expand which can result in leakage of water in well. So it entails a lot of designing, computer simulation and testing. Tight gas reserves do exist in the country; OMV has also announced the discovery of tight gas. It’s a matter of financing the project to utilize it. BRR: Is pricing for tight gas economically viable? AM: This is a subjective question. If you find a tight field of 30 to 40 million or even 50 million, the price is appropriate. However, if you find one of 20-25 million, it is not appropriate as it requires a lot of investment. An additional bonus is also available if field work is completed within two years’ time.

ENERGY CHALLENGES | APRIL 27, 2012

BRR: Is there a similar friendly approach towards shale gas reserves? AM: Shale is very expensive and different from tight gas and conventional gas. It has been discovered but the content testing to check hydrocarbon is not done yet. There is no facility available in Pakistan to check the contents of shale gas. It requires specialized testing which is done in the US. No company is going for it due to an uncertain pricing policy. We need a framework to start the exploration as it is too early to write a policy, given the lack of technical and commercial data. BRR: What is the potential of shale gas reserves in Pakistan? AM: According to one publisher, there is 51 TCA shale gas in the Indus Basin, but we believe this is outdated data. But the recovery rate is only 10 percent as it depends on the quality of the reservoir and technology. With current technology, we can recover 10 percent, but as technology improves this rate can rise to as high as 70 or 80 percent. BRR: If pricing of $6/bbl is implemented, would it be incentive enough to attract foreign firms who are not here? AM: We do not need other foreign firms, but the challenge is to retain the foreign firms which we already have.

BRR: How far has the Sui ﬁeld depleted and how long can we expect it to continue producing gas? AM: Sui has depleted by around 70 percent and only 2.3 TCF is remaining. If we think about production, it can even produce gas for next 20 years but that is not the main concern. The main concern is its economic cut down and that is more of a political issue. TAL block in KP has been a good area. Now moving towards Balochistan, there are many blocks that have not been surveyed. There are political issues, tribal issues and so access is limited. These are good areas but foreign companies won’t go there for the old prices. BRR: Tell us about the potential of offshore reserves in Pakistan. AM: In offshore areas, wells have been drilled but no recovery has been made so far. Offshore exploration is very expensive; especially the wells which cost around $60 to $80 million to drill. More efforts are being diverted towards onshore areas but that doesn’t mean we have completely divested from offshore areas. BRR: How will the 2012 petroleum policy impact the sector? AM: It must be accompanied by new licenses. If license and conversion are

ENERGY CHALLENGES | APRIL 27, 2012

applied to the new policy, it will speed up things and small reserves will become more economical. If new pricing is introduced, the threshold of commerciality will be lowered and it will become more viable so the success ratio will also improve.

problem, which will result in stopping development work as it needs capital investment.

BRR: How much exploration work does PPL plan to do in the current year?

AM: Well currently it’s Rs29 billion. But it’s not hurting currently, as today we are meeting our operational expenses, but if there is no discovery, there will be a big problem.

AM: You can expect a lot of drilling activity in 2012 as all companies that were issued licenses in 2009 are passing through the same process and generally commence drilling in the third year. BRR: What is the average wellhead gas price at the moment? AM: The price from Sui is $2.3/mmbtu and its share in production is 18 percent, Qadirpur’s price is $2.5/mmbtu and the production share is again 18 percent. So, the approximate weighted average price is around $3/mmbtu as compared to the world average of $4/mmbtu. BRR: What about circular debt? AM: It is increasing.

BRR: How much of your cash ﬂow is stuck in circular debt?

BRR: Does PPL not focus on oil? AM: It’s not the matter of focus, wherever we went, we found gas. But prospects are rising for oil, even offshore is gas in Pakistan, we have very good infrastructure of gas and if we augment that, it will take care of future needs. But we need to expand as current gas reserves are declining and infrastructure must be developed in Balochistan. BRR: What is PPL’s next 15 year plan? AM: We will be moving towards unconventional gas. Shale and tight gas will be more focused in the years to come.

BRR: So does it hit your cash flows? AM: Well exploration will not be hurt, however fieldwork will be hurt. If one field needs $200 million then it would be a

interview by Ali Khizar, Zuhair Abbasi & Sidra Farrukh

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WITHDRAWN GAS HAS TO BE RETURNED TO POWER SECTOR Engr Tahir Basharat Cheema

The people of Pakistan, especially the power customers, have great grouse against WAPDA. Although, WAPDA’s power wing has since long been de-bundled under a reform programme and converted into GENCOs, the NTDC and nine DISCOs; people still consider the power issue as WAPDA’s responsibility alone. The main complaint against the DISCOs is the extremely high tariff which has seen an average 100 percent rise during the last three years. That this rise after incorporating the ill-fated monthly fuel price adjustment has been up to 200 percent for some categories and around 70 percent for some customers further complicates the scenario.

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The power sector managers, on the other hand, talk of factors beyond their sway as being responsible for the steep rise in prices–foremost being the inordinate jump in oil prices from a low of $37 to $125 at present. They further propagate that the burden of oil prices has manifested in a debilitating manner because the earlier requirement of 780 mmcfd of gas has since been curtailed to as low as about 250 mmcfd for the public sector GENCOs. It is further informed that the ﬁrm allocation of 70 mmcfd for KAPCO against the full need of 200 mmcfd (once WAPDA’s ﬂagship venture and now privatized) too has been

cancelled since the last three years through the non-extension of the binding gas supply agreement with SNGPL. Money managers of the power sector also highlight that full gas supplies to the sector can easily bring the power tariff down by a hefty 30 percent, thus doing away with the imposition of the current level of the monthly fuel price adjustment. Incidentally, this price adjustment is the present bone of contention between the DISCOs and the customers–so much so, that nearly all the high courts were privy to litigation in this regard. Agreeing to the above thesis, the requirement boils down to one speciﬁc issue: that

somehow the earlier withdrawn gas has to be returned to the power sector, at least for the coming 2-3 years, during which period other solutions for the conversion of existing public sector power plants to cheaper fuels may be undertaken. This seems to be an uphill task especially when the country is facing a shortfall of 1 bcf of gas at present. Unfortunately, most of the professionals also consider any extra gas supplies to the power sector as an unlikely proposition. However, the facts belie this thrust of opinion. OGRA has pin pointed unaccounted-for gas (UFG) losses to be in the range of

ENERGY CHALLENGES | APRIL 27, 2012

13 percent for SNGPL and SSGC systems. Imagine the savings if this figure could be brought down even by 1-3 percent in the coming 3 months, especially when huge amounts are available for this activity under the World Bank/Asian Development Bank loans and USAID grants. It is further seen that 3.5 million gas fired water geysers are operating in the country and guzzling a staggering 600 mmcfd of gas. Simple installation of conical bafflers in the fire tubes of these geysers can save up to 30 percent of the fuel intake and full conversion to solar heater systems can subsequently wean the geysers away from gas use. The gas companies and the DISCOs can jointly underwrite the provision of this gadget. Thirdly, it is in full knowledge of every one and which has been debated at all forums of the country that there is widespread theft at CNG stations. Banners displayed at these stations highlighting huge discounts attest to this conclusion, which is further bolstered when seen along with the high level of UFG in both the gas utilities. The situation attains even more serious proportions when we see that CNG usage is on the rise with 58 percent increase in such usage in the South alone.

sanctions. A quick survey (easy when only a few sites have to be studied) can list the defaulters, who then can be corralled to stay within the limits. This according to experts can easily reduce the present usage by up to 10 percent. Looking at the various sectors being fed by the gas companies, another group stands out menacingly as a predator. These are the captive power plants (CPPs) originally fed along with the CNG pumps by both SSGC and SNGPL out of the cuts of GENCOs and the KAPCO (only one from the IPPs) made during the period 2000 to 2008.

speciﬁc issue: that somehow the earlier withdrawn gas has to be returned to the

Additionally, it is seen that all the CNG stations are fed through the low pressure system, while the right way is to use high pressure pipelines for supplying the CNG stations. This irrational way of dispensing gas is responsible for losses amounting in billions of rupees.

power sector, at least for the coming 2-3 years, during which period other solutions for the conversion of existing

The case in point would be the only 19 CNG dispensing points in the Dehli ICT (Indian Capital Territory) against more than 350 such facilities in Lahore alone. Consequently, but in sustained manner, the existing system has to be upgraded. The quick and hefty gains out of this exercise can easily be passed on to the power sector.

