We now move to another important sub-sector of the energy namely the natural gas. A host of problems surround the gas sector: What should be the position of gas in energy needs of the country? What uses be marked for gas as desirable and what restricted? What sources of supply of gas are desirable? Is the pricing regime for gas conducive to exploiting the potential of gas and realizing the best value of the scarce resource? Is the current structure of transmission and distribution optimal? These are some of the key questions that we would attempt to briefly answer in our next few articles of the series.
Let’s us first have a quick look at the demand and supply of energy as projected for 2030 by the Petroleum Institute of Pakistan (PIP), in its Pakistan Energy Outlook 2017. In the base year of analysis (2016), there was a deficit of 10 million tons of oil equivalent (MTOE), with supply at 72 MTOE and demand at 82 MTOE. The share of local energy is 46 MTOE and imported is 26 MTOE. The report estimates: “the energy supply is estimated to increase from 72.01 MTOE to 199 MTOE in 2030, based on government planned projects and anticipated domestic oil and gas production. The actual supply may vary depending on the completion of projects and/or development of newer projects. The supply is estimated to meet energy demand in the low growth (4 percent GDP growth) and business as usual scenario (5.5 percent GDP growth), whereas, a supply deficit of 109 MTOE is estimated in the high growth scenario”.
At an estimated demand of 305 MTOE in the high growth scenario of 7% where energy demand would be rising at a compound annual growth rate (CAGR) of 9%, the projected supply would 190 MTOE, leaving a balance of 115 MTOE. In the ‘business as usual’ scenario demand would rise to 229 MTO and the deficit would be reasonable at around 39 MTOE, which is 17% compared to the present level of 12%.
The supply projections are based on some critical assumptions about the Government plans that include inter-state gas pipelines (Iran and TAPI), raising share of hydro from 10% to 19%, coal from 8% to 17% and other renewables from virtually nothing to 6%. These estimates have not yet been adopted by the Government. But it is high time that this plan or a modified plan for the same horizon is adopted by the Government to remove the looming uncertainty over the future of energy supplies in Pakistan.
Our pessimistic view is that the Government (this or the past) is not fully alive to the challenge being posed by energy that continues to remain a stifling constraint on country’s growth potential. The demand gap, besides being vulnerable to unplanned additions to supplies, also misses out supressed demand which is significant. It is a rule of thumb in gas demand that only 50% demand is taken into account while determining the gap. A similar situation prevails in the electricity market, where our per capita consumption is half that of India, a country seven times larger in population. Therefore, we would remain energy deficient as long as our policymakers fail to reform the entire system of energy planning, regulatory framework, markets and pricing. The pressures of demand are so intense, with rising population and incomes that planners would be unable to create a balance in the sector and set prices other than those that not just recover costs but provide for future investments.
We now review the existing gas availability scenario and examine its adequacy in meeting the current needs. The current level of supplies of energy is 78 MTOE of which gas provides nearly 42%, of which 38% is locally produced. With hydro at 10% and some coal and other resources, the local sources meet only about 50% of our needs. Thus there is a very high dependence on imported oil, coal and now gas (7% including LPG), which is a new phenomenon with the introduction of LNG in 2015. The local gas is around 4 BCF and LNG is now close to 1 BCF.
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The domestic supply of gas is on the decline and in the energy forecast for 2030, it is assumed that domestic gas would decline to less than 2.6 BCF and LNG would rise to 3.6 BCF. It would be a huge challenge how to replace relatively cheap local gas with much expensive imported gas. At present, nearly 25% of the local gas is used in the domestic (households) sector through an extensive system of distribution between the two companies, Southern and Northern gas companies. Another 25% is used in the industry, 25% in the power sector, 16% in the fertilizer sector and 9% in the CNG. It should also be realized that more than 1 BCF gas is dedicated to power generation and fertilizer and hence not available for pipeline supply which primarily serves the domestic sector. Inevitably the pressure of the above substitution would come on the households sector as the sector pays only a fraction of the price of gas and would simply be unable to pay the higher prices of imported LNG.
In fact, the country should and must revisit the gas uses allowed in the past under the false assumption of plenty of availability. For instance, such an extensive use of gas in the domestic sector is in sharp contrast to gas use in India, where virtually no supplies are available for pipeline supply of gas for households. Nearly 80% of gas supplies in India are provided to power generation and fertilizer. Households use LPG in cylinders.
In fact we should ask a more basic question. Going forward, how much LNG is feasible for use in the country. The primary use of LNG was for the power sector but we have started supplying it to industry, fertilizer and CNG. The issues of circular debt have started emerging in the supplies of LNG as the power sector is facing the same problem for lack of payments made to power suppliers. But both industry and fertilizer demand subsidies for making LNG economical for their use. The CNG was supposed to make its own import arrangements but it is also piggybacking on Government imports, as there are excess imports at the moment.
Apart from the emerging problem of the arears, there is even a more basic question of economical supplies of electricity based on the use of LNG. Already, with the rising international oil prices, LNG has lost its shine in terms of being the cheapest fuel for power generation. The renewables from hydro, wind and solar are what the country should aim at rather than being exposed to a fuel subject to the vagaries of international oil price volatility.
(To be Continued)
(The writer is former finance secretary) Email: firstname.lastname@example.org
(This news/article originally appeared in Business Recorder on September 12th, 2018)