Managing the natural gas crisis

The dual menace of power and gas shortage is a serious issue that has caused much damage to the national economy and is likely to damage more, if the right decision and actions are not taken speedily. In this brief, we would like to explore the gas crisis and offer some suggestions in this respect.

The gas crisis has the following dimensions which we would take one by one:

1)Falling local production and lack of reasonable effort in exploring new resources, compounded by poor law and order situation in Balochistan.

2) Gas import projects of LNG and IP, and the problems thereof; high prices of imported gas

3) Gas pricing and tariff issues

4) Gas uses and the required diversification into other sources such as coal gasification, biogas etc.

5) Conservation and efficiency issues

6) Priorities setting under gas shortages; the case of CNG and fertiliser plants

7) Performance of Gas companies and its reorganisation or privatisation; market forces and competition into the sector

Let us first deal with the case of CNG. There is one strong argument in favour of CNG and that is of its environmental friendliness as compared to petrol and specially diesel, the latter two being more polluting. An Indian High Court has ordered the Delhi city authorities to run buses on CNG, as pollution had become intolerable due to diesel buses. Many European cities are planning to switch the commercial vehicles to CNG even to Bio-CNG, the reason being environment. European car drivers though still are skeptic of carrying a high pressure (200 bar) CNG cylinder in their vehicle and are loathe to switch over despite environmental and monetary advantage.

CNG consumption has been increasing at a phenomenal rate under highly attractive CNG prices. People and even knowledgeable circles like CNG and industry associations want not only gas but cheap also. They are not willing to pay the real opportunity cost. CNG association wants to maintain a sizeable difference in the prices of CNG and petrol and diesel. Today, CNG sells at Rs 65 per kg and petrol/diesel at around Rs 101 per litre. One kg of gas is equivalent to 1.3 litre of diesel. Common people take 1 Liter of diesel or petrol to be the same as 1 kg of gas, which obviously is not correct. This means that even if there is no difference in apparent prices of gas and diesel/petrol, there is a 30% price advantage. A 25% margin of difference translates into a real margin of 55 %.The long lines of CNG indicate that there is too much of a price differential. There used to be an unofficial fee for Ogra licence of Rs 1-2 crore, as Tauqir Sadiq absconds. There are still pending license cases, despite a negative horizon for CNG at least apparently. There is a strong case for pruning it down.

As suggested by some, LPG may not be able to compete in the market in the automotive sector. In real terms, there is no price advantage in LPG vis-à-vis petrol. LPG competes with petrol in markets where taxation on petrol is high such as in Europe and even in India. In Pakistan, petrol taxation is milder than in many jurisdictions where LPG has prospered under reduced taxation. Thus LPG is expected to be limited to domestic and commercial sectors’ requirements, especially in the Northern Areas where gas network is not there.

CNG sector has a huge footprint in Pakistan’s transport sector, if not the whole economy; there are addicted and needy consumers, public transport owners and employees, and CNG pump owners and their employees. This together makes a sizeable stakeholder which any government cannot wipe off summarily. Its discouragement would have to be phased and gradual. Among the knowledgeable, there is almost a consensus that to say the least CNG future is not bright. CNG stakeholders should start withdrawing from their commitment and investment in a planned manner. I had CNG in my last car. In my new car I did not install CNG, believing that its life was limited. It has survived more than I initially believed it would. Unless something drastic happens in the gas supply scenario which is highly unlikely, CNG would face rationing to a disproportionate level, increased gas tariff, reducing margins and ultimate phase out totally or limited to a drastically reduced role. This would be my recommendation as well.

There is a shortfall of gas to the extent of 2 BCFPD. Our current gas production capacity is around 4 billion BCFPD, which is projected to go down by the year and would be halved in the next ten years. They want to add another 4 BCFTPD through LNG, IP and TAPI projects .In the end, the net capacity would stagnate at 6 BCFPD due to decrease in local production by 2 BCFP. The demand has been projected to be 8 BCFPD for the year 2020 .Thus the gap and crisis would persist despite LNG and IP, although, one can expect more of the same from the same sources. Iran’s gas resources are going to be there for a long time, if the US keeps restraining their gas exports. So for gas, both prices and supplies are difficult issues at best.