Incidentally, such an offer from PEPCO was spurned by the SNGPL in early 2010. According to rough estimates, 183 mmcfd of gas can be saved through these measures alone. Additionally, it is seen that most of the CNG suppliers at the busy intersections of urban areas are utilizing much more gas than their

At this point, we would also talk about the requirement to stop giving any further gas

The requirement boils down to one

Here, it is recommended that strict vigilance be undertaken by the gas companies and the defaulters and those indulging in illegal abstraction of gas be pinpointed for permanent removal from the pipelines.

It is also of merit to state that the human resource and other facilities of the power sector (DISCOs) can be used to supplement the efforts of the gas utilities. More so, when 2000 or so complaints and customer service centers of the DISCOs are already operating in the jurisdictional areas of the SNGPL and SSGC.

According to these experts, a saving of up to 100 mmcfd of gas can be arranged in an operation spread over ﬁve years. This converts into a ﬁrst year saving of 20 mmcfd on the average and double for the next year and so on, which is no mean achievement. However, for this step the regulator viz OGRA, Ministry of P&NR, the gas companies, ENERCON (correctly placed under the Ministry of W&P now after the wilderness of the last decade or so), PCSIR, PSQCA, etc. would all have to work in tandem.

public sector power plants to cheaper fuels may be undertaken. Here, it is seen that the usage has no reliance to the relevant clauses of the Gas Management and Allocation Policy of 2005, which speciﬁcally requires optimum and efﬁcient use of such allocations through co-generation and combined cycle power plants.

connections or extension of pipelines. In fact, a downsizing plan has to be implemented whereby the system facing low pressure could be reduced under a set time schedule to maintain the technical parameters of a standard system.

All that is needed now is the implementation of rules and the policy in vogue. This would arrange for discipline and disconnection of a large number of the defaulters and surely immense savings–which could be passed on to the troubled power sector.

The right answer thus is the arrangement for providing LPG to the new domestic consumers through delivery and vending systems to be maintained by the SNGPL and SSGC companies.

Experts from amongst the SNGPL and SSGC cadres further inform us that savings can also be made through ensuring use and sale of standards burner tips (12.0 million) in the country.

The private sector already in this business may carry on with their business in competition with the public sector. The necessity for this step can be gauged from the fact that 67,000 kilometers of transmission /

ENERGY CHALLENGES | APRIL 27, 2012

distribution lines in 2008 have now reached the unmanageable ﬁgure of about 90,000 kilometers for SNGPL alone. This step will contribute at least 100–200 mmcfd during various months of the year; more so, when seen in the context of the upsurge in consumption of about 106 percent between 2000 and 2010. Besides, this step would result in frugal use, conservation, reduction in UFG and rise in productivity of the nation through gainful use of the saved gas. How do we take up this program and assure success? An inter–company committee will have to be set up while being co-chaired by the additional secretaries of the ministry of water and power and the ministry of petroleum and natural resources. This committee with members from GENCOs, CPPA, SNGPL and SSGC (DG Gas of the Ministry of P&NR can also co-opted) will be tasked to achieve the above listed savings in the least possible time and then duly monitored by the federal secretaries concerned. It is considered that true implementation of the various steps would result in the saving of up- to 250 mmcfd of gas and its provision to the power sector will result in a reduction in power tariff of at least 10-15 percent in 6-12 months of operation. This scheme needs full commitment and seriousness otherwise the gains would not be of the envisaged volumes. However, it would set the ball rolling for the attainment of energy efﬁciency in the country.

Engr. Tahir Basharat Cheema is the President Institution of Electrical & Electronics Engineers Pakistan and has served as MD PEPCO in the recent past. Presently, he is the Project Director for WAPDA’s International Technical University.

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Refineries Conundrum By Hammad Haider

Oil refineries are dubbed as the strategic assets of a country for myriad reasons. Refineries help fuel the engines of economy, by maintaining a steady stream of petroleum products during peacetime and providing a lifeline during wartimes. Being a mega project, establishment of a refining unit spurs massive investments and creates employment opportunities. However, when it comes to the local refining scene, there is a general perception that the refiners have long been playing the ‘strategic card’ to evade responsibilities. A host of issues, it appears, have led to the creation and sustenance of ‘Dutch Disease’ in the sector.

The Capacity Factor Pakistani refineries are all hydro-skimming units, lacking secondary processing facilities and hence, cannot maximally process crude oil. Due to limited sourcing of indigenous crude oil and the local demand dynamics of POL products, refining capacities are low compared to the region. The product mix of the refineries is tilted towards loss-making POL products like fuel oil. Consequently, gross refining margins (GRMs) tend to be low compared to the region. Refineries’ appetite to process crude oil, and hence capacity utilisation, is dependent on their gross refining margins. Should the margins go down, refineries run into losses. To deal with anticipated low GRMs, rather than shutting down their operations, refineries start restricting their processing of crude oil. This happened worldwide after 2006-07 when the global refining capacity overhang led to depressed GRMs, after a considerable period of flush liquidity and inflated bottom lines. Lately, marked capacity underutilization has been seen in local refineries, mostly due to low GRMs. The liquidity crunch in the power sector debilitated the situation. Currently, nearly half of capacity utilisation owes itself to PARCO’s operations. Liquidity shortages are feared to further decrease crude oil processing. Capacity expansion, in these times, would be asking for a lot. Due to lackluster E&P scene, Pakistan doesn’t really enjoy the raw material (crude oil) location advantage for investment in refining operations. Add to that the clichéd (but still potent) law and order concerns weighing heavy on investors’ minds. At the end of the day, however, it is all about incentives which the so-called ‘controlled deregulation regime’ has failed to provide.

Systemic Inefficiency Most refineries in the country cannot produce value-added products as deep-conversion facilities are not installed. This status quo is not sustainable when nearly half of the refined products are yielding negative margins, forcing refiners to knock on the government’s door for tariff protection. The hydro-skimming refining units do not have much value in modern refining system due to their loss-making yields.

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REFINING: INSTALLED CAPACITIES & CRUDE OIL PROCESSING PARCO DHODAK

NRL PRL ARL BYCO ENAR CRUDE PROCESSED

(mn tons)

15 A general view is that local POL demand dynamics are such that Pakistan does not need complex refineries and instead, can make do with the current hydro-skimming refineries (which investors treat as junk). Knowing that such refineries are not viable in the long-run, the existing refineries are still not upgrading their establishments and in fact, cry about low GRMs and keep asking for incentives.

