Serious energy shortage, massive load-shedding and lowest ever strategic oil reserves are emerging as major risk to the economy.

The situation, it appears, will not be any better in the days ahead given the political uncertainty and policy planning failure over the last few years.

Combined with multi-layered risks including current account deficit, the critical shortage of energy--an ingredient that fuels the economic growth— has the potential to choke economic growth.

The shortfall in electricity generation did not emerge suddenly but was developing over the years as the development of cheap and indigenous energy sources was discouraged for lack of any vision. Sponsors of hydropower producers who were offered a tariff of 4.7 cents per unit under the 1997 policy were practically blocked from developing their plants at this tariff rate and offered a much lower rate of 3.3 cents per unit in 1999.

Same happened with development of coal resources. A Chinese firm that had agreed to set up a 600MW project at Thar for 5.79 cents per unit was forced to quit when the authorities refused to offer a tariff of more than 5.39 cents per unit. As a result, no power project could be set up in the last eight years. The regime never tired of criticising political governments for signing costly energy contracts (at the average rate of 5.7 cents per unit). But it allowed signing of contracts for thermal power project at a much higher tariff of up to 15 cents per unit, although none of these projects would be available to the economy in the next 6-12 months.

Likewise, the recent revelation of the country’s strategic oil reserves at a precarious level clearly exposed the government’s lack of vigilance and failure of energy companies to meet their contractual obligations. The strategic oil reserves for defence had also been consumed to meet shortage and thus the country’s security has been exposed to great risks.

Under the fuel supply and power purchase agreements, the oil marketing firms and power generation companies - whether in the public or in the private sector – are required to maintain a minimum of 21 days of their fuel requirements. Non-compliance of such contractual obligations is subject to heavy penalties under the law. The government, too, is required under the standard operating procedures defined in the official Blue Book to ensure that it has oil stocks for at least 21 days of consumption to meet any eventuality, either a natural calamity or war or any such event.

The imperative of maintaining stocks for 21 days was highlighted by the blocking of communication routes during the violent protests following the tragic killing of former Prime Minister Benazir Bhutto. The entire episode led to disruption of fuel supply chain that included railway, pipeline and road transport. In varying degrees, it came to light that neither the independent power producers, nor the oil marketing companies including those in the public sector had maintained sufficient stocks as required under the law.

The result would be more load shedding in the days ahead. The export growth that is already stagnating would be hit if enough energy – gas and electricity – is not ensured to the industrial sector.

The power shortage that had officially been estimated to remain in the range of 1000-2000MW during the current year has already touched 3600 MW. The economy is being run at almost 30 per cent energy shortage, which could worsen if oil supplies continue to remain short or the current disruption of oil transportation prolongs.

Wapda estimates that the country could face a power shortage of about 5,500MW by 2010. Overall, Pakistan’s total energy need is expected to be around 80 million tons of oil equivalents (MTOE) in 2010, up by about 50 per cent from the current year’s 54 MTOE. And since at least four out of five major initiatives, originally planned for meeting this demand, are uncertain at present or significantly behind schedule, the shortage estimate could be anybody’s guess.

Even the closure of business after sunset and reduction in street lightening did not get the desired results, leading to a massive load shedding of almost daily four hours across the country. Most of the industrial and commercial sector has also been deprived of the natural gas since the advent of winter. Energy shortage is severe and widespread in almost all areas, while different sectors contribute to each other’s problems. “Natural gas, power, and oil shortages were all posing risks to the economic growth in medium to long-term period,” a government official said.

A major shortfall is expected in natural gas supplies. According to an official energy demand forecast, the demand for natural gas, having about 50 per cent share in the country’s energy consumption, would increase by 44 per cent to 39MTOE from 27MTOE currently. The government had planned to add an overall power generation capacity of about 7,880MW by 2010. Of this, about 4,860MW was to be based on natural gas, accounting for 61 per cent of the capacity expansion. However, the gas-based power expansion of about 4,860MW would remain in doubt since these estimates are based on three gas import options for completion in 2010, 2015 and 2020.

A major part of about 4,860 gas-based plants may not be available and the difference may be met through other costly options. Even if the physical work is started today, it will take at least seven years to complete a pipeline project and it was not clear if construction of Iran to Pakistan pipeline project could be taken in hand in the near future.

Partly contributed by gas shortfalls, the power shortage is expected to be little over 5,500MW by 2010, said a Planning Commission official, adding that the oil demand would also increase by over 23 per cent to about 21 million tons in 2010 from the current 16.8 million tons.

This would leave a total deficit of about nine million tons of diesel and furnace oil imports. Since gas shortfalls are expected to be much higher, the country would need to enhance its dependence on imported oil, increasing pressure on foreign exchange balances.