With almost Rs2.5 trillion circular debt in the power sector and more than Rs1.5tr in the gas sector amid global prices calling mayday, the new coalition government’s energy sector challenges are unending and increasing.
It has been discussing the creation of an energy sector task force led by former Prime Minister Shahid Khaqan Abbasi with participation from the private sector and key coalition partners to coordinate troubleshooting and policy-making of the power and petroleum divisions of the Ministry of Energy along with the Ministry of Maritime Affairs.
From making payments out of the federal budget to the extent of Rs80-90 billion per month to subsidise petroleum products for almost $2bn spending on oil and gas-related imports, the proposition is simply getting unsustainable. The port facilities and related infrastructure, too, are in shambles and unable to facilitate smooth operations of petroleum products, LNG and coal.
The overall import bill of the petroleum group, including LNG, in the first three quarters (July–March) has surged by 96 per cent to $14.8bn when compared to the same period of last year. This included a 112pc jump in imports of petroleum products to $7.3bn, followed by a 92pc increase in LNG imports to $3.32bn despite lower LNG quantities and 82pc growth in crude imports to $3.69bn even though refineries operated sub-optimally at the cost of foreign exchange loss.
Much would depend on how perhaps the broadest-based coalition government of Pakistan’s history finds an acceptable ground for common ownership of decision-making in this key sector
Yet on the other end of the equation is a combination of inefficiently run public sector entities in the energy sector unable to recover the cost of goods and services they deliver, let alone make a profit on commercial business models and consumers neither paying nor able to or willing to pay the fair price of electricity, gas and petroleum products. Resultantly, the private investors are unable to get funds for goods and services they sell to the public sector — technically recurring default of the purchaser and the sovereign.
Mr Abbasi, therefore, leading the task force would be expected to provide strategic direction, intermediation and policy guidance to the federal minister for power Engineer Khurram Dastgir and minister of state for petroleum Dr Mussadik Malik to synchronise the supply chain while simultaneously focusing on their day to day firefighting operations.
The task force is aimed at enabling the prime minister and the cabinet to take key policy decisions on the short and long term basis on how to shift base loan reliance to local resources instead of allowing the related ministries and divisions to continue operating in silos, resulting in cycles of shortages and surpluses. It would be expected to guide the government for pricing reforms in the gas and electricity sector including private sector participation. This would depend on how perhaps the broadest based coalition government of Pakistan’s history finds acceptable ground for common ownership of decision making.
Based on internal discussions, the prime minister and Mr Abbasi are to engage at the official level and in the background with Saudi Arabia, China and Qatar for keeping oil, electricity and LNG supplies secure in challenging market conditions. This would have to be dealt with the care of the experienced hand because of some mishandlings over the last couple of years. All three have one or another set of complaints.
For example, Qatar’s repeated requests for a complete LNG supply chain — from import to regasification terminal and sale of gas — in the private sector were discouraged by the last government even though the gulf state has emerged as the single largest supplier with secured supply line at competitive rates against repeated defaults under similar long term contracts of the private sector.
On the other hand, the government is considering soft-paddle international arbitration proceedings against continuous LNG defaulters — Gunvor and ENI — and encouraging Trafigura and Vitol etc to increase their supply footprint in the country in the short term, to be followed by bringing in Russian companies in the medium to long term. The boards of directors and top leadership teams of the gas companies could soon see reshuffles as existing operators of government-guaranteed LNG terminals keep lobbying to increase capacity contracts and sponsors of private LNG terminals, still struggling to find clarity of policy direction and future roadmap, begin setting up their units.
This happens despite the fact that official studies suggest that the country’s existing LNG terminals are overstressed and the LNG value chain very fragile from all parameters against global standards. The situation could lead to operational and safety risks, contrary to the common perception in public discourse that terminals are underutilised.
“Even with the low ratios of ‘Regas to Storage’ and ‘LNG import capacity to storage’, the overall utilisation rate of LNG terminals across the globe is approximately 43pc. Pakistan’s utilisation is at a remarkable 84pc, despite having extremely inflexible infrastructure and other constraints,” according to a study of public sector LNG entities.
“Operating Terminal-1 (of Engro Elengy) at nearing 100pc utilisation rate leaves very little flexibility to handle shocks,” said the report adding that when compared with the global and European averages, “it is realised that Pakistan’s utilisation rates are 249pc and 196pc, respectively”.
Moreover, when Pakistan’s LNG import infrastructure was compared with the countries which solely rely on Floating Storage and Regasification Units (FSRUs), Pakistan’s utilisation rate is 30pc higher than Kuwait’s and a striking 200pc higher than Argentina. The comparison is based on the FSRU capacity utilisation of almost all nine countries. It has to be kept in mind here that Pakistan is only next to Argentina and Kuwait in terms of throughput to storage ratios and with a difference of less than 1pc.
Published in Dawn, The Business and Finance Weekly, May 9th, 2022