Technical Standards Then there is the issue of technical and quality standards which the refineries are yet to comply with. Local refinery products have been found to be of higher sulphur content compared to regional POL products. When the fuel burns in a vehicle, it releases all kinds of chemicals like hydrocarbons, nitrogen oxides and carbon monoxides. The government had set a target of bringing down the sulphur content to Euro-II emission standards. For long, the refiners contended that low GRMs prohibited investment in de-sulfurization and other cleaner products. To help refineries upgrade their establishments, the deemed duty regime was announced in July 2002 by the government, wherein a 10 percent duty, sort of an upgrade cess, was added to the ex-refinery price of POL products like HSD. A period of high GRMs existed uptil 2007-08 and refineries raked in handsome profits. In 2008, the oil crisis hit the sector hard, government revised the deemed duty down to 7.5 percent. As things got financially worse from 2008 afterwards, built up reserves of billions of rupees – hitherto rarely used for the intended purpose – were eaten up as refineries incurred losses. Ten years on, very little has been done for up gradation of infrastructure. The environment is getting increasingly polluted and the Euro-compliant engines of imported cars continue to get seized by fuel with high sulphur content. Clearly, the deemed duty has failed to serve its intended purpose. With no more juice left in the Petroleum Levy and the OMCs and dealers’ margins already fixed in absolute terms, the ‘cutting-corners-axe’ is expected to befall the deemed duty, albeit in a phased manner. This may incite the refiners, but tough luck!

12 9 6 3 0

FY07

FY08

FY09

FY10

FY11

create some issues in the short run, but it will induce competition in the long run. However it must be noted that POL prices have political underpinnings.

The future With local refineries seemingly not interested in fast-tracked up gradation of their units, the vibrancy of the sector squarely lies on the government’s policy orientation to woo foreign investment. However, seeking commitment for mega projects is one thing and seeing those projects through is another. The erstwhile certain, multibillion dollar investments (e.g. Khalifa Coastal Refinery, TransAsia, and Indus Refinery) are yet to materialize. In such a scenario, does it make sense to let the inefficient refineries go under? The authors of the Integrated Energy Plan (2009) noted that, “In case of the opting to completely close refining operations, the country would require importing at least ten separate products instead of importing just two to three commodities (Crude, HSFO and HSD) in order to meet its existing petroleum requirements. Under these circumstances, availability of the product is always a problem and the country would be at the mercy of market forces. Any snag could disrupt the entire nation’s supply chain, which in turn will impact the overall economy and availability of petroleum products to the common man”. Closing down may make some business sense, but economic sense? Not really…

Pricing Regime The pricing regime must also take some flak. Since March 2006, OGRA has been authorized by the federal government to independently announce and fix ex-depot/ex-refinery sales prices of petroleum products. However, the government still decides about any modification in the POL pricing formula. Under a ‘controlled deregulation regime’, refineries were allowed to announce the ex-refinery prices for petrol, HOBC, LDO, and jet fuel in June 2011. However, OGRA still notifies the ex-refinery prices of HSD, Kerosene oil and E10. Partial deregulation in the sector doesn’t make the pricing regime less distortive. The basic foundation of deregulation is the free-market pricing mechanism. Deregulation might

The writer works as Research Analyst at Business Recorder. He can be reached at hammadshah24@gmail.com

ENERGY CHALLENGES | APRIL 27, 2012

PAKISTAN NEEDS INTEGRATED ENERGY PLAN Ziad Alhadad, Former Director World Bank BR Research: Where is Pakistan lacking in terms of energy planning and policy and what needs to be done to start with? Ziad Alhadad: Pakistan faces a range of energy related issues and the first one is the problem of the non-commercial sector of energy being left out or given less importance. Nearly 45 percent of the total energy mix is from the non-commercial sector, which is energy that is not connected to the national grid. Secondly, when there is a huge energy deficit that also is a source of great concern. Thirdly, when there is a perception, and rightly so in case of Pakistan, that there are substantial energy resources which have not been fully tapped. It is a trend with policymakers around the world, that when they face such a situation, they tend to push for all forms of energy and that is a common trap, particularly for cash-strapped countries like Pakistan. It is better for a country like Pakistan to work for optimum solutions rather than looking to all possible avenues. I would also want to add that no country follows the optimum, but you have to at least know your optimum potential otherwise you would not know the cost penalty of the departure from the optimum, and therefore, you are going to make mistakes. So simply, it makes all the sense to have an integrated energy plan and then you can make informed choices through a system of analysis. It may not be the eternal solution, but will provide a starting ground, without which our policymakers are pretty much shooting in the dark. BRR: With all the free market debate, what role does the private sector need to play and what should be the government’s role in the energy sector? ZA: Any sensible government would include all stakeholders to further its policies. The understanding and expertise in the private sector is very much there and they certainly should be involved. There should obviously be a core team which puts all the things together, but all the facts and figures should be drawn from wherever the expertise lies.

combination of the ministry of petroleum with the ministry of water and power. That will be a great first step as these are the major ministries in charge of the bulk of commercial energy sector. The second side is the non-commercial side, and I think we need an integration of that before we complete the picture. Our poor have been neglected very severely in the past – so by excluding the non-commercial sector, you are adding to the complexities of the issue. Your solutions will be more meaningful if you add the non-commercial sector to energy planning. What I also keep hearing is that the ministry of hydro power and irrigation is planned to be formed separately, and if that happens, it would be a step backwards. It defies the whole purpose of integrating the sector, I hope that doesn’t happen. Fragmentation must not take place as it has contributed heavily to the decline of energy sector. BRR: How much flack should the implementation take and how much should the policy take? Where exactly does the fault lie? ZA: Implementation has always been the soar point in the development history of Pakistan. Let me tell you that the situation is not beyond repair, not by a long short. Yes, it is a serious crisis, but is not beyond redemption. It can be recovered much faster than the pessimist would have us think. Implementation must take a lot of blame as it has been visibly poor in Pakistan. There have been instances that foreigners point out to Pakistan having the finest plans on paper. But having said that, I think we have to start on the right footing that is planning. I must also tell you that this is not new to Pakistan – it was first initiated in the 80s and I was associated with the World Bank as the energy advisor in Pakistan. Pakistan was one of the early reformers in the world – the sad part is that we do start but do not take it forward. BRR: What are the consequences of neglecting the non-commercial sector from the overall energy picture?

ZA: It is very tempting to give the answer but I am not going to give you one. It is not the prescript solution that matters; it is to build the capacity in Pakistan so that the policymakers can make the right decision themselves. They are not to be spoon-fed from outside. Another reason why I am not giving you an answer is that I do not know. BRR: Is there a case for inter-fuel substitution in Pakistan today? ZA: You have to go back and look what are the energy resources and to what extent have they been tapped. There is a dismal picture in this regard. If you look at the hydel power resources, of the economically viable potential today, we have not even harnessed 20 percent. Pakistan’s E&P success ratio is significantly above the global average, the density and sedimentary basin is absolutely wonderful but we still lag behind. Had more been invested in those areas, the security situation would have been much better today. Inter-fuel substitution is premised upon the supply of fuel which unfortunately is far from secure and remains uncertain. BRR: What regional options can Pakistan explore to plug its energy gap in the near term? ZA: Energy trade is definitely something which we should promote. Central Asia is a huge market; it has a very large exportable energy surplus. Once you establish the energy corridors, it will bring prosperity and energy security to the region. Back in the 90s, Central Asia was ready to open its corridor for the region, but somehow that has not materialised for Pakistan which is a huge opportunity lost. But we can start even today and benefit from it. BRR: What is the solution for the circular debt crisis that is severely hampering the energy sector? ZA: I can tell you what is not the solution. Bailing out is a moral hazard. The situation should never have happened – it is the manifestation of arrears problem gone haywire. The installed power generation capacity is nearly 20,000 MW – the peak demand is around 15,000 MW and yet we are not able to meet our demand. That simply means we are unable to generate half the power requirement. When you dole out money, you have to put certain conditions so that reforms gather pace.

