LNG outlook

February 26, 2017


PAKISTAN grew up on natural gas. For decades, much of our power generation requirement was met by this fuel after substantial domestic reserves started being discovered from the 1950s.

In addition, we used cheap gas to fuel the requirement for our domestic and industrial heating. Then in the 1960s, as the green revolution took off in agriculture, we used it for fertiliser production which fuelled the farm economy.

Then, in 1974 came the oil shock and massive devaluation of the rupee. Pakistan was able to greatly mitigate the effects, thanks to the ample availability of domestic natural gas.

In opting for LNG are we making the right choice?

In the early 2000s, compressed natural gas was widely adopted as vehicle fuel. A few years ago, that party began to taper. We had reached peak natural gas production and were facing a downward slope while the demand projection indicated steady growth. There were upward pressures on pricing on what was becoming a scarce natural resource.

Few new discoveries had been made and in any case the rate of new discovery had been well below the rate of depletion of old fields.

So where is Pakistan to go with meeting its immediate and future energy requirements? It is now becoming quite apparent that imported gas, particularly in the form of LNG, will be a major fuel of the future — apart from renewable energy. Let us look at what is happening.

The first floating LNG terminal has been operational for some time. PSO is handling LNG imports. Supplies are already flowing. A south to north gas pipeline capacity enhancement is also in the works to handle future requirements. A number of more floating re-gasification terminals are also planned. Gas-fired power plants are under construction or planned in different parts of the country.

So are we making the right choice? To be sure LNG is the most immediate solution and fills our short-term requirements for energy. LNG is a versatile fuel and feedstock for fertiliser.

The supply chain calls for investments in infrastructure (terminals and pipelines) and the plan appears to be unfolding. The closest source of supply is Qatar, a country that accounts for nearly one-third of global production.

Power plants can be built with relative ease and located in proximity to the south-north gas pipeline, a veritable energy corridor. The same for example would be more cumbersome with coal, mountains of which would need to be transported by rail. And though the landed cost of LNG is higher compared to coal (in terms of calorific value), it is a cleaner fuel. When compared to oil, it is and is expected to remain cheaper.

On the flip side, LNG and gas in general is not easily storable. The capital costs of the limited storage that can be built are phenomenal as it is a highly pyrogenic substance.

In general, oil and coal can be stored while electricity and gas cannot. This may have implications for energy security and reserves held during disturbances such as wartime and that aspect would have to be dealt with separately as it is beyond the scope of the present discussion.

But from the purely supply chain point of view what this means is that demand and supply need to be carefully matched and managed. Power plants and fertiliser plants which in Pakistan would account for the overwhelming share of demand are ‘continuous process industries’. There is little room to build buffers. This is not like local production of gas where output can usually be regulated to match the ebb and flow of demand.

Going forward of course, once demand has been built up and a steady flow commenced, the day will also arrive when the LNG sector is deregulated and other private-sector players also join in the game. A favourable policy environment and contract enforcement mechanisms will encourage private-sector players to build floating and even onshore terminals with some storage capacity, invest in pipeline and transmission infrastructure and enter into long-term procurement contracts.

This is normal industry evolution and a long way from a decade ago when the Mashal LNG import project was first conceived. The days of cheap gas may be coming to an end and new gas discoveries that are made will be able to utilise the infrastructure we are laying. For the lifeline domestic consumer segment, the government may consider a direct and targeted subsidy which is a better mechanism than keeping prices low across the board. For the end consumer, deregulation and competition in the energy market will be a good thing and the economy will only gain from it.

The writer is an energy entrepreneur and author of Putting Pakistan Right: Standpoints on the War on Terror, Energy, Transit Corridors and Economic Development.

Published in Dawn, February 26th, 2017