Pakistanis will start 2022 from a peak of expensive energy in 2021. The pattern appears set to go on into this year with higher average gas rates, oil prices and electricity costs.
There are no indications that a major decline in transmission and distribution losses in the electricity and gas sector is likely to take root in the 12 months from now as the authorities and energy sector entities struggle to sustain a higher recovery rate or inculcate efficiency patterns in the system.
Apart from high global energy prices, the 2021 energy scene in Pakistan was marked by mismanaged imports of oil and gas and lower production of domestic resources, thus adding an additional cost to consumers throughout the supply chain — oil, LNG and electricity.
These governance and supply chain mismanagement issues would have to be addressed if the Pakistan government is to minimise these additional costs in 2022. The fuel cost of power generation for imported coal, LNG and furnace oil has been higher by 20-25 per cent in the recent quarter of 2021 and most of these are expected to generally remain in the same range in the first half of 2022.
The governance and supply chain mismanagement issues would have to be addressed if the government wishes to minimise the additional costs to consumers in 2022
As a pointer, Pakistan’s oil import bill increased by 112pc to $8.4 billion in the July-November period, mostly because of higher international oil prices and increased imports of petroleum products instead of crude. In these five months, the import bill of petroleum products increased by 129pc to $4.15bn when compared to the 89pc increase in crude import bill of $2.05bn.
Ironically, import of petroleum product quantities went up by 27pc in these five months against just 1.8pc growth in crude quantities.
November witnessed the peak as the total oil import bill went up by 180pc to $2.2bn when compared to November of 2020 but this was chiefly because of a 309pc increase in the import bill of petroleum products. The increase in quantities was 113pc in November for products against just a 6pc increase in crude imports while local refineries operated at sub-optimal capacity ultimately leading to closures. This obviously had an additional direct cost on consumers besides the indirect cost of loss of foreign exchange.
The import cost of LNG also more than doubled to $1.92bn in the July-November period (up 120pc) even though import quantities were down. It should be remembered that the international LNG market witnessed record increases in the winter months which may not be able to sustain this trend but Pakistan authorities would need to improve their forecasting and planning capabilities to not only ensure sufficient quantities but also at an appropriate price mix.
The prices of petroleum products, particularly that of petrol and diesel are also anticipated to be on the higher side or generally stay stable in 2022 given the expected revival of the International Monetary Fund (IMF) programme under which the government is required to increase petroleum levy by Rs4 per litre every month till it reached a maximum of Rs30 per litre from about Rs13 at present. The government also has to gradually increase sales tax rates on these products.
Electricity consumers faced a double whammy — significant increases in base tariff under requirements of foreign-funded programmes and record-breaking fuel price adjustments. In November alone, the national distribution companies were allowed a whopping Rs4.75 additional fuel cost recovery from consumers while K-Electric would follow suit with Rs5.5 per unit additional burden.
The trend is anticipated to go on throughout the year on account of base tariff to ensure full cost recovery and payment of huge circular debt under the IMF programme and a mixed bag of imported fuel cost impact — oil prices going up and LNG slightly going down from the peak seen in 2021.
The price of surplus electricity amid subdued economic growth will continue to haunt the consumers this year and cost the government quite a political capital as it gets closer to the election cycle. The gas shortage would keep increasing as a result of politically motivated gas expansion plans and village gasification, not only by the previous governments but paced up by the current government as well amid falling domestic output.
The drastic reduction in renewable producer tariff over the past few years has appeared to have touched rock-bottom and is unlikely to go down further but its impact on overall energy tariff would remain unchanged in 2022 at its existing minuscule level.
International independent forecasts in the meanwhile suggest crude prices moving up to $85-90 per barrel by mid-2022 from the $70-78 per barrel band at present.
The cartel of Organisation of the Petroleum Exporting Countries plus in no mood to immediately increase their production significantly and the expected attempts by the US to replenish its stockpile released for price control would further support demand pressures. For example, JP Morgan Global Equity Research forecasts oil prices to overshoot $125 a barrel in 2022.
The US Energy Information Agency meanwhile has a different view and expects global liquid fuels inventories to increase and crude oil prices to fall in 2022. “We expect this shift will put downward pressure on the Brent price, which will average $72 per barrel (bbl) during 2022,” the EIA said a few days ago adding that the price of Brent will fall from an average of $84/bbl in October 2021 to $66/bbl in December 2022.
Published in Dawn, The Business and Finance Weekly, January 3rd, 2022