However, there is a second aspect and that is the policy level institution and that’s where Pakistan has made the common mistake of having too many policy level institutions in the public sector and that needs to be rectiﬁed. This often leads to conﬂict of interests and overlaps and that has to be addressed by having one ministry of energy, which can draw upon the strengths of all the sub-sectors.

ZA: Neglecting the non-commercial energy distorts the picture as it affects nearly half the population of Pakistan – which is generally the poorer half. If you include the non-commercial energy sector, the policy will deﬁnitely change as the focus will not solely be on the industrial consumers. The policymakers will be forced to look into that when they see the ﬁgures.

BRR: There have been talks regarding formulation of an integrated energy plan? Why has Pakistan not been able to achieve that yet?

One of the reason why non-commercial energy is not looked at is that it is a very difﬁcult sector to keep track of. The efﬁciencies are not commonly known and also act as an excuse to the neglect.

ZA: I have no doubt that it can improve. The problems are not insoluble, it is not a meltdown. What we must see is action – if we don’t see that, then it may reach a point beyond redemption.

BRR: After incorporating the non-commercial sector, what should thebe the optimal energy mix for Pakistan?

ZA: I am hopeful that it will go ahead. It will indeed be a tragedy, if the idea is shelved altogether. I have seen that in the press that the ﬁrst step, which I fully support is the

ENERGY CHALLENGES | APRIL 27, 2012

BRR: Do you see the energy equation improving in the future?

interview by Hammad Haider

Page 35

Reversing the Precipitous Decline in Pakistan’s Energy Sector By Ziad Alahdad Pakistan, with its many crises, should also have many opportunities. Pakistan’s policy makers do not lack clarity on what needs to be done but on how it is to be done. The missing element is Integrated Energy Planning and Policy Formulation (IEP). The underlying issues can be clubbed in four key sets, presented summarily here. The assertion is that IEP can help reach short-term as well as long-term solutions to these hurdles. Pakistan has the wherewithal – what is needed is a major shift in the mind-set of all stakeholders. For policy makers the initial step, which has proved elusive so far, is a clear recognition and ownership of the problems. In essence IEP is a ﬁve-stage process which, starting with national socio-economic objectives; projects energy demand, analyses supply options, prepares energy balances, deﬁnes policy options and assesses their impact. The sophisticated part – at the heart of the process – is the construction of the energy balance. The successful implementation of IEP depends on establishing a separate ministry or department of energy with overarching responsibility for the sector and access to top policy levels. There are indications of a step in the right direction through a merger of the Ministry of Petroleum and Natural Resources with the Ministry of Water and Power.

However the much-talked about possibility of the creation of a separate ministry for irrigation, agriculture and hydropower would be a retrograde measure leading to further fragmentation of institutions at the policy level, thereby undoing the beneﬁts of the initial merger. It is important to break this legacy of one-step forward, two-steps back. Based on data contained in the 2010 Energy Yearbook, total primary energy supply in Pakistan is 63 million tons of oil equivalent (MTOE) of which natural gas accounts for 49 percent, oil 31percent and hydroelectricity 11 percent. Pakistan imports a third of its energy requirements, mostly in the form of crude oil and products at a prohibitive cost of $12 billion a year. With rising oil prices, this ﬁgure is projected to increase 300 percent to $38 billion by as early as 2015. Energy consumption is 37 MTOE. The industrial sector is the dominant consumer with over 40 percent of the market. The transport sector consumes 30 percent and households around 22 percent. The concept of IEP was introduced in the 1970s and successfully applied in a wide range of countries, amended to suit individual country conditions. Success was characterized by three ingredients: comprehensive coordinated analysis; supporting institutional arrangements at the policy level; and sound implementation of these policies.

First Set of Issues: There is a glaring omission in the Yearbook figures which reflects the preoccupation of policy makers. The data pertain only energy for consumers connected to national grids and billed for services. Estimates of non-commercial or traditional forms of energy are missing. If non-commercial energy is integrated, the picture changes dramatically. Traditional bio fuels head the list by a large margin and households become the primary consumer using 50 percent of the mix. While commercial energy consumers do contribute significantly to GDP growth, at the same time, neglected non-commercial consumers drag down national output over the longerterm by unregulated and unchecked practices and technologies which waste energy and denude forestry resources. We only need to look around us to see the disastrous effects on the degradation of forests and eco-systems, and the poverty that this approach has engendered over the past 64 years. This is the story of Pakistan, short-term crisis response rather than longer-term vision based on sound analysis. IEP can prevent this. Based on international experience, the current working model for poverty alleviation supports economic growth with two important provisos. Adequate incentives to boost growth and social protection measures for equitable distribution of wealth. Immediate pressures seem to drown out any serious long-term vision, let alone put the vision into practice. The disparity between rich and poor continues to increase as does the incidence of poverty. The shortage of energy and insufficient regard for the poor contribute substantially to this decline.

Page 36

Second Set of Issues: First consider that only 16 percent of the economically viable hydropower potential of 41,700 MW has been tapped, while less than ﬁve percent of the viable small hydro potential of 1500MW has been captured to date. Similarly oil and gas drilling levels are extremely low. Indigenous coal reserves are huge with a reserves-to-production ratio of over 400, although admittedly much of this coal is of low quality and located in remote areas where security is a concern. Solar and wind potential has barely been touched. Secondly, the energy deﬁcit is large and expanding quickly. A disquieting shortfall of 20 MTOE at present is expected to surge over 120 MTOE by 2025. The third characteristic is reliance on non-commercial energy for nearly half the population which is not connected to the main energy grids. This alarming combination often solicits a panic response from policy makers – to promote the harnessing of all forms of energy available. This is a common trap, particularly in a severely cashstrapped environment such as Pakistan. A mechanism needs to be in place to strike an affordable balance. Only with an integrated approach, can this be achieved.

ENERGY CHALLENGES | APRIL 27, 2012

Third Set of Issues: One of the most significant benefits of IEP is the ability to quantify the cost penalty of pursuing sub-optimal plans – vital for a country confronted with poverty and inequitable income distribution, where access to and affordability of energy is a critical concern among the urban and rural poor. This inevitably leads in the shorter term to subsidies; which are fine only as long as they are targeted, affordable and transparent. An integrated approach provides the tool to assess the impact of energy subsidies on the national economy, to enable informed decisions.

Fourth Issue: Circular debt is a complex and convoluted problem, but can be aptly summed up as the cumulative effect of payment arrears in the power utilities and their suppliers and clients. Instead of focusing on the endemic issues behind high production costs, the solution sought by the authorities is a series of bail-outs which, clearly presents a major moral hazard. The issues involve system management and structure, maintenance, operational efﬁciency, system losses including an inordinate level of theft, tariff collection performance, and so on. System losses are a prohibitive 25 percent of net generation and consumer payment arrears are an unacceptable 30 percent of the amount billed. Even though the existing power system has the capacity to produce 19,855MW, it remains unable to meet more than 70 percent of peak demand of 14,500 MW.

BYCO AD 30X3

IEP is not unknown in Pakistan. It was introduced, albeit partially and briefly, in the 1980s. But the plan was bound to unravel as there was no follow through. Instead of moving towards a simple integrated structure with a single Ministry of Energy there was a gradual fragmentation of policy institutions, compounding the complexity, confusion and overlap of responsibilities. Instead of one integrated agency at the policy level there are over 15 agencies and ministries involved, making coordination, well nigh impossible. More recently, with the re-emerging international recognition of IEP, there have been some attempts to re-introduce the concept especially within the Planning Commission, but these efforts are confined to an analytical level. The conclusion is simple. The elusive fundamental in Pakistan’s energy sector reform is IEP and the imperative of revitalizing this is unquestionable. With it, Pakistan’s policy makers can finally go beyond what needs to be done to how it is to be done.

