Offshore Energy US Pakistan Port Logistics

Pakistan’s Energy Security

Existing Scenario & Energy Mix

Pakistan’s energy demand growing at a rate of 7.4 % annually. Pakistan’s yearly energy supply is about 54 million tonnes of oil equivalent. Oil and natural gas meet about 81% of the requirement (oil 29%, natural gas 52%) and the balance is derived from coal, liquefied petroleum gas , hydroelectricity and nuclear power. Thermal plants (oil, gas and coal) make up 64% of installed electric generation capacity, with hydroelectricity making up 34%. Traditionally the policy has been to alleviate heavy dependence on imported oil as prices exhibit volatility making the country prone to oil supply risk disruption. Almost 19 % of the oil demand is met through local sources and the rest through imports. Pakistan meets 30% of its annual fuel requirement through domestic refineries and imports around 70% of its remaining fuel needs.The production of oil and gas on an average is 76,000 barrels per day and 4.1 billion cubic feet per day.

Consumers want electricity on need basis not when mother nature decides that it is appropriate to generate power. Accompanied by largesse in subsidies otherwise orders go to zero despite being the cheapest energy source.

Sources of Fossil Fuel Imports

The top imports of Pakistan are Refined Petroleum ($3.87B), Petroleum Gas ($2.24B), Palm Oil ($2.15B), Crude Petroleum ($1.92B), and Raw Cotton ($1.68B), importing mostly from China ($14.7B), United Arab Emirates ($5.34B), United States ($2.78B), Indonesia ($2.43B), and Saudi Arabia ($1.8B).

SBP Country Wise Import Data in USD

Saudi Arabia 2.4

U.A.E (Dubai) 5.34

Qatar 1.32

Kuwait 1.4

Pakistan Imports By Country	Value	Year
China	$20.64B	2021
United Arab Emirates	$7.35B	2021
Indonesia	$4.19B	2021
United States	$3.83B	2021
Saudi Arabia	$3.77B	2021
Qatar	$2.66B	2021
Kuwait	$2.27B	2021

Oil And Gas Exploration & Production

Pakistan possesses a sedimentary area of 827,268 Sq. Km in which to date 655 exploratory wells have been drilled and 95% of these wells are concentrated in Indus Basin, while Balochistan with offshore basins remain virtually unexplored.

The domestic production of crude oil was recorded at 24.6 million barrels during the period of July – March in the financial year (FY) 2019 compared to 21.8 million barrels during the corresponding period last year . During July – March in FY 2019 crude oil imported was 6.6 million tones with value of US $ 3.4 billion compared to 7.8 million tones with value US $ 2.9 billion during the same period last year with the decline attributable to increase in international prices. Oil is mainly used in the transport and power sector and during the period July – March FY 2019, share of oil consumption in transport increased to 77 from 56 percent during the same period last year, while share of oil consumption in power decreased to 14 % in the same period . Gas being the cheaper source encourages a shift in the power sector from oil to gas. The indigenous and imported crude is refined by six major and two small refineries. The refineries in Pakistan produced 1.8 m tonnes and 4.5 m tonnes of petrol and high speed diesel in FY 2016-17 respectively and the import of petrol was 6.7 m tonnes inclusive of Refined Octane Number (RON) 87, 92, 95 and 97 . During the same period import of diesel was 3.89 m tonnes .

Role of Regulator

In order to reform and segregate the regulatory function from policy function in relation to midstream and downstream Oil & Gas, the Oil & Gas Regulatory Authority (OGRA) was created under the OGRA Ordinance 2002. The electricity regulator National Electricity Power Regulatory Authority (NEPRA) informs that the existing energy mix of the country is heavily skewed towards the costlier thermal power plants, mainly operating on imported fuel . Unfortunately the capacity addition in the system without rationalizing the same with the demand projections is currently yielding a capacity surplus of 908 megawatts. Role of both the regulators is to increase private investment and ownership ,encourage competition and to protect the public interest while respecting individual rights and providing effective and efficient regulations in such matters being the need of the hour as where the added capacity has helped ease the bottlenecks at generation side, yet the transmission and distribution side congestion and inefficiencies has hampered the sustained delivery of energy services.

The global energy supply is seeing a shift towards renewable energy growth and a transitioning and resilient grid particularly as the developed countries are restructuring their energy systems to integrate distributed energy in general and renewable energy in particular, with visible changes being made on the technological front through switching to low carbon technology to mitigate and adapt to the climate change. Pakistan’s power sector is burdened with subsidies as along with other subsidies Industrial support package (ISP) subsidy has been continued at PKR 3 per unit for industries while for five main exports oriented industries (zero rated industry) , the tariff has been capped at the rate of US cents 7.5 per unit for electricity and USD 6.5 per MMBTU for RLNG on the assumption being that the share of furnace oil-based energy will decline to single digit percentage in the energy mix.

Energy Costs Hindering Export Competitiveness

Subsidizing of fossil fuels to boost exports of Pakistan

One of the main factors causing higher generation costs is the faulty upfront tariff system of NEPRA which had worked out a highly unreasonable tariff and awarded it in a wholesale manner since 2014. With high interest rates of LIBOR plus 4.5 % awarded at a time of low LIBOR rates of 0.5 % thus increasing generation costs coupled with a still higher and unreasonable Return on Equity ranging from 15 to 18 % .

Rather then taking a shield behind the inviolability of existing and in-pipeline capacity under the over arching umbrella of legal contracts to be honored refinancing may be resorted to and litigation and loss of credibility may not occur if adroitly managed. Although we are groaning under Karkey and Reko Diq claims and penalties subtle negotiations may be possible around accepted norms and financial traditions. The electricity regulators tariff system is based on cash flow and debt schedules where life of the power plants and their depreciation is 25-30 years and the capital costs could be spread over the life period of 25-30 years instead of 10-12 years currently. At least under CPEC projects scenario encapsulating lenders and borrowers under a unified command structures. At some stage old and inefficient power plants should be retired except for IC engines and gas turbines which may be retained for peak demand purposes. Competition has to be introduced under EPC and tariff bidding and solicited projects.

Global gasoline prices

Pakistan relies heavily on thermal sources for its electricity and a high cost of electricity will negatively impact upon the competitiveness of exports whether it be in goods or services. The average price of gasoline or Motor Spirit (MS) as known in Pakistan is USD 1.07 per liter in the world. However, there is substantial difference in these prices among countries. Generally richer countries have higher prices while poorer countries and the countries that produce and export oil have significantly lower prices. One notable exception is the U.S which despite being an economically advanced country has low gas prices. The differences in prices across countries are attributable to various taxes and subsidies for MS. All countries have access to the same petroleum prices prevailing in international markets but impose different taxes. As late as two years back the range of price of MS per liter in USD was , as under :

USA 0.73

UK 1.56

Bangladesh 1.07

Indonesia 0.63

India 1.12

Iran 0.34

Pakistan 0.71

Japan 1.17

Saudi Arabia 0.24

South Korea 1.42

Venezuela 0.01

Density & Sulfur Content of Crude Oil Worldwide

Pricing framework of Gasoline Worldwide

Essentially, the final price of petrol a consumer pays in Pakistan comprises of six components. The table below lists each component, its average percentage of the total price in the past four years ;

Sr. No.	Price Component	Avg % of Total Cost (Rs.)	Info
1	Ex-Refinery Price	62.5% (Rs. 59.9)	The ex-refinery price is the amount at which local refineries sell their product to the Oil Marketing Companies (OMCs). Refineries are not free to set this price and instead it is calculated by OGRA which follows the Import Parity Price formula. The price is determined by averaging the FOB price of Arab Gulf Gasoline 92 RON and then adding the import incidentals and surcharges*. It is essentially the landed cost of imported petrol and is almost wholly dependent on the global crude and fuel market.
2	IFEM	3.6% (Rs. 3.4)	In-land Freight Equalization Margin (IFEM) is calculated by OGRA and implemented to equalize prices throughout the country. Without this, there would be a marked difference between the price in Karachi and Islamabad.
3	Distributor Margin	2.8%	This is the maximum margin OMCs (e.g. Total, Shell and PSO) earn per liter of petrol. In the case of petrol this is set by the Govt of Pakistan (GoP) and notified through OGRA.
3	Distributor Margin	(Rs. 2.7)
4	Dealer Commission	3.7% (Rs. 3.5)	Set by the GoP, this is the maximum amount the owner of a petrol station earns on every liter.
5	Petroleum Levy	14.2% (Rs. 13.6)	An amount collected as tax by GoP. The rate of levy is notified by the Ministry of Energy (Petroleum Division).
6	Sales Tax	13.3% (Rs. 12.8)	General Sales Tax (GST) applied as a fixed percentage on the sum of all the above components. The final cost after applying the sales tax is known as the Ex-Depot Sale Price.
	Total Average	Rs. 95.9

BENCHMARK CRUDE OILS: OPEC, WTI, AND BRENT

The three most well known regional benchmark oils are WTI, Brent, and OPEC.

WTI stands for West Texas Intermediate. This is oil produced in the United States. It is typically on the lighter end of the spectrum, at an API gravity of 39.6. WTI sulfur content is 0.24%, putting it at the sweeter end of the spectrum.

Brent oil comes from the Scottish Brent and Ninian Systems located in the North Sea. This oil is also light and sweet, with an API gravity of 38.3. Brent sulfur content is 0.37%.

OPEC stands for “Organization of Petroleum Exporting Countries.” It is a collective group of seven different crude oils from Algeria, Saudi Arabia, Nigeria, Dubai, Indonesia, Venezuela, and the Mexican Isthmus. The oil from these regions is typically on the heavier and sour end of the spectrum.

While logistics also play a role, typically the lighter and sweeter an oil is, the more expensive it is.

Fuel import costs globally

China is the world’s second largest importer of oil at USD 116 billion after the USA. India’s crude oil import bill was USD 112.7 billion in the F/Y 2014-15 and USD 64 billion in 2015-16. Japan’s crude oil imports were around USD 50.8 billion during the year 2016 , Thailand USD 15.2, Singapore USD 15.1 ,South Korea 44.2 USD, Indonesia USD 8.1, Malaysia USD 3.3 In the FY ending 2016 the oil import bill was USD 7.667 billion as compared to USD 12.166 billion in the FY 2015 .

Electricity generation from oil

In the FY 2011-12 electricity generation from oil (furnace and high speed diesel) in Pakistan was 35 % followed closely by hydro at 29.9 % and gas at 29 % . During the FY 2014-15, the total energy generated in the country was 109,059 GWh of which the share of thermal electricity generation was 69,988 GWh (64.17%), hydel power plants were 30.24% nuclear power plants were 4.90% and wind power plant was 0.27% with increasing share of thermal electricity generation increased the utilities financial burden in foreign exchange. The source wise fuel cost (Rs/kWh) of furnace oil, high speed diesel (HSD), gas and coal was Rs 12.54, Rs 17.14, Rs 4.81, and Rs 4.50 respectively for the FY 2014-15

Contribution of POL to Revenues – A Sacred Cow

The net collection of the federal taxes including GST (imports & domestic) and Customs duty from POL works out to almost 17 % of the total collection of FBR and remains a steady revenue stream requiring little effort in its collection. From a revenue aspect POL is a sacred animal.

Subsidies in Asia

Essentially the Pakistani government provides electricity subsidies to users, but is unable to pay off the subsidies’ cost difference to electricity providers, who in turn, are running low on the cash reserves necessary to pay Independent Power Producers (IPPs) and fuel suppliers and presently the debt has crossed the Rs.800 billion mark.

Traditionally Pakistan does not provide any subsidy on petroleum products. Fossil fuel subsidies in India, Indonesia, Malaysia and Thailand are extensive at 2.7%, 4.1%, 2.6 % and 1.9% of gross domestic product (GDP) respectively in 2012. For subsidy to be recovered tax has to be raised or recovered as well. Governments’ response to slowing exports has been the standard ploy namely to devalue their currency. Nonetheless, fuel prices have a real market cost, and a devalued currency buys less fuel on the open market which does not enhance exports in the long term.