I grew up as a child hearing that our Sui gas resources (there was no gas source other than Sui and the late Akbar Bugti, then young Bugti, used to drive flashy sports cars in Quetta, as per the account narrated in the late General Shujaat’s book) would last for a century. Then only a few years earlier, our Planning Commission was planning for a whole 80,000 MW of electrical power coming from gas. After that kind of planning, Raja Pervez Ashraf and the Pepco/Wapda bosses attempted to go for the infamous Rental Power, to run on fuel oil. Today, 1000 MW of existing IPPs running on oil are reportedly unutilised because of lack of cash and circular debt issues. The PPP spent a lot of money in election campaign castigating PML (N) in their media advertisements that Shaheed Benazir Bhutto wanted to install 24000 MW, but Nawaz Sharif and the famous unknown forces opposed it. The common theme in all this is that there has been little realisation that there is a shortage of primary energy sources and whatever is there has not been developed. Hydro resources kept suffering under Kalabagh controversy, only lately has there been a consensus of sorts to go ahead with other hydro projects, thanks to the national (Pakistan Khappe) politics of the PPP.

Serious efforts in local exploration of more gas, if not for oil, have been lacking most of the time. The kind of scandals and inefficiency, OGDC has been allowed to suffer indicates the poor realisation, that there has been a shortage of primary resources. There is a potential of 282 TCF of gas resources (as per Planning Commission’s presentation), six times the gas resource that were discovered originally. True, that the law and order situation has been bad in Balochistan. Outside OECD countries, most source regions of raw materials suffer from law and order situation. Hopefully, if the government of PML-N is able to bring about a political solution in Balochistan, this excuse would go away. In addition to conventional gas, there are tight gas, Shale and CBM (in Thar). The last PPP government did bring out some policy on tight gas, but nothing seems to have happened. The promise of cheap and abundant gas is too much to be taken lightly or forgotten or soft-pedalled. Both local and as well as foreign companies are to be inducted and facilitated for gas exploration activity in all potential areas. Our proposal of direct marketing by gas producers to large consumers may provide incentive enough to gas companies to risk their investments in our gas fields.

Recent LNG tenders have returned with offered prices around 17-18 USD per million Btu (MBtu). IP gas project offers the same prices as well. At current 110 USD per barrel oil prices, the Iranian formula of 76% of the price of oil plus transmission project costs would come out at 18 USD as well. By comparison, oil prices are at around 20 USD per MBtu. Currently, our local prices to utilities are at around4-5 USD per MBtu, resulting in electricity generation price of Rs 4-5. With Iran gas or LNG, the unit cost of electricity would be Rs 14.00 per kWh. But we do not have option in the short-term, although in medium term, we have other choices. Both the projects are in doldrums. LNG project due to the upfront financial commitment of 25 billion USD suffers from rivalries and legal difficulties. Iran project is opposed by Americans, tooth and nails. PPP government could muster the courage of symbolic inauguration only in its last days, knowing well that the music will be faced by the new government.

It appears that international gas market in a state of transition. It is difficult for me and many others to accept a price of 18 USD per MBtu for South Asia, while in Europe LNG prices (landed) are around 8-10 USD. There is such a glut of gas in the US, that gas prices are the lowest in American history. Americans currently are vacillating between thoughts of keeping the bounty unto themselves or exporting to Europe boosting the latter’s energy security and giving tough time to Russian gas of which there is a kind of monopoly. There have been proposals of arbitrage including by this scribe of which chapter is not to be closed yet. If the US is opposing IP-Iran pipeline project, at the expense of appearing naive, I would urge that the US must do something for the regional LNG market making it more reasonable. Private sector should show its efficiency in this respect. The now-redundant LNG re-gasification plants may be shifted to Pakistan in a JV arrangement along with its LNG supply arrangements from North Africa.

One has to ponder over as to what would happen when imported expensive gas, LNG or Iran Gas, makes its way into our pipelines at prices between three to four times of the existing rates. Gas would be at the price of oil. Today, you shutdown your power plants because oil is expensive, tomorrow you will be shutting power plants and almost everything else because gas would be expensive. There could be a case for expensive imported gas, however, if it is put to high efficiency use, where 50% or more of its energy content is extracted and usefully utilised, eg cogeneration, tri-generation and combined cycle power plants. Giving it away to Fertiliser plants at near zero prices or to inefficient boilers and furnaces wasting energy and demanding lower gas tariffs should not be permitted. As to the CNG, in that kind of price environment, CNG would die its own death. One did not have to make an extra effort to close down or discourage CNG. LNG projects would have done it ultimately.