The writer has over 40 years experience in Energy Management including 25 years as Director of Operations, World Bank

ENERGY CHALLENGES | APRIL 27, 2012

Page 37

Advertorial

FAUJI FERTILIZER COMPANY LIMITED Company Proﬁle: Fauji Fertilizer Company Limited (FFC) is the largest urea manufacturer in the country. It was incorporated in 1978 as a joint venture between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A/S of Denmark. The Company is operating three world class urea plants with an aggregate design capacity of over 2 million metric tons per annum. In addition FFC together with Fauji Foundation participated in setting up the country’s only granular urea and di-ammonium phosphate (DAP) complex at Port Qasim, Karachi in 1993. The new company, Fauji Fertilizer tBin Qasim (FFBL), was formerly called FFC-Jordan and is designed to produce 551,100 metric tonnes of granular urea and 675,000 metric tons of DAP. FFC also markets the entire production of FFBL under its brand name “SONA”. Thus FFC’s Marketing Group, the largest marketing network in the country, markets nearly 3.8 million metric tons of fertilizer per annum (including imported potash and phosphatic fertilizers). FFC holds 50.88 percent stake in FFBL and 6.79 percent stake in Fauji Cement (FCCL). Besides it holds 12.5 percent stake in Pakistan Maroc Phosphore SA (PMP) in Morocco which meets the entire raw material requirement of FFBL’s DAP production. FFC is listed on all the stock exchanges of the country and is one of the most actively traded stocks. It has been amongst the top 25 companies of Karachi Stock Exchange for the last seventeen years and was judged as the best company for the year 2010. Since commencement of commercial operation in June 1982 till December 2011 the company had sold over 58 million tons of fertilizer, achieving urea import substitution to the extent of close to $10 billion since inception.

FFC IS DEVELOPING A 50MW WIND POWER PROJECT Additionally company has made signiﬁcant contribution of Rs162.73 billion to the national exchequer through taxes, levies, and excise duty and gas surcharge besides providing direct and indirect employment to thousands of individuals.

FFC Wind Power Project: In pursuance of its vision of business diversiﬁcation, FFC is developing a 50MW Wind Power Project for which it has incorporated a special purpose subsidiary, FFC Energy Limited. The project shall cost $133.5 million. The project achieved ﬁnancial close in June 2012 after receiving tariff from

Page 38

National Electric & Power Regulatory Authority (NEPRA) and Government of Pakistan’s Sovereign Guarantee. It is the ﬁrst renewable power project of such a scale to achieve ﬁnancial close under GOP’s Policy for Development of Renewable Energy for Power Generation 2006. The implementation agreement was signed with Alternative Energy Development Board (AEDB) along with Energy Purchase Agreement signed with National Transmission and Despatch Company (NTDC).Turnkey Engineering, Procurement & Construction agreement has been signed with Nordex & Descon. Nordex is one of the leading manufacturers of wind turbines in the world and Descon is a premier

provider of engineering, manufacturing, construction, project management and maintenance services. The project is being developed in Jhampir, District Thatta, Sindh. It is moving at a fast pace and while the trial production is likely to start in June this year, commercial operations are expect to begin in November 2012. Once completed it will be the ﬁrst project of this scale in Pakistan. In future plans FFC intends to set up wind farms with generation capacity of 200MW in Sind Wind Corridor for which the targeted ﬁnancial close is December 2012.

ENERGY CHALLENGES | APRIL 27, 2012

The perfect blend of insights Business Recorder, as exclusive SYNDICATION partner of The Economist in Pakistan, brings a hand-picked selection of the latest insightful articles from the ‘world’s most compelling publication’. Start every Friday right, with Business Recorder

Renewable energy: Do it before opportunity expires By Manal Iqbal The energy supply mix of a country mirrors its economic health. A cost-effective energy mix and continuous power supply are essential to keep the wheels of any economy churning. In Pakistan, it is unfortunate that energy crisis has put the whole the economy through the wringer. Owing to rudimentary power supply system, the country’s infrastructure is below par. This can be gauged from the fact that Pakistan ranked 109 on the quality of overall infrastructure (e.g. transport, energy and telephony, and) out of a sample of 142 countries, according to The Global Competitiveness Index Report 2011. Similarly, the country positioned at 38th place out of sample of 64 developing countries on Energy Development Index, compiled and calculated by IEA, which tracks four indicators: per capita commercial energy consumption, per capita electricity consumption in the residential sector, share of modern fuels in total residential sector energy use and share of population with access to electricity. The electric power consumption is 449 kWh per capita in Pakistan, which pales in comparison to 597 KWh in India, 918 in Vietnam and 590 in Indonesia, according to the World Bank. Behind the rising power cost is a huge concentration of the energy mix on thermal resources, with oil and gas accounting for roughly 80 percent of primary energy supplies. As a result, the country has dished

Page 40

If energy production capacity stays at the current level of roughly 19,500 MW, the supply deﬁcit will likely reach above 18,000 MW by 2015. Moreover, the country’s energy demand is projected to reach 113,695 MW by 2030, nearly six times higher than current installed capacity.

DEMAND & SUPPLY GAP PROJECTION FOR PAKISTAN Project Demand (GW) Gap (GW) GWatt

114

120

100

40 20

24 7

0 2010

2015

2020

2025

2030

Source: PEPCO

out around $12 billion for import of petroleum crude and products in FY11, making up around 35 percent of the total import bill. Then there is the huge power supply deﬁcit. The gravity of the situation can be analyzed from the fact that the demand outstrips supply by 5000 MW during peak hours.

The million dollar question is how Pakistan can get out of this energy quagmire. Part of the solution lies in harnessing cost efficient renewable resources. The country’s plains receive an average of 300 days of sun, biomass is abundant and channels of strong winds abound. Foregoing these natural endowments would be unwise, to say the least. Not only will renewable sources curtail dependency on oil imports; they will also reduce emissions of pollutants. Various studies support that renewable energy projects have played a whip hand in poverty alleviation in far flung areas, where access to conventional energy sources is limited. A lot of research has also been conducted to gauge the potential of renewable energy sources in the country. Official estimates suggest that wind power offers a technical potential of close to 360 GW. Major parts of the country receive solar radiation on the order of over 2MWh/m2 and 3,000 hours of sunshine a year, which is at the highest end of global averages. Similarly, research conducted by a reputable local university highlight that around 1000 MW can be produced from biomass.

To promote development of renewable energy sector, so far a slew of initiatives have been announced by the government. It established the Alternative Energy Development Board in 2003 with an aim of meeting at least ﬁve percent of electricity needs through alternative sources by 2030.

WIND POWER CAPACITIES Country

Wind power generation (MW)

added in 2010 (MW)

China India Turkey Brazil Egypt Iran Philippines Vietnam Pakistan

44733 13066 1274 920 550 100 33 31 6

18928 1259 478 320 120 18 0 22 0

Source: World Wind Energy Report 2010

But progress on this front has been anything but satisfactory so far as the contribution from renewable sources in the energy mix is dismally low at less than one percent.