The energy subsidies by country as per the International Atomic Agency reveals Iran at 20 billion USD , Saudi Arabia 29 billion USD, China 12 billion USD , India 14 billion USD , Thailand 0.7 billion USD, Malaysia 1 billion USD, Pakistan 0.01 billion USD, Bangladesh 0.02 billion USD. China subsidizes petroleum prices through a mechanism of retail ceiling based upon a basket of international prices whereas Indonesia Malaysia and India manage through budget subsidy. Vietnam subsidizes oil prices through a price management fund.

Pricing structure of petroleum products in Pakistan

In Pakistan the price structure of fossil fuels at retail stage in respect of petroleum products refined by refineries in Pakistan and imports includes petroleum levy and GST which is adjusted as per revenue requirements and political expediencies. The retail price of MS and High Speed Diesel (HSD) is arrived based on the ex-refinery price (of major POL imports) being the import price determined from the Arab Gulf Market Average of imports of Pakistan State Oil, the largest public sector oil marketing company, during the month. The ex-refinery price is inclusive of Customs Duty (4 % & 12 %) on MS and HSD respectively at the import stage (local refineries are not subjected to these duties) .Then comes inland freight, distributors margin and dealers margin none of which individually or separately is more then 8 % of the ex-refinery price. Petroleum levy is presently 22.8 % and 18 % on MS and HD respectively. After adding the petroleum levy to the ex-refinery price GST is charged at 17 % and 31 % on MS and HSD respectively vide SRO 984(I)/2017 dated 30^th September 2017 to arrive at the retail price or the price at which the consumers purchase MS and HSD at the filling station. Kerosene and Light Diesel Oil is not charged GST.

Pakistan Energy Resources Potential, Reserves position :

	Estimated Theoretical Resource Potential	Total Discovered Reserves	Cumulative Production So Far	Remaining Proven Reserve	Production
Oil	27 billion barrels	844 million barrels	536 million barrels	308 million barrels	66,000 barrels per day
Gas	282 trillion cubic feet	52 trillion cubic feet	19 trillion cubic feet	33 trillion cubic feet	3.7 billion cubic feet per day
Coal	185 billion tones	3.3 billion tones	0.2 billion tonnes	3.1 billion tones	2.8 million tonnes per year

Hydro- elec-tricity	more than 40,000 MW (Mega Watt) Potential	6,500 MW Installed Capacity	–	More than 33,500 MW remaining exploitable potential	2,6000 GWH (Giga Watt Hours) per year

One version is that version is that the HSD and MS retail price is lower then those prevailing in India and Bangladesh yet no mention is made of the energy mix of other countries as the price of electricity generation from hydel and coal is lower then that of thermal power generation therefore the exports from these countries are competitive internationally as compared to Pakistan. The energy policy and finance planners have to decide whether to subsidize oil costs so as to reduce electricity power generation costs which directly or indirectly pushes up cost of production of exports thus rendering exports uncompetitive or to switch over to other sources of electricity generation which have lower electricity generation costs yet may require extensive capital investment. Refineries in Pakistan produce a range of refined products to remain commercially viable. Since our reliance on thermal energy production has been mainly from furnace oil hence any shift to gas or coal based energy generation would imply that furnace oil produced locally would not be consumed and may lead to an exportable surplus and the economics need to be worked out.

Deep conversion

Its imperative that local refineries commence executing deep conversion in order to increase capacity utilization after converting furnace oil into high margin fuels like petrol (MS) and high speed diesel (HSD) currently being imported for domestic consumption. Out of combined operational capacity of 240,000 bpd (excluding Parco), listed refineries operate at 70 % (160,000 bpd) capacity despite record margins and lower production is attributable to FO constituting 22 % of overall production being a dying product all over. On account of lower demand from the power sector (due to government policy of merit and reliance on cheaper fuel) local refineries reduced overall production of FO, which in turn affected production of higher distillates like MS and HSD.

Based on existing gross refining margins (GRMs) of record $25/barrel (against historic average of $ 5-7/barrel) in June/July 2022 financing for upgradation can be arranged without additional government support (duty protection etc). Deep conversion project roughly costs around $60-65 per bpd of refining capacity. Adopting GRM of $ 25/barrel it is estimated that local listed refineries including National Refinery, Pakistan Refinery, Attock Refinery, and Cnergyico are likely to cumulatively generate earnings of Rs180 billion or $0.9 billion during the financial year ending 30^th June , 2023. Even in the event of GRMs normalizing to historical averages deep conversion would enhance future earnings of refineries and result in saving of forex to the tune of $ 0.5 billion per annum. Refineries would have the capacity , after deep conversion , to produce additional 25-30 million barrels of oil products per annum thereby lessening the burden on import payments.

Cheaper Power

However, industrial power tariff is lower in most European countries. Obvious reasons for high electricity costs: T& D losses (20 percent or more), legitimate and illegitimate tariff issues, lower capacity utilization, liberal and unreasonable Nepra tariff parameters, high capital cost (elite capture and cost padding) etc. Some of the issues are well known and some not that well known.The burden of high cost has been borne by successive governments as is indicated by the ever mounting circular debt.

Generation costs in Pakistan are high by 40 to 100 percent, some for legitimate and some for not so legitimate reasons. Older hydro plants like Tarbela and Mangla and cheaper local gas have somehow neutralized the high generation cost effect. Expensive furnace oil has been eliminated to quite some extent, although oil refinery issues continue to militate against its total elimination. Some of the newer power plants (RLNGCC) are efficient and cost effective and will contribute to control the cost down, while others will contribute to increasing the average cost to an almost unbearable level.

Fascination with Coal

In China 45% of electricity generation is from coal fired plants. In India coal is used as a major source of electricity generation and 71 % of the electricity is from coal both imported and local. Interestingly in the USA electricity generation from natural gas, coal , nuclear and hydro is 33.8 % , 30.4 % , 19.7 % , 6.5 % respectively.

In Pakistan investing in coal power, both local and imported ones, small (330 MW) and inefficient coal power plants are being set up which obviously cannot result in cost reduction.

Lignite electricity generation cost in the US is 3 USc (US Cents) per unit and in Germany somewhat higher. Lignite electricity tariff in Gujarat is 4 USc and Nyveli is 6 USc per kWh whereas it is an exorbitant tariff prescribed by NEPRA for Thar coal. Under the garb of scale economy imported coal power plants have been built at a cost of $1.4 million per MW whereas a Power Purchase Agreement has been signed for a coal power plant in UAE which is actually under construction, at 4.5 USc per kWh, almost half the Pakistan tariff. Even Egypt has entered into an EPC contract with almost the same Chinese builders and financers at lower tariffs.

Pipeline Routes

The oil transportation pipeline network of Pakistan comprises of two parallel pipelines originating from the port city of Karachi and connecting the mid country refinery located in the proximity of Multan. The Black Oil Pipeline started operations in 1981, with a length of 871 km, designed for hauling crude oil northwards having pumping capacity of up to 6 million tons per year. The other pipeline network known as White Oil Pipeline (WOP) commenced operations in 2007 designed to haul diesel calculated to transport 12 million tons annually to the central regions of Pakistan. The WOP, constructed at a cost of almost USD 480 million, caters to almost 60 % of the diesel consumption of Pakistan. The motive behind launching of oil pipelines is to drastically reduce oil transportation costs, prevent environmental degradation with the existing pipeline network is being enlarged to transport Motor Gasoline to strategically complements storage as pipeline transportation drastically reduces time from days to hours. The share of pipeline works out to approximately 37 % and use of railways for refined products stand at around 4 %. Another major oil pipeline covers a distance of 362 km extending from Mahmoodkot to Faisalabad transporting refined products including diesel and kerosene to Lahore (Machike) with a designed pumping capacity in the range of 3.7 million tons annually. The point of origin of the oil pipelines is bolstered by a 22 km Korangi to Port Qasim link tactically connecting both the port of Karachi with Port Qasim and the existing cross country pipeline systems enabling pipeline operations to remain flexible whether receiving crude or refined products.

Pipeline development should theoretically spur investment in refineries which will reduce the refined products import bill as excessive imports of LNG for operating power plants has impacted profitability of re KARACHI-MAHMOODKOT (KMK) PIPELINE

The 870-km Karachi-Mahmoodkot (KMK) Pipeline, commissioned in 1981, transports crude from Karachi to Mahmoodkot near Multan for its Mid Country Refinery. Its initial annual pumping capacity of 2.9 million tons has been upgraded and KMK is now capable of pumping up to 6 million tons per year.

MAHMOODKOT- FAISALABAD–MACHHIKE (MFM) PIPELINE

PARCO commissioned 362-km Mahmoodkot- Faisalabad–Machhike (MFM) Pipeline, in 1997 to transport refined products like diesel and kerosene to Faisalabad and Machhike near Lahore. MFM has designed pumping capacity of approximately 3.7 million tons per year.

WHITE OIL PIPELINE

The US$ 480 million, White Oil Pipeline is the mega infrastructure project owned by Pak Arab Pipeline Company Limited (PAPCO). After conversion of PARCO’s existing pipeline network for Crude Oil transportation, the White Oil Pipeline (WOP) is catering to transport diesel to the central regions of Pakistan; which account for almost 60% of the total Petroleum consumption in the country.

For the implementation of the 786 km White Oil Pipeline Project (WOPP) from Karachi to Mahmoodkot, a joint venture company, Pak-Arab Pipeline Company Ltd. (PAPCO) was created. PARCO holds a 62% majority share in PAPCO while Shell and PSO hold 26% and 12% shares in equity respectively. The 26” dia White Oil Pipeline is designed for a capacity of 12 million tons per year, starting with 5 million tons in the initial years.

KORANGI-PORT QASIM LINK (KPLP) PIPELINE

The 22-km Korangi-Port Qasim Link (KPLP) Pipeline was laid by PAPCO, linking PARCO’s Korangi station with PAPCO’s Port Qasim station was commissioned in 2006. This tactical link has connected both the Karachi ports (Keamari & Port Qasim) with PARCO & PAPCO pipeline systems, providing flexibility in pipeline operations to receive crude as well as product from either port.

PARCO’s Pipeline System includes a network of highly sophisticated Telecommunication facilities and a comprehensive Supervisory Control And Data Acquisition (SCADA) System.

PARCO’s pipeline network is a critical and efficient life support system for the Central and Northern areas of the country. In addition to its strategic nature, it is contributing to the national exchequer not only through payment of attractive dividends, taxes and import duties but also by delivering major savings in freight expenses.

Cautions Transnational Pipeline

Based on the forecast of IEA primary energy demand in the Asia Pacific region is expected to grow by over 40 % to 2040 making up 2/3 of global growth.

Turkmenistan-Afghanistan-Pakistan-India (TAPI) Gas Pipeline Project. Physical construction has been started on TAPI pipeline with 56-Inch dia, 1,680 km length and gas volume of 3.2 billion cubic feet of natural gas per day (bcfd) expected first gas flow under phase-1 by 2021.

Iran-Pakistan (IP) Gas Pipeline Project: Iran-Pakistan Gas Pipeline Project (IP) envisaging laying of 42 inches 1,931 Km pipeline having 750 MMCFD capacity could not proceed well due to sanctions on Iran. Pakistan remains engaged with Iran on this project subject to US sanctions and availability of gas from the South Pars gas fields of Iran and most importantly the success of negotiations of rate of gas purchase.

Sanctions

In the year 2019 passage of the National Defense Authorization Act for Fiscal Year 2020 containing a slew of provisions to strengthen sanctions regarding North Korea, Syria, Russia, Turkey, and synthetic opioid trafficking, among other topics. In particular, Section 7503 mandates sanctions (subject to a 30-day wind-down period and several exceptions) against vessels and others involved in pipe laying for the Nord Stream 2 or Turk Stream pipeline projects. Moral being politics, diplomacy and transnational gas pipelines go side by side.

