The burdens of an oil crisis

How should Pakistan deal with its energy shortage?

The burdens of an oil crisis
Pakistan is not doing too well on the macroeconomic front. The real GDP growth rate for fiscal year 2014 stands at 4.1 percent, which is below target. Inflation is looming large. The state bank of Pakistan’s estimates puts the rate of inflation in the range of 11 to 12 percent, courtesy concerted efforts by the government to reduce fiscal burden through increased power tariffs and a sharp appreciation in the Pakistani rupee, resulting in imported inflation. As things were far from stable, the ongoing petroleum crisis rocked the government. The energy crisis in Pakistan is not new. What is happening right now is essentially tied to the same crisis that has been haunting Pakistan for the last five years or more. Petrol stations in most of Punjab and parts of Khyber Pakhtunkhwa are virtually dry. Long queues outside petrol stations have brought the country to a standstill. Ordinary citizens, already grappling with acute power shortages are enraged to see the level of incompetence of the present regime in managing the crisis.

Pakistan’s petroleum sector is heavily dependent on the power sector. It can also be argued otherwise, that the power sector is dependent heavily on the petroleum sector. The supply chains are closely tied and the two sectors are inherently complementing each other through joint operations of power supply and in country petroleum distribution mechanisms.

Pakistan’s power sector was initially overseen by WAPDA. In the early 1990s, the government of Pakistan embarked on a structural reforms project following the severe electricity shortages of the 1980s, whereby WAPDA was unbundled into separate generation, transmission and distribution companies.The unbundled WAPDA now looks after the entire thermal generation in the country and accounts for more than 65 percent of the power sector. It includes four generation companies, one transmission and dispatch company, and nine distribution companies (DISCOS), managed by Pakistan Electric Power Company (PEPCO). These DISCOS have their tariffs determined by an independent regulator called NEPRA, established in 1995.

The distribution companies buy power from the Central Power Purchase Authority, who in turn buys it from the power generation companies, Independent Power Producers, and the infamous Rental Power Plants. In a load shedding environment like Pakistan, bulk of the energy consumption is after sunset and that is when the peak load occurs. Oil and gas based generating plants are more or less shut down during the off peak hours, resulting in severe outages for the industrial and commercial customers.
The power sector is heavily dependent on the petroleum sector

In Pakistan, like in any other country, the consumers are divided into four categories - residential, commercial, industrial and agricultural. Within these four categories are slabs that represent various consumption levels. The bills paid by the consumers pass through a fairly long chain. Collected by the distribution companies, the bills have a tax component which is deposited into government accounts straight away. The remaining sum - minus the operations and maintenance costs of the DISCOs - goes to Pakistan Electric Power Company. PEPCO then remits these funds to CPPA, which is managed under the auspices of the National Transmission and Despatch Company. The funds are then paid to WAPDA, Generation Companies, Independent Power Producers and Rental Power Plants, who in turn make payments to the oil marketing companies (OMCs) and gas utility companies. The OMCs then pay the oil refineries, which pay for the import of crude oil. Irregularities in payments at any level in this supply chain may disrupt the entire process of power generation, power transmission and power distribution. As or if the government fails to successfully monitor the flow of cash flows to the last mile, a potential scare like the one witnessed right now is very much on the cards again. As the Pakistan State Oil (PSO) company spearheads supply of oil to majority of the power plants in the country, a potential jitter in its ability to supply oil will also put pressure on all other oil marketing companies in the country. PSO customers as a result would throng other multinational oil supply operatives in the country, thereby causing supply side distortions in the petroleum markets. Typical arguments doing the rounds, blaming the oil mafia for deliberately cutting supply in response to deterioration in international oil prices, are a little farfetched. A reduction in international oil prices would inevitably reduce import inflation and should in turn benefit any domestic oil company by scaling down its own costs. The current crisis is more a result of mishandling by the present regime. This also exposes the fact that any effort to corporatize a government entity so that it behaves like a privately run entity has also failed. The government must have the following overarching objectives:

  • Relying heavily on oil based power generation has time and again taken a drain on the government’s fiscal coffers. Steps must be taken to diversify out of oil into other more economical alternatives.

  • The Pakistan State Oil Company must be immediately assessed, restructured or perhaps privatized to improve its efficiency. The government cannot and must not look to manage everything other than its own offices.

  • Tariff differential subsidies must be abolished gradually to make power tariffs more rational and cost reflective.

  • The government must also fast track demand side management measures through the import and facilitation of hybrid cars. Duties on such imports must be minimized to incentivize even the middle classes who end up bearing the brunt of a potential oil crisis.

  • The government must engage the private sector in exploring domestic potential oil blocs.

All these measures only require sound leadership and a committed administration.

The writer is a development economist