ENERGY CHALLENGES | APRIL 27, 2012

Pakistan became the world’s 62nd country to have harnessed wind power back in 2008 with the introduction of a six megawatt project. A subsidiary of the Fauji Fertilizer Company, FFC Energy Limited is also scheduled to start trial generation of 50 MW by

Lack of local expertise, non availability of trained personal and lack of supporting industries are just some of the barriers to the proliferation of alternative energy in the

ELECTRICITY CONSUMPTION (kw/h)

449

PAKISTAN

597

INDIA

918

VIETNAM

1,549

252

Moreover, at the government level, there is a need to introduce incentives aiming at involving the private sector and universities in development of renewable resources. Moreover, the government, along with private companies and foreign donor agencies, should chip in resources to make a combined effort to foster home grown human expertise. Last but not the least, cue can be taken from models adopted in neighboring countries India, Bangladesh and Sri Lanka -where such projects have been gaining ground.

BANGLADESH

3,614

EGYPT

Lack of local expertise, non availability of trained personal and lack of supporting industries are just some of the barriers to the proliferation of alternative energy in the country.

June 2012 at its new facility in Jhimpir, Sindh. It is imperative that the government play an enabling role to propel this industry from its nascent stage quickly.

MALAYSIA

Denmark is considered the poster child for wind power, with 19 percent of the country's electrical energy needs being met by wind power. The Asian giants India and China are also aggressively pursuing renewable energy and are already among the top ﬁve wind power producers of the world. Clearly, the future belongs to alternative energy.

Source: World Bank

On the other hand, solar energy projects are yet to see the light of day, with the exception of a few solar powered street lights installed in some areas and the odd home system installed in the homes of that rare species of environmentally conscious citizens.

ENERGY REVIEW 2012 | APRIL 30, 2012

country. Moreover, another key factor bottling up demand for renewable energy is lack of ﬁnancing. Since none of the existing projects has made it past the pilot phase, prospective investors and ﬁnanciers are also shy of new opportunities.

The writer is a Research Analyst at Business Recorder. She can be reached at manal.iqbal@br-mail.com

Page 41

Advertorial

OIL AND GAS DEVELOPMENT COMPANY LIMITED Background:

Core values:

Corporate social responsibility:

To revive exploration in the energy sector the Government of Pakistan signed a long-term loan agreement on March 4, 1961 with the USSR, whereby Pakistan received 27 million rubles to ﬁnance equipment and services of Soviet experts for exploration. Pursuant to this agreement, OGDCL was created under an ordinance dated September 20, 1961.

Integrity, teamwork, safety, dedication and innovation.

The company endeavors to be a responsible corporate citizen of the E&P community. Being fully aware of its social obligations, it continues to proactively promote, develop and maintain medical, social and welfare facilities and schemes for the beneﬁt of the local communities affected by its work and presence.

The corporation was charged with the responsibility of undertaking a well thought out and systematic exploratory program and to plan and promote Pakistan’s oil and gas prospects. As an instrument of policy in the oil and gas sector, the corporation followed government instructions in matters of exploration and development. The day to day management was however, vested in a ﬁve-member board of directors appointed by the government. In the initial stages, ﬁnancial resources were arranged by GOP as OGDCL lacked the ways and means to raise capital. In a period of 15 years OGDCL developed its manpower and building of infrastructure enabling it to undertake much larger exploration programs.

Initial successes: A number of donor agencies including the World Bank, Canadian International Development Agency (CIDA) and the Asian Development Bank provided assistance for major development projects in the form of loans and grants. OGDCL’s hectic efforts in exploration of oil and gas resulted in a number of major oil and gas discoveries between 1968 and 1982. Toot oil field was discovered in 1968 which paved the way for further exploratory work in the North. During the period 1970-75, the company reformed the strategy for updating its equipment base and undertook a very aggressive work program. This resulted in discovery of a number of oil and gas fields in the 1980s, including Thora, Sono, Lashari, Bobi, Tando Alam and Dhodak oil/condensate fields and Pirkoh, Uch, Loti, Nandpur / Panjpir gas fields. These commercial discoveries testify to the professional capabilities of OGDCL, giving the company a measure of financial independence.

OGDCL’s role as the country’s leading E&P player: Pakistan, for last many years, has been suffering from an energy crisis triggered by multiple factors. With supplydemand gap yawning day by day, OGDCL has assumed greater significance. The role of the organization is critical when it comes to securing energy future of Pakistan. Deficit of power and energy is one of the major national issues adversely impacting the economic growth of the country. In an environment of energy shortage OGDCL is engaged in continuously exploring new possibilities and meeting new challenges. As we try to bring Pakistan back on the track of progress through long-term reforms after years of turmoil owing to our peculiar security dynamics and security factors, we surely rely on our main energy players to act. A strong and steady OGDCL is of great significance to the country and the economy. OGDCL, which has a track record of competitiveness and being futuristic, is ready to seize the opportunity. The company spearheads the execution of policy initiatives in relation to exploration and production. The reason for this lies not in OGDCL being a state entity, but in its sheer capacity-size, exploration acreage, production and production capacity, manpower, machinery and equipment, and above all, its best management practices. We see ourselves as the nation’s growth engine, entrusted with the vital task of energizing Pakistan.

OGDCL celebrates 50th birthday: During the 50 years since its inception, OGDCL has come a long way and overcome many challenges — from acquiring and sustaining its position as a self-ﬁnancing entity to making a transition in corporate culture to that of a public limited company, listed on all three stock exchanges of Pakistan and also at the London Stock Exchange.

To be a leading multinational exploration and production company.

Currently the company is the leading E&P player in the country. The company holds 22 percent of the total exploration acreage in the country. Out of the country’s total oil reserves, OGDCL hold 51 percent and 35 percent of the country;s total gas reserves as of June 2011. The company presently produces 55 percent of the country’s total oil production and 23 percent of total gas production.

Mission:

Discoveries:

To become the leading provider of oil and gas to the country by increasing exploration and production both domestically and internationally, utilizing all options including strategic alliance.

OGDCL has made a total of 94 discoveries comprising of 23 gas, 24 oil, 8 condensate, 12 oil/gas and 27 gas condensate since its inception to date.

Vision:

To continuously realign ourselves to meet the expectations of our stakeholders through best management practices, the use of latest technology, and innovation for sustainable growth, while being socially responsible.

Page 42

Wells drilled: OGDCL drilled a total of 634 wells comprising of 274 exploratory, 31 appraisal and 329 development wells since the company came into existence to date.

These include employment opportunities for locals, construction of roads, setting up dispensaries and providing free first-aid and health care, establishing schools, granting fellowships and scholarships, supply of drinking water, donations for charitable causes and financial assistance for numerous projects to improve the quality of life of people and communities with which it interacts. OGDCL provides health care facilities, in addition to free services of doctors, dispensaries and ambulances each year to the inhabitants living in and around OGDCL fields. OGDCL not only paves the way for progress and prosperity communities affected by its work and presence, but while doing so, is also aware of, and observes local traditions and ethnic practices out of mutual respect for social and cultural differences.

Future outlook: OGDCL has a strong vision and passion to contribute to the development of the country’s E&P sector and to enhance energy security of Pakistan. With a formidable presence in the country, OGDCL is looking beyond geographical boundaries for E&P opportunities. Efforts are continuing towards formulation of joint ventures with leading E&P companies both within the country and abroad. With technical prowess in onshore exploration and production, the company has changed focus to a more challenging area i.e. offshore exploration and tight gas reservoirs. OGDCL is actively participating in national bid rounds for acquiring more acreages and gearing to participate in international bidding rounds to work towards international presence in line with its vision. OGDCL also intends to enhance its reserves and to focus on and strengthen core business functions by incorporating international best practices and innovative thinking in the company’s culture. The company plans to optimize its concessions portfolio to support aggressive exploration activities, which in turn will ensure continuous reserves additions. OGDCL is also looking at seamless development of new discoveries in shortest possible time which will add substantially to the production base of the company. It has in place, strong business processes and internal checks in all operations to ensure transparency and accountability. Continuous review and improvement of internal policies and processes is part of the agenda, in addition to further enhancing corporate goodwill through focused CSR initiatives for the beneﬁt of the communities that OGDCL interacts with.