LNG & Proprietary Technology or Intellectual Dishonesty

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 is offset by the proposition that locally produced gas is costlier the imported gas. 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.

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. Interestingly Wet Charges for a single LNG Import cargo are almost the same as a return trip/transit charged by Suez canal authorities. In August , 2022 a bulker collided with a LNG carrier of Gibraltar yet no damage was caused to the LNG carrier which indicates that random collisions with fishing vessels can cause no significant damage to LNG carriers in the navigation channel.

Major E & P Giants exiting

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. 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

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.

Russia Sakhalin and LNG Price War

Russia can intensify its economic war with Western countries as President of Russia signed a decree to seize full control of the Sakhalin-2 gas and oil project in the far-eastern Russia. by creating a new firm to take control of all rights and obligations of Sakhalin Energy Investment Co, which is held by Shell (RDSa), , Mitsui and Mitsubishi just under 50% stake. Meanwhile, state-run Gazprom is now holding a 50% plus one share stake in Sakhalin-2, which produces about 4% of the world’s liquefied natural gas (LNG). The move could force Shell and the two Japanese corporates out, adding more volatility in the already tight LNG market.

Russia Sakhalin Islands Taxation on LNG & International Arbitration

Russian authorities have temporarily re-nationalised the foreign-led Sakhalin 1 oil and gas project in the country’s far east as pressure grows from the Sakhalin Islands inhabitants to resume production from the development. Production from Sakhalin 1 halted in May 2022 when operator Exxon Neftegaz declared force majeure at the project on Sakhalin Island in response to international sanctions imposed on Russia following its invasion of Ukraine in February 2022 . ExxonMobil said the sanctions had hindered exports of oil from the De-Kastri marine terminal on the Russian mainland , which is linked to Sakhalin 1 via a dedicated pipeline. Exxon Neftegaz is a regional subsidiary of US supermajor ExxonMobil, which has had its efforts to sell its 30% stake in the project blocked by Russian authorities. A new decree signed by Russian President Vladimir Putin in September 2022 has instructed authorities to disband Exxon Neftegaz and transfer the project and all of its assets and equipment to a new operator, in which the government will hold a controlling 80% shareholding for an initial period of one month.The new operator has yet to be named and will take the duty only when the structure of its shareholders is finalised. Before then, a local company will manage the development, according to the document.

The 2018 agreement followed ExxonMobil’s plan to start arbitration against the Russian government and extended the Sakhalin 1 production sharing agreement to 2051 in exchange for Exxon Neftegaz paying corporate income tax at 35%, significantly higher rate than normal level of 20%. Russian authorities have proposed increasing the tax take on the country’s liquefied natural gas projects as the government faces reduced revenues from Gazprom’s pipeline gas exports to Europe.

According to the Moscow business daily Kommersant, Russia’s Finance Ministry has proposed increasing the corporate income tax on three export-oriented LNG developments — the Novatek-led Yamal LNG and Vysotsk LNG projects, and the Gazprom-led Sakhalin 2 scheme. The proposal calls for a 32% tax rate for the three projects between 2023 and 2025. The project, which began exporting LNG to global markets at the end of 2017, has received significant concessions, including an export tax exemption, to help Novatek and its foreign partners recoup their multibillion-dollar investments in the scheme and foster further LNG investments in the country. Sakhalin 2’s revenues are currently taxed at a rate of 20%, which was fixed in 1994 by a production sharing agreement (PSA) between the Russian government and the project’s foreign investors, according to Kommersant. This PSA remains in force, despite a Russian court having ordered the Sakhalin 2 operator Sakhalin Energy to be disbanded and replaced by a new corporate entity, Sakhalinskaya Energia, according to a partner in Moscow based energy consultancy RusEnergy Mikhail Krutikhin The two-train Sakhalin 2 LNG facility in the south of Sakhalin Island in Russia’s far east has a nameplate capacity of 9.6 million tonnes per annum (tpa) of LNG, while the four-train Yamal LNG scheme has a capacity of about 17.5 million tpa and Vysotsk LNG project on Russia’s Baltic Sea coast has a capacity of about 700,000 tpa. Russian Finance Minister Anton Siluanov was quoted by the Moscow business daily Kommersant as saying that the ministry was also proposing to increase the pipeline gas export tax.

The tax is currently set at 30% of the gas export price and may be increased to 50% from 1 January 2023, according to reports . Earlier in September 2022 Gazprom reported that its gas exports declined by 53.7 billion cubic metres to 84.8 bcm between 1 January and 15 September this year, compared with exports of 138.5 bcm in the same period of 2021. The decline is expected to contunue gathering pace as Europe steps up its drive to replace Russian gas supplies following Russia’s invasion of Ukraine in February — further reducing Gazprom’s pipeline gas export tax payments. The European Union is also debating whether to introduce price caps on Russian hydrocarbon imports.

Siluanov was quoted by Kommersant as saying that the adjusted taxes would mean that Gazprom, Novatek and the country’s oil producers may generate up to an estimated 3 trillion rubles ($50 billion) in budget revenues between 2023 and 2025. Earlier in August 2022 Reuters reported that ExxonMobil was reported to have sent a “note of difference” to the Russian government after Russian President Putin signed an order that effectively blocked the supermajor’s efforts to sell its Sakhalin 1 shareholding to an unidentified third party.

The note of difference is a necessary legal step before a complaint can be filed for international arbitration against the Russian government, which is a signatory in the 1995 Sakhalin 1 production sharing agreement. ExxonMobil and Sakhalin 1’s other foreign shareholders including Japan’s Sodeco consortium and India’s ONGC Videsh, which held stakes of 30% and 20%, respectively in the scheme were invited to apply to take stakes of similar size in the new operator within a period of one month, according to the new decree. The Japanese government, which holds a 50% interest in Sodeco, has yet to decide whether it wants to keep its stake in the development.

“It remains an important project for the stable supply of energy,” a senior Japanese Industry Ministry official told news agency Kyodo in September 2022 at the same time making it clear that Japan does not import oil from Sakhalin 1, as its needs are covered mostly by Middle East volumes.

https://www.upstreamonline.com/production/russia-takes-control-of-sakhalin-1-oil-and-gas-project/2-1-1331213 https://www.upstreamonline.com/finance/russia-eyes-heavier-tax-burden-for-country-s-lng-players/2-1-1320697

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.

Pakistan ratified UNCLOS in the year 1997 , having previously delineated the baseline from which to measure the width of its territorial breadth and to delimit the outer limits of its maritime zones. In the year 1996 the Government of Pakistan , in pursuance of section 2 of the Territorial Waters and Maritimes Zones Act 1997 notified the coordinates for the drawing of its baselines from which the limits of its territorial waters , contiguous zones , exclusive economic zone (EEZ) and the continental shelf shall be measured . The Continental Shelf , as defined in the referred to Act , is aligned with the definition as contained in Article 76 of UNCLOS. Pakistan in the year 2009 had submitted its case under Article 76 of UNCLOS for establishing the outer limits of its Continental Shelf. The provinces of Sindh and Balochistan need to appreciate that in order to maintain baseline coordinates the decision of the federation is constitutionally binding.Pakistan’s coast is about 990 Km long from the east to the west. The EEZ of Pakistan is about 240,000 sq. km, with additional continental shelf area of almost 50,000 sq. km and attempts to encroach Pakistan’s EEZ and threaten its marine bio-diversity by external fishing vessels are frequently repulsed. Eighteen offshore wells have been drilled during the period 1963 to 2019 with three wells located in the deep-water area however their lack of success remains attributable to insufficient hydrocarbon charge and poor quality of reservoirs. Geological analysis reveals that the northwestern part of the Offshore Indus Basin possesses favorable geological conditions of oil and gas with three sets of reservoirs being developed. As Pakistan is deficient in energy through fossil fuels the emphasis should be on accelerated offshore oil and gas exploration despite its heavy capital costs. The total maritime zone of Pakistan is over 30% of its land area and its exploration in offshore oil and gas exploration is essential in order to ensure energy security.

Oil And Gas Exploration & Production

Electricity generation from oil

Shale & Tight Gas Myths

Shale emerging as threat to traditional oil based economies

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. Despite decades of hype and hopes for a move towards clean and renewable energy petroleum fuels 95 % of transportation of people and goods for trade. The astonishing growth in US shale oil production upset the apple cart of major oil producers including the Kingdom of Saudi Arabia (KSA) often touted as a permanent secular shift in petroleum technology. If shale industry expands as fast as it did from its inception in 2005 with nascent technology US oil production may be doubled in a decade. Shale dynamics include advantages that individual shale wells (running into thousands) are tiny compared to traditional megaprojects and can be put into operation in months instead of years with a capital investment in millions only and the combined output of shale wells may rattle global markets. Combined with the advantage that Shale wells are drilled in two stages reducing costs not beset by exploration risks. Technically speaking the first stage involves installing the subsurface horizontal pipes and the second involves “stimulating” the rock to produce for hydraulic fracturing. Well operators can hold initiating the second stage as a strategic reserve and these drilled uncompleted wells numbering number over 5,000 in the USA can be brought into production rapidly. On average the shale oil produced per rig incrementally increased by 20% in 2016 alone while drilling costs declined slightly sending shivers up the spine of OPEC giants. The U.S. Geological Survey recently reported that the Wolfcamp shale (part of the Texas Permian Basin) has 20 billion barrels of oil.

Till the year 2022 shale production profitability was reducing. But having oil and gas production in any country instead of importing fossil fuels rendering oneself vulnerable in case of supply chain disruption. Countries like the US with access to shale ensures that US doesn’t have massive energy and electricity cost hikes like Europe .

Oil revenues 50 % of Saudi GDP

The Saudi government has been draining its massive USD 2 trillion sovereign wealth fund to cover revenues lost from the petroleum price collapse over the past couple of years. Saudi Arabia’s dream of securing a USD 100 billion windfall from the IPO of Aramco may be clouding its judgment. The kingdom needs higher oil prices to entice international investors to buy a stake in the state owned company which supplies almost all its crude. The Saudi women have the US Shale drillers to thank partially for their newly acquired liberation and freedom of movement and hopefully the momentum will be sustained as long as KSA remains dependent on oil revenues. Consumers of oil worldwide including China with its voracious appetite for energy stand to be beneficiaries of the shale gas boom as petroleum prices will remain in the affordable range leading to enhanced industrialization and economic growth with employment generation.

Fracking

The UK has called a halt to fracking after a new report found it was impossible to predict “the probability or magnitude of earthquakes” caused by the shale gas extraction technique. In 2013, George Osborne, then chancellor, announced “the most generous tax regime in the world” for shale gas, saying he wanted “Britain to be a leader of the shale gas revolution”. Fracking involves pumping water, sand and chemicals deep underground at high pressure to release gas from rock formations. It is common in Canada and the US, which has become the world’s biggest natural gas producer, but is banned in some EU countries including France and Germany. Opponents say that apart from the tremors, old wells could leak dangerous fluids into the water table. They also question why the UK would want to encourage a new fossil fuel when it has pledged to become carbon neutral by 2050.

Emphasis on Renewables

Wind projects have now suffered an unprecedented shutdown of six consecutive days since the federal government halted all offtake from their wind farms and turbines are standing idle while the government tells us that there is not enough power demand in the country.”The Jhimpir Wind Corridor has total installed capacity of 980MW. Three plants in Gharo, adjacent to Jhimpir but closer to the coastline, are seeing continuing offtake because the K-Electric is continuing its purchases of renewable energy. All those that sell to the Central Power Purchasing Agency (CPPA) have been curtailed to zero. Thermal plants are superior options because they are closer to load centres in Punjab and a safer option for system stability. Fortunately or otherwise Renewable power plants have no capacity payments in their Power Purchase Agreements, so curtailment of power evacuation for them means no revenue. The plants do not factor on any merit order list since they are commissioned on a “must-run” basis, which means so long as they have power due to availability of wind, they will generate and sell to the government.