Energy planning both by the government and the private sector should be done on the assumption of short term price of 120 USD per barrel of oil and 150 USD in the long run. Indexing of any energy commodity with oil is going to be a losing game for the buyers. Presently both LNG sellers and pipeline gas sellers insist on indexation with oil and that at 80-90%. This is unsustainable. Precious years have been lost trying to get hold of imported gas, be it LNG or otherwise. Affordable gas and electricity can come out of hydro and Thar only; and if Allah is kind and conditions improve in Balochistan, cheaper local gas resources can be developed. Only then CNG can continue although at a lower price differential.

Let the target be 10 BCFPD for 10 USD per MBtu. Local gas exploration would get a boost under this policy, after all you are prepared to give 18 USD per Mbtu to the imported gas.10 USD is the right price of gas, be it imported or local. It would be 50% of the Oil price. This is what prevails in gas scarce Europe. Ultimately, we should be able to bring our Iranian brothers to this price level. Islam promotes fairness and not exploiting somebody in need, a lesson Iranian government needs to be given by some preacher.

Astonishingly, both industrialists and the CNG sector are not investigating for other alternatives. All they are looking forward is purchase of expensive energy by government, its dilution in the total mix and the eventual subsidy and an unfair tariff in their own sector’s favour. Media support is garnered through expensive advertisements through this end. This is naïve and short-sighted being continued for long and no more sustainable. The hour of truth has arrived. Energy professionals and managers dealing in energy efficiency and conservation projects often complain that industry does not take interest in saving energy and continues wasting in inefficient devices and machinery. Heat losses are not prevented and put to good use. Hardly any interest is shown in cogeneration, when the world is talking of tri-generation trying to extract 80-90% out of any thermal resource. We currently are at the level of 30-35% generally except for combined cycle power plants where this number goes to 40-45%. Gas companies imposed a condition of using cogeneration in awarding permission to install gas generators. Compliance remains only on paper while the gas inspectors are entertained suitably. So every body wants cheap gas and energy and ends up wasting it. The IMF and the World Bank are abused when they argue for increase in tariff, terming them enemies of Islam and Muslims. Exploiting cheap labour and energy seems to be the motto all around. What happened in the Baldia garment factory is not unrelated. It is a continuation of the same theme and attitude. Yet the change has to come from within. The nation is looking for leadership which has yet to emerge. May be it does in the upcoming electoral process.

There are alternatives that need to be investigated by government and its ministries, gas distribution companies like SSGC and SNGPL, CNG and industrial users. We have in this space discussed Biogas alternatives in detail. In order to achieve diversity and energy security, Europe is trying to have 20% of gas supplies coming from bio sources, although the US is lukewarm in this respect as it has a gas glut these days which may continue for quite a while. We have both price and energy security imperatives. The Biogas issue should be examined beyond the small biogas schemes being currently pursued at a very low tempo. While the scale of effort, resources and targets ought to be increased many times, there is a need to consider large biogas seriously for distributed generation, bio-CNG and even for injection to gas grid.

Our estimates show that the biogas potential in Pakistan is as much as the current annual production. Because it is widely distributed, its potential may be best developed at the point of tri-generation. However, there are many point sources where large-scale biogas can be generated at one location. The most ready example is of Landhi’s Cattle Colony, where a 20 MW power project of Biogas has been formulated. Lately, KESC and IMF involvement has given the project more credibility. Biogas would be produced from gober slurry, blood and offal and bio-waste of all sorts. There could be several large project of this size elsewhere in the country. There is food industry, dairy farms, vegetable and fruit waste at mandis, solid waste, agro waste etc. Biogas need not be a monopoly of electric power producers. Gas companies can and should also enter in this arena of biogas. In fact, they ought to be the primary players. Biogas can be upgraded to pipeline quality gas. I am not dreaming or talking theory. It is already being done in Europe and there are big targets about it for 2020 and beyond. European targets should not be taken as lightly as we take ours. They take it seriously. Similarly, there are bio-CNG projects. Electricity sector may have other cheaper options like hydro and Thar. Gas sector’s alternatives are LNG and Iran gas which have not only been problematic but are too expensive to afford. A biogas alternative, cheaper and securer, to LNG and even Iran gas is certainly there. Although I would neither oppose LNG nor Iran gas as short term alternatives which can be brought on line the fastest, all eggs should not be put in the basket of these projects, as there are uncertainties in both the cases. I would encourage the LNG promoters to also start developing these projects as extra business. Also novel methods may be investigated for gas distribution like promoting micro gas grids for local purposes and Plastic sacks for holding low pressure biogas for rural areas. Syngas from Thar coal is a serious option for mega resource which ought to be pursued rigorously.