ENERGY CHALLENGES | APRIL 27, 2012

THE WAY FORWARD By Dr. M. Asif

In order to address the energy problems in a sustainable manner, it is time to have a robust and integrated energy policy The year 2012 has dawned as people face up to 20 hours

of electricity and gas load-shedding. The prevalent energy crisis – the worst in the history of Pakistan - is intense, costly and multi-layered. It is imposing enormous economic, sociopolitical and strategic implications upon the country. The crisis is extremely formidable both in terms of scarcity and unaffordability of energy. It initially emerged in 2006 in the form of electricity loadshedding. It has gradually been compounded by challenges like severe shortage of gas, frequent and daunting jumps in energy prices and disruptions in the supply of transportation fuels. More alarming is the fact that the concerned authorities appear to have no strategy and intent to arrest the problem. The anatomy of the energy crisis suggests that the two major challenges are a widening gap between demand and supply and over reliance on imported energy resources. These challenges have originated and fostered by lack of vision and strategy on the part of policy makers as much as bypoor

governance. Timely and adequate exploitation of indigenous energy resources could have placed the country in a much better position to overcome these challenges. In order to address the energy problems in a sustainable manner, it is time to have a robust and integrated energy policy and to ensure its stringent implementation. The main point of a well-thought-out energy policy should lie in its long-term approach — it should be designed to cover at least 25 years, obviously incorporating periodic reviews that would enable decision-makers to correct any lapses. The policy should be framed in consultation with all stakeholders including mainstream political parties. Other political forces with provincial or regional manifestoes and advocacy groups also need to be taken into conﬁdence. Inter-provincial harmony and agreement has to be at the heart of the policy. Once agreed upon, the designed policy should be given constitutional protection so that future governments do not jeopardize it in pursuit of political interests.

Short term solutions •

First off, all key appointments must be based strictly on merit.

•

The existing power generation capacity must be fully capitalized. Under utilization of thermal plants by up to 4000MW has worsened the current crisis.

•

Inter-corporate debt in the energy sector must be resolved comprehensively and quickly.

•

Revamping of old thermal plants such as Shahdara, Faisalabad, Multan, Jamshoro and Guddu can add more than 3,000MW, at cheaper rates compared to IPPs.

•

System losses are close to 23 percent for Wapda and 40 percent for KESC. These must be curtailed to about seven percent.

•

Government must actively support action against incidents of electricity theft.

•

To meet the gas demand, import of gas has to be streamlined while load management of gas also needs to be rationalized.

•

Meaningful energy conservation drives and management programs can save up to 20 percent of the national energy.

•

Utilities must be downsized and political appointments must be stopped immediately.

ENERGY CHALLENGES | APRIL 27, 2012

Medium-to-long term solutions • Hydropower is a very economical source of electricity as its cost is less than 8 percent of the cost of thermal power generation. Large and small dams must be developed to exploit the immense potential on offer here. • Coal accounts for less than one percent of the power generation showing that coal reserves are virtually untapped. Development of Thar Coal is the key to securing cheap, indigenous resource for power generation going forward. • Government policy should encourage companies to go after untapped reserves within the country. • Cost effective gas import arrangements with neighboring countries should materialize quickly to supplement local supplies. • Renewable energy resources such as solar, wind power and biomass should be pursued. • Requisite technology for thermal, nuclear and renewable energy must be brought into the country. • Requisite human resources must be developed indigenously in conventional and non-conventional energy systems, energy trading, energy conservation and management, energy security and risk assessment.

The writer is an Associate Professor at the Glasgow Caledonian University, UK and is author of the book ‘Energy Crisis in Pakistan: Origins, Challenges and Sustainable Solutions’. He has authored over 50 other research publications and sits on a number of international energy forums. His research interests include: energy policy, renewable energy, energy conservation and management, sustainable development and value engineering. email: dr.m.asif@gmail.com

Page 43

ENERGY CHALLENGES: THE FIX Farooq Rehmatullah INTERGRATED ENERGY PLAN 2010-2025: Considerable work has been done on this in 2009 by our Energy Expert group consisting of 14 eminent experts from various sectors of energy ranging from E&P, hydro, thermal, coal, gas, LNG, oil marketing, LPG, reﬁning, nuclear, alternate sources of energy, wind, etc. This group of leading experts worked diligently over a period of ten months on pro-bono basis. This work resulted in the compilation of the ﬁrst-ever produced Integrated Energy Plan 2009-2022 and was submitted to the Government of Pakistan in March 2009. This work was updated and reproduced by the Expert Energy group in 2011 called the Integrated Energy Plan 2010-2025.

Where we stand & the way forward

The major recommendations of these reports are as follows :

Objective

1. Formation of a national energy authority to implement plans, responsible for providing an umbrella organization for the entire energy sector for improved coordination.

To provide a road map for Pakistan to achieve greater energy self sufﬁciency by pursuing polices that are sustainable, provide for energies security and conservation and are environmentally friendly.

2. Change the energy mix of the country from its present heavy dependence on imported hydrocarbons to that of hydro, coal, wind, renewable and indigenous gas.

Energy mix

3. Provide a pool of human resource within the government and both public and private sector organizations for fast-track implementation of the plans.

The objective of this proposed plan is to aim for greater self sufﬁciency and if the plan is implemented, the energy mix by 2025 will be as follows projected on GDP growth 2.5-4%

4. It is equally important that the political parties of the country should have a pooled resource within the parties of qualiﬁed, competent professionals to oversee and ensure implementation of these plans. 5. Most importantly, there has to be a political will among the parties to implement the plans which have been developed by professionals and provide solutions for the energy crisis being faced by Pakistan.

2010 Current Energy Mix LPG 0.9%

Nuclear 0.6%

2025 Proposed Energy Mix

Renewable 12%

LPG 2% Gas 43.7%

Oil 29%

Security issues Lack of political consistency Inadequate incentives

Nuclear 3%

Coal 10.4% Hydel 15%

Oil & Gas

Coal 15% Hydel 20%

Gas Local 21% Gas Import 7% Oil 20%

The proposed energy mix will maximise use of indigenous resources for meeting energy demand Page 44

ENERGY CHALLENGES | APRIL 27, 2012

Energy Sector

Short, medium & long-term recommendations • In order to minimize the impact of the huge import bill, the country will be facing because of our huge reliance on fossil fuels as percentage of our energy mix, we need to take immediate steps in the following sectors: - Gas prioritization - Use of indigenous coal for power generation - Use of alternate & renewable • Maximize the use of indigenous resources

Gas sector – recommendations • Prioritize criteria for load management policy - Power generation to combined cycle power plants - Industry - Commercial - Domestic – for cooking only - CNG (price parity with motor gasoline) • All new thermal power plants to be coal based or CCGT plants to use RLNG as this fuel has advantages over liquid fuel. • In order to incentivize distribution companies to work on commercial considerations, price mechanism should permit fair margins on gas selling price and be fined if UFG losses are greater than acceptable. Reduce UFG by at least 50% from current levels. • Merge transmission business of SSGC & SNGPL. Distribution operation to be separated from transmission. • Subsidies to domestic users to be eliminated. All gas water heaters to be converted to solar. • Subsidies on fertilizer sector to be systemically removed. • To improve the environment, CNG to be used as part of a mix with LPG in metropolitan transportation. • Do not provide gas to every small village and town, needs should be met by solar, LPG or other hybrid solutions. • Privatization of gas distribution.