The use of solar energy for the generation of electricity is not something new. Solar panels basically utilize solar cells in their manufacture. . In one panel, approximately, 80 or more solar cells are used, depending upon the power required and the electric gadgets you want to run utilizing these panels. Each solar cell costs approximately Rs. 1000 if imported from abroad. These cells would be required in millions or may be in billions if requirement of the whole country is to be met. Fortunately silica (sand) which is in inexhaustible quantity in River Sindh as water these days is otherwise in less quantity in our rivers. raw materials are available. Joint ventures with world-renowned company as India has done. It had a joint venture for the manufacture of wind turbines with a company that has 26000 wind turbines to its credit! This company has a name in wind industry and its wind turbines are being used the world over! This way, we would lay our hands on the best and the latest technology in the field of solar energy and our manpower would also be trained through short orientation courses as they already possess sound knowledge and strong technical base

Commercial Storage

Refineries

Pakistan needs to have strategic petroleum reserves to combat any war like situation. With country’s growing reliance on imported energy, port development should be the top priority. In the 1965 War, India attacked the Attock Refinery in north. In 1971, the Karachi Port came under attack by the same enemy country.
Pakistan has zero strategic oil (or petroleum) reserves. Such reserves are prepared for war-like situations. The US has 90 days of reserves. Indian strategic energy reserves are of 10-12 days and are being increased further. Apart from that, Indian refineries have 65 days of operational reserves. Pakistan refineries are living on clutches. The operational reserves are not more than 15-20 days. They are operating on age-old technology and are becoming financially infeasible without government’s active support.

The situation in Pakistan is different from what it was in 1965 or 1971. Over the period of time, country’s reliance on energy needs is increasing on the imported fuel options. The demand is growing whilst domestic natural gas reserves are depleting. The gas production at home is reduced by almost 20 percent in the past four years. Pakistan does not have adequate port infrastructure to handle growing imported energy reliance. Almost a two-third of country’s oil is imported at Karachi port. Most of country’s crude and petrol are handled at Karachi port. Port Qasim is equipped to handle Furnace Oil (FO) and Diesel. The import of FO is almost over. The strategic reliance is highly skewed towards Karachi port.
The storage and handling capacity at Karachi port is chocking. Two of the three oil piers are non-functional at this moment. The port is operating 24/7. Tankers are filled and moved round the clock. Ports are not supposed to be this busy. Any accident could create a serious energy shortage in the country. Some fear that security protocol is not fully followed. The petrol storage tankers have floating roofs to prevent fumes catching fire. Some private tankers are using non-safe equipment for transporting and handling petrol. What if a tanker catches fire?

Any operational delay can choke the country’s energy supplies. Mishandling in petroleum imports at KPT created an acute shortage of petroleum products up north in Jan 2015. Situation has gone worse since then. There are three oil piers at KPT to handle oil import. Oil Pier-3 is not working since second half of 2018. In Dec-19, Oil Pier-1 became non-functional too. At this point, a two-third of country’s oil import is handled by mere one pier (Oil Pier-2). One of the two non-functional oil piers is scrapped. The other can be operationalized in a few months. What if something happens to functioning of Oil-Pier 2?

Every port has its natural life. Karachi port has lived it. With area becoming populous, not much can be done with the port. Due to illegal construction and slums dwellings, natural mechanism to clean water through tides is diminishing. It has environmental concerns for Karachi inhabitants. The need of the hour is to build new ports. Keti Bandar could be one, and there are other options too. Developing Gwadar could reduce the load on Karachi port. Port management is a federal subject. Which new ports are under consideration to develop? What is the government preparation to ease the load on Karachi port? What are the plans to make Oil-Pier 1 operational?
Closure of refineries due to government’s not lifting furnace oil for power generation would lead to non-availability of local JP8 fuel for fighter jets in a situation when Pakistan’s defence is at high alert.The refineries asked for government’s support through lifting of FO for power generation, as its price has come down sizably while its export is not possible due to its low price in international market.Refineries proposed to the Petroleum Division to have a separate merit order for fuel oil, and run the efficient power plants of about 2,000MW so that 7,000 to 9,000 metric tons/day of local FO production is consumed for the interim period.

The present financial health of local refineries would also have negative impact on foreign investments in refinery sector. The committee was informed that the indigenous and imported crude is refined by six major and two small oil refineries in the country having 19.37 million tons per annum (MTPA) refining capacity. Except PARCO which is semi conversion refinery, all other refineries are hydro skimming therefore struggling with efficiency issues. Due to ban on its use in the power generation the product is being dumped in the storages. The refineries are running out of space and its refining capacity has decreased.

Fuel requirement of the Air force is being met through local refinery and in case they were shut down, then the Jet fuel will be imported. Reduced uplift of FO from refineries due to shutdown of FO-based power plants forcing refineries to run at lower throughput. “Refineries are losing around Rs35 to Rs80 million per day and low FO prices making their operation unsustainable”. Refineries could not export FO as drastic reduction in FO price was recorded due to International Maritime Organization (IMO) 2020 regulation mandating use of low sulfur fuel in ships from Jan 2020. With natural gas reserves at home fast depleting, the need is to build gas storage facilities too. Pakistan’s strategic gas reserves are thin. Floating Storage Regasification Unit (FSRU) has storage of mere 5-6 days. The reliance on RLNG from Qatar is increasing and this might halt in days of war. The onshore gas storage is simply missing. Building strategic gas reserves is a federal subject too. The other important element is to build strategic oil and products reserves. Energy security in Pakistan is extremely vulnerable. It should be the top security agenda. There are things to do beyond fighting war on the Internet. The refineries operate on Gross Refinery Margins (GRMs). They refine crude to get white oil (petrol, diesel etc) and the residual comes out as fuel oil (Furnace oil -FO). The margins on white oil are positive, and they are negative on fuel oil. The government fixed the refining margins on white oil (including deemed duty) to compensate for the losses of FO. All the refineries in country (barring Parco) operate on age old technology of hydro skimming, producing substandard products. The contribution to environmental degradation is high. The fuel oil has to be produced invariably in this method. Globally, refineries are mostly upgraded to deep conversion. The white oil production is of better quality (Euro 4/5) and residual black oil can be converted into other refined products. Since the margins are supported and low standard white oils are picked up, refineries have been rather passive. Now, two fundamental shifts are taking place. One is Pakistan specific and the other is global.

In Pakistan, the demand of FO is reducing. There is no demand in winters. In the past two seasons, government kept on facilitating refineries to store the product, and consumed it by running FO based power plants which were low on merit list. This year, there are adequate orders of RLNG. Government will not run FO based plants. The country wide storage is exhausting. Globally, black oil (high Sulphur FO) prices are nose-diving due to IMO 2020. The high Sulphur oil usage in bunkering will finish by the end of 2019. The writing was on the wall. The government was pushing refineries to put their act together. They didn’t. The discount of FO to crude is at $30 (around 50%) and to make the GRMs positive, higher spread on white oil has to be given. The incremental cost will be incurred by the consumers.

The GRMs of four refiners (PRL, NRL, ARL and Byco) were 3-3.5 percent last fiscal year. This year due to IMO 2020, the GRMs will slide further. The government has two choices. Pay them higher spread on white oil to compensate for losses on fuel oil and let refineries afloat. The other is to import white oil. Import has two benefits. One is better quality fuel (Euro 4/5). The other is to not have higher white oil prices.

The disadvantage is of higher import bill. Nearly 70 percent of crude refined is imported. If white oil replaces crude, the incremental import cost is 3-3.5 percent, or even lower. The issue is of port capacity to handle white oil. Government is confident that the capacity is to be built by converting crude and fuel oil handing to white. Petroleum ministry is in talks with FOTCO jetty to convert unloading and pulping of fuel oil into white oil. Tanker handling capacity can be managed. The government is eager to work on one damaged oil pier. The dual pipe line to transport white oil up country will be open till Sheikupura by January.

If push comes to shove, inefficient refineries have to shut down one by one. Parco is doing better. It is going to mid conversion in Feb-2020. It will take two months to upgrade to produce white oil quality of Euro 3 /4. The residual fuel oil production will go down from 2.7k tons per day to 1.7k tons per day. For further upgradation full cracker is the solution. That will take 3 years. The cracker can be installed at the side, and in three months it can be integrated with the main refinery.

The worst refinery is Byco with a nameplate capacity of refining 155k barrels per day, but it never operates at full capacity. The cost of upgrading is huge and seeing the weak financial position, it might be the first to shut. PRL is subsidiary of PSO; it’s in government interest to upgrade it. PRL has a capacity of processing around 50K barrels a day. The authorities are in talks with Chinese for joint venture. Cracker installation is not viable below 100K barrels per day capacity. Others have to join hands. Together, the four refineries have processing capacity of 250-300K barrels par day. Domestic crude extracted in North is not viable to be transported to South. Without domestic crude production, gas supply for North will stop. Attock has to continue operating for consuming North fuel. The government can live with its 1-1.1K tons daily fuel oil production as its margin compensation impact on white oil prices is a few paisas per liter.

The best deal for local four refineries (barring PARCO) is to jointly install a cracker at their choice of location. The white oil can be upgraded to Euro 4/5 at respective refineries through isomerization as the Government will start importing Euro 4/5 from Jan-2020. Government should stop buying white oil from refineries if they do not give a viable plan to upgrade in four months. The idea of deemed duty on diesel for over 15 years was to upgrade production of higher quality white oil. The poor quality products have an adverse impact on the environment. The cost of poor air quality (especially in Lahore and surrounding areas) is to be borne by its inhabitants. There are other issues of old technology. The government has to cross subsidize furnace oil production by giving higher margins on white oil products. Consumers have to bear the cost.

Lower Diesel & Petroleum Sales in June, 2022 increased consumption of Furnace Oil for power Generation

Power plants are burning more furnace oil to generate electricity with daily fuel oil consumption surging to 19,000-20,000 tonnes being met through local production and import .Pakistan’s refineries are producing 7,000 tonnes of FO every day for daily consumption, while 12,000 tonnes of the commodity is being imported to meet the remaining demand. FO sales were almost zero in December, 2021 and January of this year. Lack of uptake increased the FO stockpiles in the country, but some still had to be imported to keep the operations of local refineries running. The consumption of FO increased when the sale of petrol and diesel dropped in the month of June after government jacked up the prices of products massively and imported LNG became increasingly costly which compelling the consumers to cut down their petrol consumption.

How Essential is Hydro

World Bank has showered the praise on Tarbela-4 Hydropower project with capacity to generate 1410MW saying it is now fully operational and over 5600GWh (Gega Watt hours) have been generated so far with the cost of over $688 million since its commissioning. And this is how the project has almost recovered its cost which approximately stands at $749 million as it has generated so far electricity valuing $688 million. The value of the electricity generated for the country is over US $688 million using a conservative value of US Cents 12.3/kWh which is the cost of generation from LNG-based generation plants. This is approximately equal to capital cost of the project which is expected to be US $749 million (physical works and supervision and management excluding Interest during construction). Based on recent decision by Wapda, low level intakes of both tunnels are to be plugged and power plants would be operated by operating the raised intakes. Though not large in quantity, remaining works on the intakes of T3 and T4 are intricate as they are to be carried out on operational plants and interruption in generation should be minimized, World Bank document says and that if Pakistan is to promote further hydropower to change the current generation mix, reduce the cost of generation, and dependence on imported fuel the practice of charging such high IDC (Interest during construction) to such projects would have to be revised.

Coal

Coal Bane or Boom

Thar coal is a big energy project, involving intensive mining of indigenous coal reserves and installation of numerous power plants to generate electricity. A 660 megawatt (MW) coal-based power plant completed by Sindh Engro Coal Mining Company (SECMC) in Thar early this year is just the proverbial tip of the iceberg given the fact that 176 billion tons (bt) of local coal reserves located in Tharparkar district of Sindh can be used to generate 100,000 MW of electricity for 200 years. Scores of coal power plants in Block-II and Block-I are in the pipeline.

