Energy policy – IV: Development of indigenous resources

Perhaps the new energy policy has been only partially released to the extent of the issues that were relevant to CCI (Council of Common Interests). Not much has come out, either in the policy or in other pronouncements, on the issue of the development of local resources. The stress seems to be on imports; be it LNG or imported Coal projects such as proposed at Gadani about which we had discussion earlier in this series. Also up till now, announcements and policy have focused on electricity only which have been handled by the Minister of Water and Power. Minister of Petroleum and Natural Resources (MPNR) has been rather quiet, except on LNG. He has clarified that his ministry is focusing on the development of LNG terminal and there is no discussion on LNG purchases.

Without appearing to be supportive of LNG, I would tend to support the priority on LNG terminal. Let us discuss here the issue of local resources here, which has escaped the attention it deserves in the recent public discourse.

The next and new circular debt that is expected to emerge in a few years would be in the gas sector. Both LNG and the Iran Pipeline gas are almost as expensive as Oil, one a little more expensive than the other. The other alternative would be, as reported in the newspapers, to raise the gas prices to the level of oil which means quadrupling the gas prices. The proposal of enhancing electricity tariff from 30 to 70 % has already been reported. This is when cheaper local gas is being used in power plants and not the expensive imported gas. I am fearful of even calculating the impact. This Qayamat may not come fully in the reign of the present government but will appear in full vengeance in the tenure of next government whose specialisation appears to be limited to anti-corruption diatribes. May Almighty save us. But let us apply our minds too, as we try to do in the following.

It is only fair that I make a statement about the prospects of more competition in LNG and lowering down the prices in the medium-term, say, five years. So the bad days may ameliorate by then. It is therefore important that in LNG price formulae, equal weightage be given to gas prices as well as opposed to oil price linkage. In all previous LNG negotiations, there has been an oil linkage only. It is also important to avoid a long-term contract and rely on short- and medium-term arrangements.

To the extent that LNG is imported for high efficiency use in Combined Cycle Gas Power Plants (NGCC), there is some case for LNG. However, more imports are being planned than is necessary for the aforementioned purpose. However, it is quite possible that all of such plans may not materialise for a variety of reasons. Inefficiency has its positive sides as well?

We have covered the issue of Alternative Energy earlier in this series wherein we have made a strong case for 1000 MW of electricity that can come in one year. Provide, adequate transmission infrastructure is available; this is the shortest and cheapest option at 6-8 cents per unit. There is yet a few more years for Solar to become affordable for us. What remains is local gas potential and Thar Coal. Some discussion has already been done in the last piece and we would focus on the remaining issue in that respect.

Prospects of local gas are obviously speculative but not without any basis. Various studies estimate the potential to be several times larger than the discovered ones. This is the irony with oil and gas resource, as it happened in Saudi Arabia that before discovery, it was all speculative and risky. But the reward is great. It is worth pursuing. Now, Shale gas has been cited to be there. Estimates vary from a minimum of 51 TCF to 584 TCF . Shale gas is a reality now. After the U.S. Shale gas boom, many countries are actually prospecting for Shale gas in their lands. Generally speaking, where there is conventional gas, there is Shale gas too. In Pakistan, Al of Sindh and Southern Punjab has been cited to contain Shale gas. Production cost for Shale gas has been estimated at 6-8 USD per MMBtu as against 17-20 USD per MMBtu for LNG and 4 USD per MMBtu for conventional gas. A reputed Oil & Gas company ENI of Italy has made an offer to develop Shale resource at a gas price of about 70 % that of Oil (14 USD per MMBtu), taking cue from the ongoing LNG rates and projects. If they are making the investments, why can’t we accept the offer, when we are accepting the same rates or more for LNG? I am not sure whether the companies offer is a serious one(ENI President had travelled to Pakistan in 2012 and met Dr. Asim Hussain, and spoke of ENI’s readiness for a 10 Billion USD investment for 1100 exploratory wells). There may be others, who might come in at such a good rate. Alternatively, auctions could be organised as early as possible.

There is a Shale gas policy in place already. Shale gas technology is in public domain, as revealed by the shale gas process inventor, George Mitchell who died recently. Many countries and companies have developed capability in Shale gas and one should expect some competition in the auctions. Apparently development time is not very long. Indonesia has signed contract for Shale gas prospecting and the targeted commercial production has been kept in 2018. This is a short time span, if we compare it to LNG which we are chasing now for more than a decade and are still nowhere. Indonesia received 75 proposals for Shale gas exploration and development( If I were the minister, I would have opened this file first than that of LNG and would have gone to Italy first than Qatar).

For conventional gas, let us open Balochistan, as government is already doing and seeking a political settlement. It may be worth considering the share of the local tribes (call it Local Government) in the gas royalty. Currently, the royalty goes to the government of Balochistan, which reportedly squanders it all. Government is abstract and passive and the tribes are real and offer resistance. It would not be unique.

In the U.S. law, Oil belongs to the owner of the land. Even otherwise, let us try to be creative and recognise the realities of that province. It is difficult to break the local system there. Many have lst hope and would mentally be ready to a creative formula? However, one has to take care that the newly found money does not go into buying arms ?

Now that the last tranche of gas is to end in a decade or so, it is the right time to announce that the era of cheap gas is over. We will have to enhance the well-head prices for new discoveries as a general policy. The new price should be around 8-10 USD per MMBtu. This is the wholesale price of gas in Europe where gas is imported and as well as locally produced. For the knowledge of the readers, let me clarify that it is the Asian LNG price that is high to the extent of 80-90% of that of oil, in Europe and elsewhere, it is much lower and around 8-10 USD per MMBtu. That is why the wane expectation in Pakistan was that at least Iran would recognise this discrimination and would offer a better deal in the international political circumstances in which Iran suffers from embargoes and blockades. It has not happened despite persuasion.

I do sincerely hope that finally sense would prevail in Iran and they would revise their policies eventually. Market may eventually correct itself with the advent of American Shale gas into the system. It is therefore important to include a price revision clause in all import agreements. Iran gas agreement includes such a clause. Reportedly, as per news paper account, Qatar demanded constant price without revision clause.

For immediate and emergency purposes, imported Lignite and Biomass Briquettes may be encouraged and introduced in the market to be replaced by local ones as the local facilities emerge. Home Heating, Industrial furnaces and commercial enterprises like restaurant and Tannoors can utilise it beneficially. There is no use to chase gas when it is not available and is expensive. This recommendation ought to be taken seriously. Solutions are not always centralised and on massive scale. More effective and wide spread changes can occur in decentralised and user based systems. There is still some use of Coal briquettes in Central Europe. Greece is using it extensively in industries. In India coal is used extensively in industries. India does not have gas in quantities required by India.

While local gas may be speculative, Thar Coal is firmly located in the ground and known fairly well. All kind of investigations have been done. Both gas and electricity can be produced from it. It can be burnt directly in industrial furnaces and boilers.

Fertiliser can be produced including the existing Fertiliser plant’s conversion to it. Existing oil-fired power plants can be converted to it. Sindh Government has been given a long lease of five years to develop Thar coal. It has not happened. A new formula and arrangement is due under a new initiative. The new government should demonstrate leadership, initiative and creativity in this respect rather than exploring other options. It is in every body’s interest. Sense would prevail even in Sindh.