The controversy about the pricing formula of Liquefied Natural Gas (LNG) entered into by the government of Pakistan with Qatar as a 15-year contract obfuscates the underlying cause of our perpetual energy crisis.
According to the State Bank data for financial year 2016-17, we imported $1.2 billion of LNG. This is less than the $2.7 billion we spent on crude oil and $6.3 billion on refined petroleum products.
It is being conveniently argued that locally produced gas is costlier than imported gas.
Today LNG is being bought at a landed cost of almost $11 per MMBtu. (The price of natural gas is expressed in dollars per 1 million British thermal units or MMBtu). The Petroleum Policy of 2001 capped locally produced gas at $2.9 per MMBtu. This was raised to $5 in 2012.
LNG pricing is not directly related to internationally accepted benchmarks such as the Brent Crude and the contract multiplier is a technical co-efficient at 13.37% of Brent Crude Oil Price, translating into $6.68 per MMBtu, assuming oil is $50 (around 75-80% of the oil price).
Even if it is presumed that profits will be repatriated at $3 out of $5, given Petroleum policy 2012, the rupee component of return to the country’s economy is almost 40%, inclusive of local expenditures and royalties. Whereas, in the case of LNG imports the beneficiary is the other country in terms of employment generation of technically proficient manpower, local expenditure, taxes and royalties and acquiring technical expertise.
It is thus intellectually dishonest to import LNG import as this is not sustainable. It is bad governance that brought us to this point and the facts and figures were manipulated to present LNG as a viable solution.
Energy deficient
The Economic Survey of Pakistan reveals that Pakistan depends largely on oil and gas to meet its energy needs.
Natural gas contributes about 46% of the total primary energy supply mix. We have an extensive 119,736 km distribution and 32,823 km transmission network. It supplies 4 Billion Cubic Feet per day of natural gas. Domestic production of crude oil meets 20% of the country’s requirements.
Perhaps LNG’s import is being justified as gas-fired plants are more efficient than coal- and oil-fired plants. As our energy mix comprises mostly gas for power generation, any move towards oil- or coal-fired plants will entail more conversion costs of gas infrastructure, including transmission and distribution lines.
There is no disputing that Pakistan is energy deficient—but so was the US which achieved energy independence through the shale gas revolution. Pakistani has no policy on unconventional gas resources such as shale gas. Around 75% of the sedimentary basin of Pakistan remains unexplored. This is baffling as in the last decade the US achieved energy independence by extracting it.
The initial high costs of investing in shale gas technology paid off in Pakistan. Offshore blocks in Pakistan are available for exploration at no security risk. However, the Petroleum Policy is inexplicably allowing marginally higher profits and returns compared to onshore without considering that investment costs for offshore are in the ratio of 1:10. Once our offshore sedimentary basins of Indus and Makran are explored (one block on an average will incur an expenditure of say $500 million) at least we will know where we stand and can justify the import of LNG or otherwise.
Despite being a major gas producer, Iran does not possess proprietary technology for LNG and its export as cryogenic technology and alloys capable of withstanding temperatures in the range of -1300C can only be obtained from the West. Similarly there is no technology transfer involved in the process of LNG import in Pakistan.
Bad policies
Acrimonious political rhetoric aside, the mistakes made with petroleum policies in the past are haunting us today.
The official Pakistan Vision 2025 document identifies the causes of Pakistan’s energy crisis as aging power plants and distribution infrastructure causing up to a third of national power generation capacity loss. These leaks are exacerbated by pathetic governance at the policy level such as minimal investment in the development of indigenous sources of power generation, namely hydropower and coal, Transmission and Distribution (T&D) losses, electricity theft and a reliance on expensive imported oil.
The T&D losses in Pakistan (over 25%) are significantly more than those of OECD countries (7%), Korea (3.6%) and China (8%). Theoretically speaking, additional energy could have been made available to the national grid by reducing T&D losses.
Exploration giants exiting
It is disturbing that five major foreign Exploration and Production (E&P) companies have abandoned Pakistan in the last decade yet are willing to keep operating in conflict-ridden countries such as Egypt and Angola. This creates the suspicion that our policy makers do not have the will to ensure good governance.
Security concerns raise risk and profit margins for foreign investors yet it is only this category of foreign investor, which has the financial backbone, technological expertise and access to technology to enter and exploit the E&P sector of Pakistan.
Local small scale E&P companies entered and continue to hold on to blocks but without developing them. They also do not have the latest (and costly) exploration technology nor are they in a position to deploy fast-track resources such as proprietary E&P software which in some cases costs $10 million in license fees.
Sindh remains relatively stable in terms of law and order and 60% of our gas and 50% of our oil comes from here. In Balochistan the areas with prospects have a challenging geology because they have deeper reserves and the risk profile is higher given the law and order situation. It is not conducive for E&P activity.
Lean mean E&P
The major public sector flagship E&P company of Pakistan, a blue chip company, does not follow the “lean mean” model and boasts a ratio of support staff almost five times more than in its core Production and Exploration division. This E&P player is responsible for the production of almost 2,500 bcdf with prime fields, some of which such as Qadirpur and Pirkoh, are on the decline. Such public sector companies have their share of circular debt, curtailing the cash flow needed for aggressive drilling of oil wells, thus becoming risk averse. If this malaise is not arrested then public sector E&P companies may meet a fate similar to that of PIA and the Steel Mills. Our future generations will then need more LNG.