With intensive mining in 13 blocks of Thar coal fields and so many coal-based power plants to be installed there under China Pakistan Economic Corridor (CPEC), a project of Belt and Road Initiative (BRI), Thar coal project will certainly produce electricity at a massive scale. But the enormous power production based on the combustion of lignite coal along with extensive coal mining is also sure to have a horrible footprint, which the key players involved in planning and execution of the project have been deliberately playing down.

Land degradation, air pollution and water supply disruption due to Thar coal power project are set to kill diverse forms of life, including humans, and devastating the habitats of these life forms.

Open cast and open-pit mining in Thar involves digging deep into many layers of soil and massive excavations that will badly degrade land. Once the coal resources are fully exploited in a pit, it will be closed by depositing the excavated soil therein and another pit will be opened for mining. This will seriously disturb the geological formation of different layers of soil formed over the millennia in 90,000 square kilometres of Thar coalfield.

The plants in Thar have a peculiar feature of robust resilience to drought. Their deep survive even in the harshest and prolonged droughts. Once the dry spell is broken, rains regenerate the apparently dead plants, as their deep roots of which survive on the groundwater. Many of these drought-resilient plant species provide fodder for the cattle reared by an overwhelmingly pastoral population of Thar. The whole process of massive excavations and closing of pits will destroy the roots of drought-resilient plant species. The project might end up making a range of drought-resilient plants extinct.

In addition, the disposal of saline water from mines and effluent water with coal ash from power plants will go underground and cause land degradation. Adverse environmental impacts due to seepage from Gorrano reservoir are already being felt by the people of neighbouring villages. Land degradation will destroy local ecology and result in the loss of forest and grazing fields.

Apart from land degradation, coal combustion produces enormous quantities of air pollutants that harm public health and environment. Coal combustion causes emission of five major conventional air pollutants — particulate matter (PM), oxides of nitrogen, sulfur dioxide, mercury and carbon dioxide.

Health risks of the exposure to PM include premature deaths, chronic bronchitis and heart attacks, aggravation of respiratory and cardiovascular illnesses, changes to the lung’s structure and natural defence mechanisms. Oxides of nitrogen produce smog, contributing significantly to the formation of harmful ground-level ozone. Sulfur dioxide causes acid rain, which, in turn, acidifies lakes and streams, destroying aquatic habitat, damaging forest trees and plants. Mercury pollution from power plants is deposited in soil and water where it transforms chemically into a highly toxic form (methyl mercury) that accumulates in fish tissue. Heat trapping carbon dioxide is the largest driver of global warming.

The type of coal mined and used for power production in Thar is lignite, which is notorious for its poor energy efficiency and high emissions of carbon dioxide and other greenhouse gases. It will have serious implications for the quality of air and subsequently public health at the local level. At the national level, it will compromise Pakistan’s pledge made at the United Nations Framework Convention on Climate Change in Paris in 2015 to reduce its emissions of greenhouse gases.

Coal mining in Thar involves extensive dewatering and coal washing. Besides, the power plants need huge supplies of water to produce steam in boilers for generating electricity. Since coal mining and coal-based power plants are highly water-intensive, they will have serious repercussions for the local hydrology of Thar. On one hand, the coal-fueled power plants are water-intensive and, on the other, they yield waste water mixed with coal ash and other hazardous chemical effluents, disposal of which causes contamination of groundwater and freshwater resources.Dewatering of open pits is an essential component of coal mining involved in the project as depressurisation is necessary to reach coal depth, which is 150 metres in case of Thar. Dewatering using submersible pumps installed in sumps at the bottom of a pit is meant to lower the water table.It helps keep the mine dry and safe. Groundwater in Thar coalfield Block-II comprises three aquifers — sand dune aquifer (located at a depth of 50m to 60m), coal seam roof aquifer (depth 120m), and coal seam floor aquifer (depth 180m to 190m). To reach the target coal depth through 27 wells, second and third aquifers are continuously depressurized in Block-II. The SECMC authorities claim that the Thar Coal Block-II mining project will pump out only 0.02 percent of groundwater and that it will not affect the drinking water sources in the area.

A 330MW coal-fired power plant in Thar requires a steady supply of 8.75 cusecs of treated water for cooling and steam generations. Treated water required for power plant will be provided through groundwater extraction and a proposed water supply scheme from the Left Bank Outfall Drain (LBOD). With a mine dewatering volume of 87,000 cubic metres per day, 55,000 cubic metres are expected to be utilised by the plant.

A reservoir has been built in Gorrano area for the disposal of saline water extracted through dewatering and liquid effluents produced in the wake of mining and power generation in Block-II.

Notwithstanding the environmental havoc caused by Thar coal power project, the capital invested in it by the many national and international businesses and banks is enough power to silence every dissenting voice, showing us only the brighter side of the project. In pursuit of short-term economic gains, the key players are turning a blind eye to the disaster being caused by what they call development in Thar.The lower the quality of coal the more is used hence the emissions are greater for lower quality coal.

The Pakistani National Electric Power Regulatory Authority (NEPRA) has approved the final selling price for 660 MW Thar coal-fired power plant, located in the Tharparkar district of the Sindh province. The regulator sets the tariff for the project, which required a total investment of US$ 952m, at PKR14.8/kWh (US$ 7c/kWh) of electricity for the first 10 years, and PKR9.3/kWh (US$ 4c/kWh) for the next 20 years. The project, which entered commercial operations in 2019, is owned by the Pakistani conglomerate Engro Group (51%) and China Machinery Engineering Corporation (35%). The tarfiff for imported primary fuel of natural gas Engro power plant is Rs. 9.4 Rs/kwh , Port Qasim Engro power plant with primary fuel being imported coal is Rs. 10.0 Rs/kwh, China Power with imported coal at Rs. 11.4 Rs/kwh, Sahiwal with imported coal at Rs. 11.8 Rs/kwh, Thar Coal Block 1 with Thar coal at Rs. 14.3 Rs/kwh, Engro Power Gen with Thar coal at Rs. 14.7 Rs/kwh , Thar Energy with Thar coal at Rs. 15.1 Rs/kwh

Coal from Afghanistan

Afghanistan’s proven coal reserves are only 73 million tons. Pakistan imports around 20 million tons of coal annually from different sources, primarily for use in power plants. Import of thermal coal from Afghanistan poses risks such as security, reliability, sustainability, logistics, and, most importantly, suitability of Afghan coal for power generation that remain questionable. The coal reserves are located in various areas of Afghanistan, and vary from anthracite to lignite, but never tested or analyzed for use in power generation. Afghan coal is being used for conventional applications in industry as metallurgical coal and cement plants and used experimentally in coal based power plants . Afghanistan has no coal-based power plant and imports bulk electricity from its neighboring countries Uzbekistan, Tajikistan and Turkmenistan.

Pakistan is considering import of initially 3,000 tons of thermal coal per day, which may increase subsequently to 20,000 tons daily however at present Afghanistan extracts less than two million tons coal annually or around 5,500 tons of coal per day and that too of varied quality and type . Afghan coal is said to be used initially in two existing power plants being operated on imported coal, namely Sahiwal Coal Power (Sahiwal) and China Power Hub Generation Co (Hub), both of 1,320-MW installed capacity each. Total requirement of coal by these power plants is estimated to be 40,000 tons of coal per day depending on coal quality and characteristics. Coal based power plants are custom designed and technology selected depending on coal analysis and characteristics and power plants will need modifications in their plant configuration to use Afghan coal as fuel and concomitant are severe environmental issues of burning coal .Afghanistan has not exported coal to any country in the past, except small deliveries to Pakistan for use in cement industry, and thus has no experience of coal handling in bulk. Pakistan will import coal from Afghanistan at $200 per ton compared to current international rate of $376 per ton, presumably of equivalent quality and characteristics and it may be kept in mins that current international coal prices are unprecedented high and are projected to decline in 2023.

Afghanistan mines are slope mines in the mountains and use traditional diesel powered scoop technology.Last year Afghanistan supplied 500,000 (0.5) MT of hard coal to Pakistan, which was used by cement factories & industry. But for power generation in Pakistan we need 10 million MT/annum. Sahiwal Power plant will apply to NEPRA for a higher tariff if they procure coal from Afghanistan which is not a reliable supply chain.

Sahiwal Coal Electricity Plant

Sahiwal had been given priority due to the presence of a transmission line, railway track and irrigation system nearby. The 1,320 megawatt (MW) coal-fired power plant would eventually cost 1.8 billon US dollars. Today, the project stands tall with two 660 MW plants and is part of the China-Pakistan Economic Corridor (CPEC) project. The government buys electricity from the power plant at 8.3601 US cents/kilowatt hour and touts the project as a major success. coal-fired power plants can lead to lung diseases, especially asthma, pneumonitis (inflammation of lung tissue) and chronic obstructive pulmonary disease (COPD).Poisonous fumes and particulate matter emitted from a coal power plant can cause different skin diseases, photosensitivity and allergic reaction to the face. Higher pollution levels will reduce the amount of oxygen in the local environment and reduce oxygen supply to the brain and creates issues of long-distance transport of coal from Karachi to Sahiwal. Groundwater table has decreased by up to 15 feet over the last three to four years which could be the result of over-pumping of groundwater for utilization by the coal power plant as maximum groundwater abstraction for the coal power plant happens during the winter season, when canal water is not available from January to March . Coal power plant constructed in an agriculture zone, where there are no coal reserves as such projects need to be investigated as these so-called ‘assets’ will become liabilities due to high operational, maintenance and environmental costs . Pakistan being ranked among the most water-stressed countries in the world, the Sahiwal coal-fired power plant requires 60,000 cubic metres of water daily as the March 2019 ‘Energy Innovation’ report, in the United States ,

It’s a 30-year agreement and Pakistan is obliged to pay capacity charges to the power plant, even if it doesn’t produce electricity. It’s a two-part tariff, with a capacity charge and an operating charge. On the subject of air pollution and emissions from power plants there are control mechanisms however in Pakistan data on air emissions is not made public. In 2015, when construction on the Sahiwal Coal Power Project began, the drafting of the Paris Climate Agreement finished. Apart from indigenous coal resources, there has been significant increase in import of coal as well due to commissioning of new power plants based on imported coal at Sahiwal and Port Qasim. However, domestic production of coal is expected to increase in the coming years with projects on Thar coal. Hydropower plants are considered one of the most capital intensive projects and for a country like Pakistan, it is not possible to undertake such big projects without the financial support of international development agencies .RLNG tremendous growth in energy mix has helped supply the demand to various power plants (Bhikki, Haveli Bahadur Shah, Balloki, Halmore, Orient, Rousch, KAPCO, Saif and Sapphire) while, the remaining was supplied to fertilizer plants, industrial and transport sector.

LNG Terminals

Pakistan began importing LNG in 2015 as domestic gas reserves started depleting at a faster pace. Presently there are two terminals installed on Port Qasim. Pakistan State Oil Company Ltd uses the Engro Elengy Terminal to import gas under long-term contracts, while Pakistan LNG Ltd brings spot purchases through the GasPort LNG Terminal.

Less than 50% of annual LNG imports are through the spot market and prices skyrocketed after the Russian invasion of Ukraine on Feb 24, 2022 and there is no worthwhile response by bidders to tenders by Pakistan LNG Ltd for 10 cargoes. Before that, the state-owned company made three unsuccessful attempts to buy LNG in July , 2022. There are four long-term contracts meant to bring more than half of the country’s total LNG imports at substantially lower than spot rates however there have been constant defaults by global suppliers. Since the beginning of 2021, Eni has defaulted on at least four cargoes while Gunvor has defaulted on at least seven. PLL has taken Gunvor to international arbitration.Pakistan reserves the right to impose a penalty on defaulting suppliers equalling 30pc of the cargo cost. Suppliers invoke force majeure on the ground of unforeseeable circumstances preventing them from fulfilling the contract in order to avoid paying the penalty. As long-term contracts must always require the supplier to disclose the fuel source and the vessel’s name hence its difficult to invoke force majeure on a false pretext if the long-term buyer knows the source of LNG and the vessel that’s supposed to deliver it.

