LNG and Intellectual Dishonesty

 Is LNG import justified

The controversy about the pricing formula of Liquefied Natural Gas (LNG) entered into by the Government of Pakistan with Qatar as a 15 year term contract on government to government basis downplays the underlying cause of the perpetual energy crisis. It is being conveniently bantered that locally produced gas is costlier the imported gas. There is no disputing the fact that Pakistan has remained energy deficient but so was the USA which achieved energy independence through the Shale Gas revolution. Acrimonious political rhetoric aside the follies committed in the petroleum policies of the past are haunting us now. The official Pakistan Vision 2025 document identified causes of Pakistan’s energy crisis as aging power plants and distribution infrastructure causing up to a third of national power generation capacity loss. These power leakages are exacerbated by pathetic governance at policy level such as minimal investment in development of indigenous sources of power generation namely Hydropower and Coal, Transmission and Distribution (T&D) losses due to technical issues and electricity theft and reliance on expensive imported oil. The T&D losses in Pakistan (over 25%) are significantly more than in OECD countries (7%), Korea (3.6%) and China (8%) and theoretically speaking additional energy could have been made available to the national grid by reducing T&D losses being a governance issue thus reducing cost of generation per unit. Intellectual dishonesty is exemplified by LNG import which is not sustainable and successive bad governance led to LNG import with facts and figures conveniently manipulated to present LNG as a viable solution.

The Economic Survey of Pakistan reveals that Pakistan depends largely upon oil and gas resources to meet its energy needs with natural gas contributing about 46% of the total primary energy supply mix in the country. Pakistan has an extensive 119,736 km distribution and 32,823 km transmission network providing about 4 Billion Cubic Feet per day of natural gas. The domestic production of crude oil meets 20 % of the country’s requirements.

Afterthought

Imports of LNG, Crude and refined petroleum products as per State Bank of Pakistan data for the financial year 2016-17 are 1.2 billion USD, 2.7 billion USD and 6.3 billion USD respectively. As an afterthought perhaps LNG import is being justified as gas fired plants are more efficient then coal and oil fired plants and as our energy mix comprises of mostly gas in power generation any move towards oil or coal fired plants will entail more conversion costs of gas infrastructure inclusive of transmission and distribution lines.

Major E & P Giants exiting

Security concerns raise risk and profit margins for foreign investors yet it is only this category of foreign investor, which has the financial backbone, technological expertise and access to technology that can enter and exploit the E&P sector of Pakistan. What is a disturbing scenario is that 5 major foreign Exploration and Production (E & P) companies have abandoned Pakistan in the last decade yet are willing to retain operations in conflict ridden countries such as Egypt and Angola meaning thereby the will of the policy makers to ensure good governance is suspect. Local small scale E & P companies entered and continue to hold on to blocks without any development of the blocks as they do not possess latest (and costly) exploration technology nor are in a position to deploy fast track resources such as proprietary E & P software in some cases requiring 10 million USD as license fees. The province of Sindh remains relatively stable in terms of law and order with 60 % and 50 % of gas and oil emanating from the province of Sindh. In the province of Balochistan the prospective accessible areas have a challenging geology on account of deeper reserves and the risk profile is higher as the law and order situation is not conducive for E & P activity which requires resolution by the state instead of opting for LNG import option.

Beneficiary of LNG import

Around 75 % of the sedimentary basin of Pakistan remains unexplored. Our past follies are exemplified in the Petroleum Policy of 2001 where an upper cap was placed on locally produced gas at 2.9 USD per mmbtu raised to 5 USD in the Petroleum policy of 2012 whereas today LNG is being purchased at a landed cost of almost 11 USD per mmbtu. LNG pricing is not directly related to internationally accepted benchmarks like Brent Crude and the contract multiplier is technical co-efficient at 13.37 % of Brent Crude Oil Price translating into 6.68 USD per mmbtu assuming oil price is 50 USD  (around 75-80 % of oil price).

Even if it is presumed that profits will be repatriated at 3 USD out of 5 USD, as per the Petroleum policy of 2012, the Rupee component of return to the country’s economy is almost 40 % inclusive of local expenditures and Royalties. Whereas in the case of LNG imports the beneficiary is the other country in terms of employment generation of technically proficient manpower, local expenditure , taxes/royalties and acquiring of technical expertise.

No policy has been framed in Pakistan for unconventional gas resources such as Shale gas, which is baffling as in the last decade USA achieved energy independence by resorting to extraction of Shale Gas. The initial high costs of investment in Shale Gas technology paid off. Offshore blocks in Pakistan are available for exploration at no security risk yet the Petroleum Policy is inexplicably allowing marginally higher profits and returns compared to onshore without considering that investment costs of offshore are in the ratio of 1: 10. Once our offshore sedimentary basins of Indus and Makran Basin are explored (one block on an average will incur an expenditure of say 500 million USD) at least we will know where we stand and can justify import of LNG or otherwise.

Iran despite being a major gas producer does not possess proprietary technology for LNG and its export as Cryogenic technology and alloys capable of withstanding temperatures in the range of  – 130 0 C can only be obtained from the West and similarly there is no technology transfer involved in the process of LNG import in Pakistan.

 Lean Mean E & P

The major public sector flagship E & P company of Pakistan, a blue chip company, does not follow the “ lean mean” model and boasts of a ratio of support staff almost five times more then in its core Production and Exploration division. This E & P player is responsible for production of almost 2500 bcdf having prime fields some of which are on the decline like Qadirpur and Pirkoh. Such public sector companies have their share of circular debt curtailing the cash flow needed for aggressive drilling of oil wells thus becoming risk averse. If this malaise is not arrested then public sector E & P companies may find a fate similar to PIA and Steel Mill. Our future generations will then need more LNG.

Credit : Published Friday Times