The writer has a Bachelor of Science in Business and Management from the London School of Economics and is involved in research on finance and energy
According to the State Bank data for financial year 2016-17, we imported $1.2 billion of LNG. This is less than the $2.7 billion we spent on crude oil and $6.3 billion on refined petroleum products.
It is being conveniently argued that locally produced gas is costlier than imported gas.
Today LNG is being bought at a landed cost of almost $11 per MMBtu. (The price of natural gas is expressed in dollars per 1 million British thermal units or MMBtu). The Petroleum Policy of 2001 capped locally produced gas at $2.9 per MMBtu. This was raised to $5 in 2012.
LNG pricing is not directly related to internationally accepted benchmarks such as the Brent Crude and the contract multiplier is a technical co-efficient at 13.37% of Brent Crude Oil Price, translating into $6.68 per MMBtu, assuming oil is $50 (around 75-80% of the oil price).
Even if it is presumed that profits will be repatriated at $3 out of $5, given Petroleum policy 2012, the rupee component of return to the country’s economy is almost 40%, inclusive of local expenditures and royalties. Whereas, in the case of LNG imports the beneficiary is the other country in terms of employment generation of technically proficient manpower, local expenditure, taxes and royalties and acquiring technical expertise.
It is thus intellectually dishonest to import LNG import as this is not sustainable. It is bad governance that brought us to this point and the facts and figures were manipulated to present LNG as a viable solution.
In the case of LNG imports the beneficiary is the other country in terms of employment generation of technically proficient manpower, local expenditure, taxes and royalties and acquiring technical expertise
Energy deficient
The Economic Survey of Pakistan reveals that Pakistan depends largely on oil and gas to meet its energy needs.
Natural gas contributes about 46% of the total primary energy supply mix. We have an extensive 119,736 km distribution and 32,823 km transmission network. It supplies 4 Billion Cubic Feet per day of natural gas. Domestic production of crude oil meets 20% of the country’s requirements.
Perhaps LNG’s import is being justified as gas-fired plants are more efficient than coal- and oil-fired plants. As our energy mix comprises mostly gas for power generation, any move towards oil- or coal-fired plants will entail more conversion costs of gas infrastructure, including transmission and distribution lines.
There is no disputing that Pakistan is energy deficient—but so was the US which achieved energy independence through the shale gas revolution. Pakistani has no policy on unconventional gas resources such as shale gas. Around 75% of the sedimentary basin of Pakistan remains unexplored. This is baffling as in the last decade the US achieved energy independence by extracting it.
The initial high costs of investing in shale gas technology paid off in Pakistan. Offshore blocks in Pakistan are available for exploration at no security risk. However, the Petroleum Policy is inexplicably allowing marginally higher profits and returns compared to onshore without considering that investment costs for offshore are in the ratio of 1:10. Once our offshore sedimentary basins of Indus and Makran are explored (one block on an average will incur an expenditure of say $500 million) at least we will know where we stand and can justify the import of LNG or otherwise.
Despite being a major gas producer, Iran does not possess proprietary technology for LNG and its export as cryogenic technology and alloys capable of withstanding temperatures in the range of -1300C can only be obtained from the West. Similarly there is no technology transfer involved in the process of LNG import in Pakistan.
Bad policies
Acrimonious political rhetoric aside, the mistakes made with petroleum policies in the past are haunting us today.
The official Pakistan Vision 2025 document identifies the causes of Pakistan’s energy crisis as aging power plants and distribution infrastructure causing up to a third of national power generation capacity loss. These leaks are exacerbated by pathetic governance at the policy level such as minimal investment in the development of indigenous sources of power generation, namely hydropower and coal, Transmission and Distribution (T&D) losses, electricity theft and a reliance on expensive imported oil.
The T&D losses in Pakistan (over 25%) are significantly more than those of OECD countries (7%), Korea (3.6%) and China (8%). Theoretically speaking, additional energy could have been made available to the national grid by reducing T&D losses.
Exploration giants exiting
It is disturbing that five major foreign Exploration and Production (E&P) companies have abandoned Pakistan in the last decade yet are willing to keep operating in conflict-ridden countries such as Egypt and Angola. This creates the suspicion that our policy makers do not have the will to ensure good governance.
Security concerns raise risk and profit margins for foreign investors yet it is only this category of foreign investor, which has the financial backbone, technological expertise and access to technology to enter and exploit the E&P sector of Pakistan.
Local small scale E&P companies entered and continue to hold on to blocks but without developing them. They also do not have the latest (and costly) exploration technology nor are they in a position to deploy fast-track resources such as proprietary E&P software which in some cases costs $10 million in license fees.
Sindh remains relatively stable in terms of law and order and 60% of our gas and 50% of our oil comes from here. In Balochistan the areas with prospects have a challenging geology because they have deeper reserves and the risk profile is higher given the law and order situation. It is not conducive for E&P activity.
Lean mean E&P
The major public sector flagship E&P company of Pakistan, a blue chip company, does not follow the “lean mean” model and boasts a ratio of support staff almost five times more than in its core Production and Exploration division. This E&P player is responsible for the production of almost 2,500 bcdf with prime fields, some of which such as Qadirpur and Pirkoh, are on the decline. Such public sector companies have their share of circular debt, curtailing the cash flow needed for aggressive drilling of oil wells, thus becoming risk averse. If this malaise is not arrested then public sector E&P companies may meet a fate similar to that of PIA and the Steel Mills. Our future generations will then need more LNG.
The writer has a Bachelor of Science in Business and Management from the London School of Economics and is involved in research on finance and energy