E&P – recommendations • Petroleum policies announced in 2001,2007 & 2009 failed to attract investment in the E&P sector. It is recommended that the wellhead gas pricing should be based on 70% of a basket of imported crude oil price. The is in line with the 1997 Petroleum Policy which gave great impetus to investment in oil and gas exploration. • The government should engage a world class consultant to evaluate the unconventional gas reserves in Pakistan and make the study available to potential investors. • To have a formula of making the local population as shareholders.

Energy shortfall’s adverse Socio & Economic impact Supply Shortfall: 3500 – 4000 MW Power Outage per day: 8 -16 hours / day Impact / Year Total cost of load shedding to the economy

2.5 Billion USD

Cost as percentage of GDP

2% Decrease

Loss of employment in the economy

400,000 jobs

Loss of exports

1 Billion USD

Source: State of the – Economy - Emerging from Crisis 2008, Beacon House National University publication

SMART solutions & remedies –

short to mid term

1. Immediate upgrading/revamping plan for existing units will result in additional 2000-2500 MW. 2. Promote sugar industry to export excess energy to grid.

E&P – issues • Pricing (local gas & oil pricing) - Gas & oil pricing policies over the past two decades have not realised the full potential of this sector because Pakistan still has a very large unexplored sedimentary basin. No large international companies have bid for exploration in the last few bidding rounds. - Policies to be formulated for giving attractive incentives for the development of tight and shale gas.

• Security & legislative problems - Balochistan and KPK are virtually inaccessible due to the prevailing law & order situation.

3. Network capacity expansion. Network studies of each DISCO to be done. 4. Energy conservation programmes to be implemented. 5. Swift measures to be taken to address both technical & administrative losses. 6. Metering systems to curtail administrative losses. 7. Utilization on indigenous engineering resources and infrastructure. 8. Encouraging investors as well as multinational institutions to invest in the power sector.

Estimated cost – Approx $2 billion Return on investment starts in less than a year

- The crisis created in the follow up legislation of the 18th amendment must be resolved as top priority as the issues has brought to a standstill, decision making by the government in E&P affairs.

ENERGY CHALLENGES | APRIL 27, 2012

Page 45

SMART solutions & remedies –

long term

Coal sector

The future source for Pakistan’s energy security

In view of depleting gas reserves, need to move fast towards developing coal and hydro plants. This will also reduce our dependence on imported fuel. 1. Pakistan has tremendous potential of coal ﬁred/hydro power plants that need to be exploited. 2. Base load power plants (1000-1500MW) should be installed to reduce the energy gap. 3. Existing fleet of low inefficient steam turbine power plant using gas should be primarily used with furnace oil and natural gas to be allocated for the new most efficient plants. 4. Renewable energy resources should be realised to cater for peak demand. - Wind power plants - Solar thermal power plants

Estimated cost: Approx $4-5 billion

Thar Coal Potential Thar Desert contains the world’s 7th largest coal reserves:

175 Billion Ton =

50 Billion TOE = 2000 TCF

Total Thar Coal Reserve

Thar Coal Reserve

More than Saudi Arabia & Iranian Oil Reserves

68 times higher than Pakistan’s total gas reserves

25% Pakistan’s Power Generation Capacity in 2010

Development of Block II alone would bring in investment of

PAKISTAN

USD 12 Billion

Entire Thar Coal Reserves can be used to generate100,000 MW of electricity for over200 years

Thar Location of Thar Coal Field

Cost of power generation in Pakistan Type

Thermal Hydel Nuclear Wind Solar

Installed capacity share

USD/MW (mn)

Capacity factor

cents/kW

Weighted cents/kW

67% 31% 2% -

10 3 3 2.5 3-4

70 -90 % 50- 60 % 80 - 90 % 30 - 35 % 20 - 30 %

7-14 3-6 2-4 2-14 15-25

9.38 1.86 0.08 -

Average energy mix would cost approx 11.3 cents/kw

Additional coal and hydel energy mix coupled with reduction in techincal losses will further decrease the average cost

The ultimate objective is to… Demand

Supply

Source:: GSP data/report -Energy equivalent is based on Shenhua report/RWE

Coal sector – Project update & recommendations • Bankable feasibility study for Thar Block II mining has been completed. • Technical, environmental and social viability of the project has been conﬁrmed meeting all internationals standards. • Phase 1: 6.5 MMT/annum coal mine and 1200MW power plant. • Total exploitable lignite reserves of 1.57 billion tons that can support 5,000 MW for 50 years. • Lignite quality better than that being used in Greece & Germany for power generation. • Federal and provincial governments should develop and ensure timely availability of infrastructure projects.

MW 40000 35000

Push Demand curve downward

30000 25000 20000 15000

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Push Supply curve upward ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 ‘19 ‘20 ‘21 ‘22 ‘23 ‘24 ‘25 ‘26 ‘27 ‘28 ‘29 ‘30

ENERGY CHALLENGES | APRIL 27, 2012

Alternative & Conclusions renewable sector • Formation of National Energy Authority.

Renewable energy opportunities • Pakistan can harness the potential of wind, hydel, solar and biomass. • Pakistan’s renewably energy strategy should focus on renewable technologies that can add significant generation capacity at a competitive tariff.

• Capacity building of institutions within the government and public sector companies. • Resolution of circular debt – currently about Rs300 billion. • Implementation steps to generate additional power from existing capacity – 2500 MW by life extension. • Implement prioritisation of gas allocation with immediate effect. • CNG price parity with motor gasoline will release 200 mmcfd.

Hydro Power

• All gas area and water heating should be converted to solar passive PVC heaters to yield at least a further 200 mmcfd.

• Current installed capacity: 6555 MW

• Thar coal – make it happen (2016).

• Realizable potential: 17,000 MW, of which 12,000 MW is reservoir based & 5,000 MW is run of the river.

• Deregulate oil sector. • LNG – make it happen (18 months).

Wind energy

• E&P sector – pricing and security issues to be resolved.

• Potential estimated at 50,000 MW

Recommendation • Pakistan should plan to increase hydel and wind power to 50% of electricity generation.

National Energy Authority Purpose & Set-up

National Energy Authority • The most important recommendation is for the setting up of a National Energy Authority • International experience shows that integrated energy planning and implementation is critical for the success of an economy. • This authority must comprise of the best of Pakistan’s industry professionals from the state, private and public sectors. • This authority will have the ability to coordinate the efforts of all the sectors, relating to implementation of the integrated energy policy and provide an oversight of regulatory issues and to work with the relevant ministries and the Planning Commission. • The Authority will report to the PM and must be headed by an eminent and recognized industry expert.

Financial implications of

change in energy mix • Moving from business as usual to implementing the above recommendations will result in average saving of $15 billion per annum for the next 15 years. • The total energy import bill in 2025 will be reduced from $62 billion to $28 billion.

Implementation will compliment GDP growth by

Mr. Farooq Rahmatullah is the Chairman of the Energy Expert Group. He has a degree in Law. He joined Burmah Shell Oil and Distribution Company in 1968 and has worked in different capacities both in Pakistan and abroad. He retired from Shell Pakistan as Managing Director and Country Chairman on 30th June 2006. He held the position of Director General CAA from August 2006 to August 2008. He also served as Chairman OGDCL from 2008-2010. He is currently Chairman Pakistan Reﬁnery Limited.

ENERGY CHALLENGES | APRIL 27, 2012

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