The developers of both upcoming terminals demand allocation of at least 300 million cubic feet per day (mmcfd) of pipeline capacity each before they take the final investment decision however, there has been little tangible progress from the state-owned gas utility companies on the allocation of pipeline during the past few years.

Qatar-backed Energas LNG and Mitsubishi-backed Tabeer LNG have capacities of 750-1,000 mmcfd each. Given the capacities of the already-operational Engro Elengy (690mmcfd) and GasPort LNG (750mmcfd), the addition of the two “merchant” terminals can more than double the country’s re-gasification capacity besides doubling the country’s LNG storage capacity, which currently stands at 320,000 cubic metres.

Pakistan is one of the top seven LNG importers globally, yet it ranks as low as 18^thin terms of storage capacity. Pakistan uses the existing Floating Storage and Re-gasification Units (FSRUs) of the existing two terminals merely as re-gasification units. This means the system relies heavily on the gas line-pack, which is the volume that can be stored in a pipeline for scheduling purposes. According to a July 4 , 2022 report by Reuters Germany has leased as many as four FSRUs in a bid to quickly diversify away from Russian energy.

Port Qasim Authority (PQA) had shortlisted a Norwegian consultant-led consortium to assess the feasibilities of liquefied natural gas (LNG) terminals proposed by local and international investors as demand-supply gap of fuel widened to reignite an energy crisis. PQA, an industrial-cum-commercial port, shortlisted DNV-GL Group-led consortium to be appointed as foreign LNG consultant to advise and assist in establishing floating natural gas terminals on build-operate-transfer (BOT) basis at the port. The port currently caters to more than 51 percent of seaborne trade requirements of the country. In October last year, PQA issued request for proposal for appointment of foreign LNG consultants to evaluate and review the feasibility studies, designs of prospective LNG developers and other studies as well as provide project management and quality assurance of implementation, including the commissioning and final acceptance of completion of the LNG terminals. Four bidders – joint ventures of DNV GL-FRR, Royal Haskoning-Nespak, Ernst and Young -Shamsi Builders-BMT-Asiatek Energi, and Exponent International-Total Dynamic System – submitted their proposals. DNV GL-FRR has been shortlisted, according to an official document.

The consultant would scrutinise and review all studies furnished by LNG sponsors, including Elengy Terminal (Engro, Fatima/Pak Arab, Shell and Gunvor), Energas (Lucky Group, Sapphire, Hallmore and ExxonMobil, PGPL (Pakistan GasPort and Trafigura), GEIP and Tabeer Energy (Mitsubishi). The consultant would also provide recommendations on the suitability of the site and mitigating measures, if any in the form of a technical reports, gap analysis or any other study where required in this regard.

Presently, two re-gasified LNG (RLNG) terminals are under operation in Pakistan. Since 2015 over 19 million tons of LNG has been imported. These terminals have pumped approximately 393.6 billion cubic feet/day of gas into the national gas distribution network in 2019, a 14 percent increase compared with 345.6 billion cubic feet in 2018.

In 2019, Pakistan imported 7.57 million tons of LNG through 123 LNG cargo ships against 108 cargos in 2018. During the same year under review, these terminals supplied around 20 percent of total gas demand. Last year, petroleum division linked the country’s energy security with a consistent supply of liquefied natural gas, forewarning massive power outages in case of any decision to stop the fuel import. Production of indigenous gas stood at four billion cubic feet per day as against the total demand of six bcfd. Pakistan is trying to chart a way out of a recurring economic boom-and-bust cycle. Many factories remained shut down for months as there was little gas to spare in winters when domestic heating consumption peaked. In the past, the crisis started to ease after the country started LNG imports four years ago.

Further, the hired consultant would review combine cumulative navigation, operational, safety and security risks assessment of locating LNG terminals in relation to close proximity of each other, including existing LNG terminals in the light of Pakistan LNG Policy 2011 updated till to date and all international codes and standards in this respect. The port provides shore-based facilities and services to international shipping lines and other concerned agencies in the form of adequate water depth in the channel, berths/terminals, available cargo handling equipment, warehouses, storage areas and providing facilities for safe day and night transit of vessels. Port Qasim Authority Wet Charges on LNG cargoes are depicted below;

LNG vs Domestic Production of Gas

Maximum gas price is USD 6 / mmbtu whereas old gas price was USD 2 / mmbtu or USD 3 / mmbtu e.g Badin field .In the 2001 Petroleum Policy the price of gas in Zone II (different prospectivity zones ) equivalent to USD 36 / barrel capped at maximum USD 2.6 / mmbtu.

In the Petroleum Policy 2012 prevalent /applicable at Zone III not above USD 5 / mmbtu and in Zone I not above USD 1 / mmbtu. In the Primary Energy mix gas comprises 40 % of the mix and is highly subsidized versus other fuels and now Qadirpur , Bhitt and Sui are being depleted. Only this time 100 % 0f Oil cost has been passed on to the end users/ consumers. Gas was subsidized at the insistence of the then industrial gas users who could not improve their technology and efficiency.

Import of LNG was started around 05 years ago and presently booked at spot at USD 40 / mmbtu ( June , 2022 ) which is the Qatar origin price (Vitol /Trafagura/Gunvor) trader price and storage and re-gasification price is higher with a volume of one cargo at 180,000m³ at a price of around USD 220 million. In last 1 ½ years remained above USD 10 / mmbtu and has never come below domestic gas price. The single bid from Qatar in the month of June, 2022 at $40 per million British thermal units (mmBtu) for a July delivery was too expensive to be accepted against Qatar’s long-term contract price of $11 – $13.7 .

SSGC and PSO operates one terminal whereas PLL ( susidairy of GHPL) operates the other terminal. The terminal ( RNLG) fixed cost – unloading btw USD 300,000 to 500,000 per day each terminal owns namely ENGRO and Z.Z Ahmed .Fixed charges are payable by PLL (subsidiary of GHPL ) indirectly by GoP. PLL is in arbitration against supplier Gunvor of Switzerland and generally Trafigura, Vitol and Gunvor are exploiting the world markets on commodities. With ENI (partially a trader and Oil and Gas producer ) there is a contract which is partially met by ENI. Permission was awarded for two additional LNG terminals by the Federal Cabinet in the year 2020 however they seek guaranteed “ take or pay “ as there is sufficient storage already in place at PQA terminals . Domestic producer gas price is inclusive of compression at site , pipeline compression charged to gas utility company which factors in its IRR as an operating cost. In the year 2013 there was talk of ‘ Tight Gas “ @ 20 % premium for the gas producer whereas industry sought 40 % premium , despite that it will not be above USD 15 / mmbtu. Geological risk is not a concern for the producer/investor. Mari Gas went for a well in Attock and 15 of its personnel were martyred and no international E&P company is wiling to take such a risk. With Qatar long term agreement at USD 15 / mmbtu on “ Take or Pay basis “ . There is usually a stability clause in each agreement. Another clause in such gas agreements is that LNG cargo may be provided late even a few months later to make up so penalty cannot be imposed.

Qatar at different levels to ramp up Liquefied Natural Gas (LNG) supplies to Pakistan to make up for shortage of four to five cargoes (about 400-500 million cubic feet of gas per day) every month. Qatar (Doha) may decline to commit additional long-term contracts for the consideration that the value chain in Pakistan was unable to accommodate more than 10 long-term cargoes per month on the two terminals. The existing six cargo throughputs per month from a 170,000 cubic metres of storage is already well above global standards.

The existing Engro LNG Terminal is supplying 600 mcfd and the other existing terminal is taking the slack in the months leading to March and October onwards. Both these terminals have dedicated gas pipelines of SNGPL and SSGCL in place. The two additional terminals may not be investing as the demand is elastic and pipeline capacity is not present and gas utility companies have not signed off on accepting in their pipeline network. At US $ 40 or even at US $ 20 the additional two terminals are not viable as Brent at US $ 16 makes LNG commercially viable in Pakistan for additional terminals. This is based on the premise that power plants are run on 60 % efficiency. OGRA has prescribed a guideline now that 30 % of pipeline capacity to be third party access and it is to be seen if the additional pipelines expected 300 mcfd can be carried in the existing LNG and gas utilities pipelines.

Reservoirs & Water Scarcity & Climate Change

The incumbent government, like its predecessors, continues to be insensitive to water scarcity in the country as neither new reservoirs are being planned on Indus nor sufficient progress has been witnessed in Diamer Bhasha despite the fact that storage capacity of Tarbela reservoirs has depleted by 38 percent (by 3.6 MAF) – to 6 MAF from 9.6 MAF.The World Bank, the Asian Development Bank and China have already refused to be part of the project due to the disputed Northern areas. The cost of Bhasha Dam with gross storage capacity of 8.1 MAF has increased to $16 billion from $12 billion. Around $ 3.5 billion were required for the construction of Mohmand Dam project, the second mega hydropower project, storage capacity of which was 1.293 MAF. Storage capacity of Mangla reservoir has been enhanced by 1.9 MAF from 5.4 MAF to 7.3 MAF. Three large dams constructed in the 1960s and 1970s – the Tarbela on the Indus, the Mangla on the Jhelum, and the Chashma on the Indus – account for most of the built water storage reservoirs in Pakistan. Designed primarily to supply water for irrigation, the original combined live storage capacity of these dams was 19.4 billion cubic meters (Tarbela, 12 billion cubic meters; Mangla, 7.3 billion cubic meters; and Chashma, 0.87 billion cubic meters).

Reservoirs buffer inflow variations to stabilize supply. Existing reservoirs adequately buffer inflow variations between years, although supply shortfalls in Rabi are common. New reservoirs would improve the reliability of Rabi supply. But given the severe environmental degradation of the lower river and delta, partly caused by high water withdrawals, any increase in withdrawals, especially in drier years, must be carefully assessed in terms of additional environmental degradation.

The volume of sediment accumulated in the reservoir is now too large for practical removal. Construction of Diamer Bhasha Dam upstream of Tarbela will create a sediment trap, thus incrementally reducing Diamer Bhasha live storage but significantly slowing the sedimentation rate of Tarbela. Mangla Dam was enlarged between 2005 and 2009 (at a cost of around $1 billion) adding an additional 3.6 billion cubic meters of live storage. Due to continued sedimentation, combined live storage is estimated to be around 16 billion cubic meters. Diamer Bhasha Dam, at preliminary construction stage and with an estimated total cost of around $16 billion, will add 7.9 billion cubic meters of live storage. At projected completion in 2023, total system storage will be around 21 billion cubic meters. The ongoing loss of storage because of sedimentation costs tens of millions of U.S. dollars per year.

Ugly head of Circular Debt Rears up

The circular debt which stood at Rs1.152 trillion in June 2018, rose to Rs2.467 tr in March 2022, an increase of 114 per cent, despite major injection out of taxpayers’ money. One of the major causes of this rapid rise in circular debt is depreciation of the rupee from Rs115 per dollar to Rs191 under the watch of the then government as well as the caretaker arrangement in place before that.

This very complex and convoluted problem can be explained, in simple terms as follows. The government owned electric power system pays for its expenses from sales revenues collected from consumers and the governments makes up any deficits. The latter practice runs counter to the declared objective of moving towards profitable operations and eventual privatization of entities in the sector. Consumer tariffs are insufficient to pay for expenses and the government coffers are overstretched. This results in prohibitive levels of arrears, including non-payments to suppliers of fuel as well as to private independent power producers(IPPs). It also gives rise to a chain of outstanding arrears through the generation, transmission and distribution entities within the power system itself. While tariff increases and injections of government capital might be the quickest short term remedy, these are only stop gap measures. Notwithstanding recent price adjustments, tariff levels have not increased sufficiently to cope with spikes in petroleum prices or low rainfall which depresses hydel generation. Tariff increases are understandably hampered by affordability issues.

