We’re running out of gas

The petrol and natural gas crises are interconnected

We’re running out of gas
It may sound counter-intuitive, but to understand the most recent petrol crisis in Pakistan, we must first understand the dynamics of our natural gas market. It is Punjab’s dependence on natural gas as a fuel – more so than any other part of Pakistan – that resulted in its staggering vulnerability to a supply disruption.

There were, of course, several factors that caused the crisis in Punjab. Declining global oil prices, low inventories of oil companies, several ships that were delayed at Karachi Port, fog in Southern Punjab, a truck accident on a highway outside Karachi; all contributed to the crisis. But perhaps nothing was more important than the shutdown of compressed natural gas (CNG) stations across the province. That decision by the federal government, more than anything else, tipped the province over the edge. It also explains why Punjab was affected worse than any other part of the country, even Khyber Pakhtunkhwa.

Natural gas is a commodity that has long been taken for granted in Pakistan. We have always assumed that we have a limitless supply, yet the reality is that Pakistan’s reserves are rapidly dwindling. According to an analysis conducted by the petroleum ministry in 2012, Pakistan’s gas production is likely to have peaked in 2014 (full year figures are not yet available) at 4,400 million cubic feet per day (mmcfd). Production is now projected to decline rapidly to just above 2,100 mmcfd in 2022, even as demand rises to above 8,000 mmcfd in that year.

Why is our gas production declining? Because the biggest gas fields – which were discovered the earliest – are starting to approach the end of their production cycles. From now on, it is unlikely that there will be any megafields discovered in Pakistan. There will still be many smaller fields, of course. But their production cost will be much higher than the larger fields.
A lack of CNG and a brittle supply chain caused the crisis

Natural gas is a relatively clean, cheap source of fuel, and hence its efficient use in a time of declining supplies is exceedingly important. When Prime Minister Nawaz Sharif came into office, he made it abundantly clear to insiders in the energy industry that he planned to prioritise the highest value-producing sectors of the economy that rely on natural gas. Yet the prime minister’s task is not quite as simple.

Just over 71% of Pakistan’s natural gas production comes from Sindh, and Article 158 of the Constitution mandates that the province that produces gas gets first priority of use. No matter how much he tries, the Prime Minister is constitutionally bound to let Sindh have as much gas as it wants, and only then use the remainder for Punjab and the rest of the country.

So what does all this have to do with the petrol crisis? Simple: it explains the gas rationing decisions that the government needed to make that caused the crisis.

In winter, particularly in January, often the coldest month, demand for gas for heating purposes in Punjab is at its highest, but it is also the month when more Karachiites are using highly inefficient geysers for hot water. As a result, the government has very little gas to distribute to shivering residents of Punjab and must make the decision to cut off gas to someone else. That someone else this year – and in most previous years – is the CNG sector, along with the state-owned power sector.

Due to development budget decisions in decades past, a greater proportion of households in Punjab are reliant on natural gas for heating than in Khyber Pakhtunkhwa, despite the latter having even colder winters.

Unto itself, the CNG shutdown would not have caused the petrol shortage. But it happened at a time when the petrol supply chain was especially vulnerable. Due to the nature of the pricing regime utilised by the Oil and Gas Regulatory Authority (OGRA) – with its bias towards large monthly changes in prices rather than smaller daily changes – oil companies have a strong disincentive to carry large inventories during a time of declining oil prices.

When oil companies know the prices are about to go down, they pare down on their inventories and wait for the price to bottom out, which is exactly what these companies were doing in January, right when the cold snap forced the government to divert a little more gas from the CNG sector to domestic consumers. Those two factors combined – a lack of CNG and a brittle supply chain – is what caused the crisis.

There were, of course, several other factors at play. Circular debt in the energy sector – the accumulation of liabilities by power companies and oil companies due to the cost of electricity theft and inefficiency – caused the government-owned Pakistan State Oil to be carrying even lower inventories than its private sector competitors. And delays by ships owned by Pakistan National Shipping Corporation (PNSC) in carrying oil to Pakistan certainly did not help. But PNSC ships are habitually late and PSO’s circular debt is nothing new.

The real problem is that we as Pakistanis have taken natural gas for granted. Our energy system is relies on it even though our domestic production capacity is likely in decline. As the events of the past week illustrate, not addressing this policy challenge leaves the country’s energy supply chain staggeringly vulnerable to even the slightest of shocks. Expect more of these unless we address our problem with natural gas.