In short the power system is financially unviable and operationally impaired. It relies on heavy government capital injection in the form of unaffordable subsidies which increases the fiscal deficit, promotes deficit financing and loss of reserves and therefore leads to depreciation of the currency. It is difficult to get an accurate figure of the net outstanding debt because of the significant overlaps and because it is a moving target. To give some idea of magnitude, the gross receivables in the energy sector are currently estimated at $6 billion. By some estimates the net figure has grown from about $3.5 billion in June 2009 to around $4.8 billion today. In addition to the state owned power system and IPPs it affects virtually all entities in the commercial energy sector.

The technical causes were wide ranging and complex. In retrospect, some simple lessons can be drawn. First while incentives for private power generation alleviated power shortages in the short term, too much capacity was contracted with insufficient attention to least cost expansion. In times of depressed demand the liability of the government owned power system becomes particularly prohibitive. Under the provisions of the Power Purchase Agreements the system is obligated to take the power or pay for it guaranteeing the IPPs an agreed minimum plant factor. IPP’s have a guaranteed annual rate of return of 35-45% which is weighed heavily in their favor vis-à-vis the consumer. Second the magnitude and nature of private investment was not in synch with the level of sector reform and national socio-economic governance reforms. It would have been prudent to stagger the competitive bids over a number of years to enable bidders to better assess the risk and reduce their bids. Fourth the staggering IPP bids which thereby reduce capacity requirements would allow the power system operator to reassess demand and adjust contracted capacity timing of subsequent projects. The fifth point is that with a more transparent and politically acceptable approach in accommodating changing country conditions would have helped. Lastly contracts should be open to a mutually acceptable re negotiation process. Power distribution companies filed petitions with Nepra to allow them to raise tariffs for the higher costs faced during the outgoing fiscal 2012. Under pressure from the previous administration, NEPRA refused to take a decision on the matter, leaving those liabilities to pile up during almost the entirety of fiscal 2013. Meanwhile, an additional complication arose when the law ministry term retroactive increases in power tariffs illegal. But the power companies cannot make their costs go away and will claim that Rs200 billion as part of their next request for tariff adjustments at the start of fiscal 2014. The commercialization of coal fired Lucky Electric Power and Thar Energy Limited (commercial operation expected in 2023) will add capacity payments of Rs 50 billion and Rupees 40 billion respectively.

Neelum Jhelum

Neelum-Jhelum Hydro Power Project if shut down deprives the nation of 950MW of electricity. With the closure of the power station, the country’s electricity shortfall can reach 7,324 MW in July , 2022 as total power generation in the country stands at 21,622 MW against the demand of 28,946 MW. Hydropower plants generate 5,660 MW and government thermal plants produce 1,670 MW while the private sector power plants generate 10,900 MW.

Production from wind power plants at 900 MW and solar plants 111 MW. Bagasse-based plants produce 103 MW while the generation from nuclear fuel was 2,278 MW, the sources added. Tarbela Dam optimal production is 3,684 MW as against 1100 MW when water inflow are low.

Understanding Renewable Energy

The UK is planning to fire up a condemned 55-year-old coal plant to meet soaring power demand highlighting the febrile nature of UK’s energy policy. A 50-year-old coal power plants is kept running, at huge cost till more and higher priced electricity is imported from Europe. The warm weather and high electricity demand were not particularly unusual or unexpected. There are now more than 11,000 wind turbines onshore and offshore which produce nearly a quarter of the UK’s electricity. Between 2000 and 2017 over a third of the UK’s firm baseload electricity generating capacity was closed to meet EU rules without any comparable net replacements. Policy makers approved weather-dependent renewables and more interconnectors to import power from the EU thus offshoring British energy jobs, resilience and security. In July 2022 the National Grid had to panic buy staggeringly expensive Belgian electricity to avoid power cuts fundamentally illustrating how perilous is UK’s energy supply. As power demand surged during the heatwave the UK National Grid paid £9,724 per megawatt hour, more than 5000 % the typical price, to prevent London suffering blackouts.

It is extremely unlikely to replace the current fossil based energy industry with solar and wind turbines as its not a question of money or political will it cannot be done from a fundamental point of view as we simply do not have the resources to build the massive number of solar panels, wind turbines, interconnecting cables, battery arrays, hydrogen electrolyzers and hydrogen storage facilities. All of these, and more, would be needed to achieve the displacement of fossil fuels. The requirement is hundreds of times the metals we are now mining on a yearly basis as per Dr. Simon Michaux however warnings fall on deaf ears. Reality is much more difficult than platitudes, nice animations and pictures of green planets would have you believe. The image below accurately reflects the anachronism.

China has been increasing the share of non-fossil fuels in its electricity generation, but coal remains a predominant source. In 2020, China generated 4,775 TWh from coal-fired power plants, a 63% share of China’s electricity generation. In 2000, coal accounted for 77% of China’s electricity generation (992 TWh). In the intervening 20 years, non-fossil fuels, including hydroelectric, wind, and solar generation, grew to 27% (2,058 TWh) of China’s generation mix, from 17% (221 TWh) in 2000. Solar has been the fastest-growing generation source and grew by an average of 43% each year from 2015 to 2020. Solar accounted for 6% of China’s electricity generation in 2020

Credit;

http://Copyright Business Recorder, 2019 https://www.brecorder.com/2019/11/10/543145/pti-government-too-insensitive-to-water-issue/

http://[1] The News,2nd July 2013, Khalid Mustafa . [1][1] Hydrocarbon Development Institute Of Pakistan, Internet [1] Hydrocarbon development Institute of Pakistan, Internet [1] Ministry Of Petroleum And Natural Resources [1] MTDF, Planning Commission of Pakistan, MTDF ,Internet [1] Pakistan Beyond the ‘Crisis State’ by Maleeha Lodhi,Chapter 12,Tuurning Energy Around,Ziad Allahdad. [1] Ministry Of Petroleum And Natural Resources [1] MTDF, Planning Commission of Pakistan, MTDF ,Internet [1] Izhar-ul-Haq,Director Dams Review Cell Wapda,Lahore,Internet dated 29 June,2013. [1] Pakistan Beyond the ‘Crisis State’ by Maleeha Lodhi,Chapter 12,Tuurning Energy Around,Ziad Allahdad. [1] ibid [1] Internet,Dr Farukh Saleem,7th July,2013, The News. [1] Pakistan Beyond the ‘Crisis State’ by Maleeha Lodhi,Chapter 12,Tuurning Energy Around,Ziad Allahdad. [1] http://tribune.com.pk/story/554370/circular-debt-power-sector-liabilities-may-cross-rs1-trillion-by-2014/ [1] Planning Commission of Pakistan, MTDF ,Internet [1] MTDF, Planning Commission of Pakistan, MTDF ,Internet [1]http://www.pc.gov.pk/hot%20links/PSR/Session-III/1-NEPRA.pdf [1] MTDF, Planning Commission of Pakistan, MTDF ,Internet [1] http://pakistaniat.com/2009/02/17/utilizing-solar-energy-in-pakistan/ [1] MTDF, Planning Commission of Pakistan, MTDF ,Internet [1]The News. Internet, 6th June 2013. Planning Commission of Pakistan, https://www.pc.gov.pk/ http://www.finance.gov.pk/survey/chapters_19/14-Energy.pdf https://www.linkedin.com/pulse/sanctions-top-5-week-ending-20-december-2019-nicholas-turner/?trackingId=phZBY7%2BvCNTEV4dG5tr%2FHg%3D%3D Dawn , December 8th, 2019 http://tns.thenews.com.pk/development-catastrophe/#.XceYl-cza9Y Forbes 2016 , https://www.forbes.com/sites/markpmills/2016/11/28/shale-wars-whither-oil-prices-as-saudi-arabia-lets-the-big-bet-play-out/#28b4d1193c8e S&P Global Platts , http://blogs.platts.com/2018/01/29/saudis-ipo-dream-shale-nightmare/ Bloomberg , https://www.bloomberg.com/view/articles/2017-11-08/the-promising-crisis-in-saudi-arabia Brookins Institute , https://www.brookings.edu/opinions/saudi-arabias-economic-time-bomb/ The Huffington Post, https://www.huffingtonpost.com/luay-al-khatteeb/saudi-arabias-economic-ti_b_8894100.html https://www.linkedin.com/feed/update/urn:li:activity:6978335120650870784/

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Can Pakistan acquire Russian Oil at discount

Understanding Ural Oil – Refinery Configuration of 06 Operational refineries in Pakistan

Russia’s Urals oil is used as a reference brand for pricing of export oil mixture . The other main reference brand is Brent. It comprises a mix of heavy sour oil of Urals and the Volga region blended with light oil of Western Siberia. Urals crude exported from the Baltic and Black Sea ports involves long shipping voyages to China and India . Russia produces four crude oils namely ESPO, Urals, Sokol and Sakhalin with ESPO and Sakhalin considered suitable for refining in Pakistan’s refineries by blending it with the crude oil imported from the UAE and Saudi Arabia. In any case local refineries meet 20 % of Pakistan’s petroleum requirements with the remaining 80 % refined by importing crude oil subject to each crude consignment being adjusted one time with technical suitability of the crude grade , refinery configuration and yield in terms of percentage of volume. PARCO however is likely to pioneer this venture.

Regional Scenario

Russian oil imports account for the second largest source for India after imports from Iraq. Indian contracts for Urals crude for March to June and projections for deliveries in July and August (around 66.5 million barrels cumulative) amount to more than the quantity purchased during all of 2021 ( procured 4.8 million metric tonnes of discounted Russian oil ). India is importing Urals oil and compared to Brent crude ,being the global benchmark, discount being favorable at around USD 30 per barrel. Urals oil from Russia currently trades at about USD 95 a barrel, while the global benchmark Brent crude is above USD 119 a barrel. Earlier Russian Ural crude was uneconomical due to high freight costs. India is taking advantage of increased global shipping costs and trying to dominate Russian trade to other South Asian countries including Iran and Oman .

Sanctions

Indian refineries are facing a daunting task to finance Russian purchases on account of sanctions on Russian banks however, no secondary sanctions apply on countries doing business with Russia. India’s dependence on West Asian oil, gives Indian refiners improved bargaining strength with Saudi Arabia oil pricing besides strategically improving its energy security.

Russian Companies & Commercial Subterfuge

International traders namely Vitol and Trafigura had to disengage from Russia’s oil trade on account of US sanctions .The Russian state owned shipping group Sovcomflot with its tanker fleet is a key player in enabling oil exports to India and elsewhere after Western certifiers withdrew their services due to global sanctions against Moscow. This is bolstered by certification by the Indian Register of Shipping IRC) , an internationally recognized classification company, completing the paper trail including the much needed insurance coverage required to maintain Sovcomflot’s tanker fleet afloat and continue delivering Russian crude oil to overseas markets. The IRC as per information available on its website has certified more than 80 ships managed by SCF Management Services (Dubai) Ltd, which not surprisingly turns out to be a Dubai-based entity listed as a subsidiary on Sovcomflot’s website.

Refining the art of evading sanctions

Iran is experienced and has developed mechanisms to evade sanctions by capitalizing on the geography of its territorial waters :

Due to sanctions by US on Iran crude and chemicals loaded from Iran come to the high seas then transferred through ship to ship mode (STS) after the ship GIS/coordinates are disabled. The vessels then move to any Middle East port (usually Fujerah in U.A.E) obtain a Certificate of Origin and BL is issued for onwards destination to any port for discharging. Deliberate switching off of AIS transmitter is a violation of SOLAS and Iran cargo remains under US sanctions 2000. A fact finding enquiry in this matter was conducted at KPT (Annex-I).
Iran circumvents sanctions and maintains a certain level of crude exports. The geography of the Gulf depicts a unregulated labyrinths of production facilities , trading hubs, networks of oil refineries, storage tanks, production sites, and export terminals littering southeast Iraq and southwest Iran near the river that separates the two countries as well as the coastal region of Iraq’s al-Faw Peninsula which camouflages the origin of oil. Cargo ships and oil tankers (with crude stored ) are moored in anticipation of Iraqi and Iranian crude.

Iran in collusion with U.A.E which is a global trading and transshipment hub for crude and refined petroleum products blends liquid cargo , changes vessel names and identification codes to obfuscate the identify of its oil tankers. The UAE coastline is hugged with Iran’s armada of 123 tankers registered in nations without the inclination to monitor tankers flying their flag.

Iranian vessels are adept at ‘spoofing’ – manipulating the GPS software that reports a vessel’s position so it appears to be elsewhere when it docks undetected in prohibited areas for disguising an illicit transfer of liquid fuel in the region.

Russian route to transport crude to India

Russia to direct West word crude to the East – Analysis of Transportation Modes

Russia’s seaborne oil exports have increased from 3.394 million bpd on 28^th February 2022 to 3.754 million bpd by 13^th June 2022 , an increase of 11% , despite trade sanctions. Russian oil transported vide sea are unloaded at India’s western ports and China is supplied Russian crude shipped from Russia’s Pacific coast . Logistic issues persist as there is a global shortage of ships which can act as ice breakers as most of the hydrocarbon is located in the Artic and after the sanctions managing insurance is problematic but trade dynamics may alter this situation. Vessels voyages are longer when transporting Urals crude from Russia’s western ports to Asia rather than Europe as typically a journey to China may take around two months.

Russia exports nearly 50% of its crude oil and refined products via long-distance pipelines with the balance through waterborne liftings and trade. It has the two longest oil pipelines in the world, the Druzhba to the west, and ESPO oil pipeline in the East. However, there are commercial limitations to delivering incremental crude oil to the east via the ESPO oil pipeline. Russia and China market participants signed a long-term oil supply contract in 2012 for an estimated annual volume of 15 MMt for the term of 20 years. In contrast to Russia’s lack of crude oil storage facilities , China has 12 SPR sites in operation totaling 249.7 mmbbl and was contemplating another 5. Russia does have an inherent advantage as besides these pipelines waterborne crude oil liftings via Very Large Crude Carriers , medium size Aframax tankers and other vessel sizes and types provide additional Russian crude oil disposition options.

Technical intricacies usually raised by concerned entities to counter acquiring of Russian Oil – Fixation of responsibility for current energy crisis :

Technical objection raised by various authorities to shirk responsibility

Sanctions will be imposed on Pakistan

Response to Technical Objection

Sanctions are on presently applicable to Russia and no secondary sanctions imposed on other countries. Sanctions are imposed as per US Presidential orders which need to be carefully interpreted. At present Russia is denied access to SWIFT/ international Western Banking channels and both China and India are circumventing this payment route by other means so Pakistan can examine this mechanism. No sanctions are imposed on Pakistani refineries and even if sanctions are imposed they will be imposed on India and China as well and existing cargoes are exempt from sanctions.

Long term contracts with Saudi and U.A.E for crude are not binding if price escalates. Only once , in 1998 , Saudi offered oil on deferred payments and later converted into grant.

Whether Embassy of Pakistan in Moscow explored potential of import of Russian Oil. What is the “ Plan B “ of M/o Foreign Affairs and M/o Finance to counter any sanctions and what exactly is the extent and scope of sanctions imposed on Russia so far .

Whether Finance Division carried out any study as to whether Pakistan’s ongoing negotiations with IMF be affected ? This is not even a new agreement with IMF but this is a continuation of the Tranche due in February , 2022 so will any pressure be brought upon Pakistan in a routine exercise with IMF ?

Saudi Suppliers may be unhappy – Apprehensions at this stage

Pakistan and Saudi Arabia and U.A.E have long term crude supply contracts and there has to be an upper cap on oil pricing. If they are unhappy they can offer Pakistan lower priced oil. Regarding labour in Saudia and U.A.E India also has a sizeable labour and technical and executive presence in Saudia but they feel no such threat. Anyway this has to managed diplomatically as well .

Was Any Contingency Plan devised by Petroleum Division since the invasion

This energy crisis was in the making since the Russian invasion of Ukraine and the anticipated disruption of Energy and Food Supply chain. Why Petroleum Division did not propose alternative energy source and was any summary moved in this regard or simply remained complacent and officials of Finance Division and Petroleum Division continued to attend Board meetings of PARCO , PNSC and PSO and get huge remunerations without foresight for overcoming energy crisis. A Summary could have been moved overnight by Petroleum Division and team could have left for Russia immediately to finalise either way ?

Were state owned refineries and private refineries sleeping

PARCO is a Mid Country Refinery with with a strategic shareholding of GoP as well as shareholding of UAE. Pakistan State Oil , which has the market share of around 65 % in the domestic market, has a strategic shareholding of GoP and can place order for Russian crude. PARCO configuration is more advanced and Russian crude can reach and initially stored at KPT Keamari storage whereas other refineries are of older configuration and have not upgraded therefore remain inefficient in any case . PARCO can blend Russian crude with Saudi and U.A.E crude or can exclusively refine Russian crude . No sanctions on Pakistani refineries and even if sanctions are imposed they will be imposed on India and China as well and existing cargoes are exempt from sanctions.We should cross the bridge when we reach it.

PARCO refinery can blend or process any crude and in case of any additional cost, being public sector , can absorb the additional initial costs of refining Russian crude out of GoP revenue share otherwise GoP should have privatized its shareholding immediately.

Which maritime supply route suits Pakistan and role of PNSC

Eastern maritime route suits Pakistan passing China and Straits of Malacca from Russian Ports of Valadivistok and Kozmino. The PNSC may study the logistic costs and time involved in these routes vis-à-vis its existing oil routes from the Middle East.

As per Cabinet decision “. First Right of Refusal is to PNSC” and all GoP cargo to be offered to PNSC. PNSC has 4 Oil Carriers which can be deployed on Russian route. PNSC can charter oil tankers as well. PNSC is bound to comply GoP directives to carry liquid fuel cargoes from Russian ports and their lame / technical excuses should not be listened to. In any case PNSC is inefficient and operates in a monopoly. Otherwise what is the efficacy of a National Flag Carrier ?

PNSC is earning PKR 4 billion profit annually. Out of its 13 vessels 6 are crude carriers and 7 are chartered to other parties in other routes. So to ensure Energy Security it can lower or not even charge freight rates as it has a healthy balance sheet. Role of public sector in Pakistan traditionally was to support state initiatives , invest and open up the sector for the private sector investment which will only come when there is assured profit. So PNSC can go insolvent / bankrupt as long as energy and food security is met. NICL being state controlled is mandated to provide insurance back up to PNSC as required .

Way forward for Pakistan to Secure Energy & Food Security – No direct sanctions on Pakistan hence :

Ministries of Petroleum , Finance and Foreign Affairs be prodded into action
Ministries of Petroleum , Finance and Foreign Affairs to present their Energy / Diplomatic Contingency Plans within regarding import of Russian Oil
Ministries of Petroleum , Finance and Foreign Affairs to present their Energy / Diplomatic Contingency Plans to counter US sanctions / secondary sanctions on trade with Russia
Ministries of Petroleum , Finance and Foreign Affairs to elaborate with evidence and irrefutable logic their apprehensions , if any , on any reaction of IMF or traditional Oil suppliers
Ministry of Petroleum to explain on technical and not financial grounds why refineries cannot process crude other then Saudi and U.A.E crude
Long term deal with Russia on Energy & Grain be executed immediately capitalizing on global situation likely to persist – Short to Medium Term
Time factor of transportation to be factored into any long term agreements by PNSC and Petroleum Division
Ministry of Foreign Affairs play off Saudia , U.A.E against Russia to keep crude prices low
Technical team , with appropriate oversight personnel present, actively interact and access Moscow for agreement
PARCO with strategic GoP holding initiate Russian liquid fuel import & its processing/import through PSO (GoP owned) – UAE shareholders of PARCO need to be managed
Pakistan National Flag Carrier (PNSC) to explore transport Russian oil regardless of freight cost
NICL be directed by Federal Cabinet to provide insurance back up to PNSC and liquid fuel cargo as required
Pakistan to establish its Marine Classification Society – Mid Term to support PNSC
Not to be mislead by apprehensions unless they are a reality
Counter Indian /external designs to control Russian cargo sea routes – as depicted in the diagram

Steel Production in Pakistan

Twenty years back with Russian built steel Mills of Pakistan were producing 01 million tons of steel per annum. Today zero local steel production. Steel unit operating are all based on melting of steel scrap and some steel imported from China through sea routes . India’s current steel production is 120 million tons of steel per annum.For Pakistan’s steel requirement 100 % is imported.

Neelum Jhelum

This project was approved at cost of $ 600 million in 2002. But was completed in 2020 at cost of $5000 million. Current Tariff for this project is Rs. 12/Kwh as compared to original proposed Rs.3/Kwh.

Clean Energy versus Fossil Fuels

The US plans to “re-evaluate” America’s decades-old alliance with Saudi Arabia because of OPEC+ decision to cut oil production. The posturing looks like a bid to distract from the effects at home of US failure to execute on a successful transition to clean energy. An American president blaming Saudi Arabia, aramco, OPEC+ or Putin for an energy crisis that results from a policy of switching from carbon fuels to clean energy is disingenuous. Unlike countries such as Japan or China, the US can produce far more hydrocarbons than it consumes. The oil prices US consumers pay are due to choices their leaders make.

In 2019, the US became a net exporter of crude oil and petroleum products for the first time. In 2020, America exported still more oil, with investment in domestic pipelines, refineries and extraction technologies and resulting employment all reaching new highs. Less than two years later, investment in the US domestic oil industry has collapsed, refining capacity has atrophied, and the jobs that investment produced have largely vanished.

The causes of the reversal aren’t a mystery. US politicians, from President Joe Biden down, ran and won on policies intended to wean the US economy off fossil fuels in favor of clean energy. These policies included bans on fracking, bans on drilling, closing down the Keystone Pipeline and other oilfield infrastructure, and subsidizing alternative energy and EVs.

US political leaders and voters must weigh the benefits and costs of clean energy. In some circumstances, voters might choose policies that reduce GDP through higher fuel prices and other measures to achieve particular goals. It also is the prerogative of elected leaders to pursue policies that promote new domestic industries, even if those policies kill off existing ones. But elected officials make voters endure the negative consequences of bad policy choices by blaming foreign entities for the predictable outcomes of those policy decisions.

To Sum It Up: The spare capacity OPEC+ intends to create with the announced production cuts helps Gulf states keep world oil markets balanced, reducing the chances of global economic catastrophe. Further, price stabilization will create a more favorable environment for sustainable investment in downstream and refining facilities that will foster market stability. Those are hardly reasons to throw Saudi Arabia under the bus.

Our Take: There’s an easy way for the US Biden admin to help prevent another shock in world markets—take the boot of the US gov’t off the necks of domestic oil and gas producers, and give them assurances they won’t be demonized or scapegoated by politicians for doing what their country and the world needs of them.To hit the net-zero targets to which 91% of the world economy is now committed, many transformations are necessary. Roads need ubiquitous charging-points for EVs that will replace internal-combustion vehicles. The technologies to make cement or fly aeroplanes cleanly but inexpensively, or to capture carbon emissions from those industries, must be found. Above all, electricity supplied to the grid must be clean—and grids must be upgraded to cope with higher demand when everything runs on electricity.

The project is vast and expensive. Advocates of green investment have often presented this as an advantage: big infrastructure investment would be part of a “green new deal”, funded by cheap gov’t borrowing, that would be able to take up slack in the economy and provide a long-term return in excess of interest costs forgetting that higher taxes are likely to hasten a recession.

Credit;

Nadir Mumtaz

https://www.linkedin.com/in/sheridandoug/recent-activity/

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