Also, coal gasification has to be pursued, whether above-ground or underground. However, the project must be retrieved from a personalised approach and strategy and should be structured and organised in a befitting manner. Similarly, all fertiliser production would have to switch to coal (Thar). It would take 5-7 years to do that, earlier the better. It is not an empty thought .It is technically and economically feasible. All alternatives are feasible compared to the scary price of 18 USD for imported gas.

Reform is due in gas tariff system. It would be unfair to blame Ogra in this respect. Ogra is not a supra government agency, it works under the policies of government and has to implement the latter. Ogra at best is only slightly more than a calculator. So much so that the formula can be computerised and prices calculated automatically and posted on websites. And because, fuel is a multi-sector and multi-ministerial issue, it is rightly being handled at ECC level. There is a general mantra, which has been pursued by the IMF and the World Bank experts, of having a uniform gas and electricity tariff irrespective of the sector or user category. There is only a partial merit to this. In a theoretical setting, price dictates resource allocation and thus has to be left independent to optimise resource allocation. Practically no government has accepted it any where. There are separate tariff for industrial and household customers and differentiation is made between small and large consumer. Industry and large customers are charged lower tariff and households are charged at higher tariff. For socio-economic reasons, we cannot possibly do that. However, gas to fertiliser sector is charged so low that it is close to nil. It’s free to them almost literally. The argument is to contain the agricultural and food prices, fertiliser being an important input. There are other ways to achieve this in the form of higher support prices. The current practice robs the gas sector of its legitimate revenue and creates many distortions. It also promotes undesirable practices in the fertiliser producing sector as well.

Some element of market, competition and consumer choice has to be brought in the gas sector as well. The existing one or two buyers model has to be modified and price control lifted for large consumers. A gas producer should be able to directly sell to large consumers at mutually negotiated prices, outside Ogra tariff framework. The transmission and distribution companies are to be paid their service charges, called wheeling charge. Under this scheme of things, the pressure of upward revision of gas prices may be relieved from government. A local gas producer or a gas importer may be able to arrive at a short or long term deal on the scope and prices of supply. A lot of bureaucracy and processes may be eliminated from the business and local gas exploration and production would be facilitated and encouraged. A policy should be made in this respect along with the determination of T&D upfront tariff.

Instead of considering protracted and controversial privatisation, consideration may be given to dividing and reorganising the gas companies; merger of the transmission function of the two gas companies (or without merger) and establishing smaller distribution companies at divisional level. About eight to ten gas distribution companies may be brought about. For all large companies providing public goods and services, a two-board system ala-Europe should be introduced.

Put together, these measures of marketising, wheeling charge and smaller companies and the supervisory board system may bring about the same or better level of service and efficiency as may be expected out of privatisation. Eventually, it may be easier to privatise smaller companies in a gradual and orderly manner. Talk of privatisation creates unnecessary uncertainty and paralyses decision making. Fast-track privatisation becomes controversial and brings forth ineligible and unsound parties.

But what to do immediately to let housewives cook their family meal. The people in Karachi do not have a realisation as to how grave the situation is in Punjab where there is a double menace of electricity and gas load shedding. Ironically, highest CNG concentration is also in Punjab. In the following, we summarise our conclusions and recommendations for the gas sector: Increase CNG price to around Rs 80/- per kg and accordingly increase the CNG pumps tariff.

—- Immediate ban on CNG use for private cars of more than 800 cc, which is easiest to implement. Ban has already been imposed, but has to be broadened to include vehicles larger than 800 cc.

—- Ban on CPP generators who are violating cogeneration requirements and issuance of notices for conversion to cogeneration; independent audit of their energy use be instituted.

—- Award CNG the lowest priority in gas management plan and first priority to household

—- Combined Cycle Power plants to get the second highest priority. Single-cycle gas turbines to be permanently shut off, if this has not been done already. Speed up the coal conversion projects.

—- Second last priority to Fertiliser sector, as fertiliser imports are possible to substitute local production; a notice of five years should be given to Fertiliser sector to switch to coal.

—- Examine the feasibility of gas storage in depleted gas fields. This may assist in load management and don’t make billion dollar projects out of it.

—- Renegotiate IP gas prices to a reasonable level of 65% of oil prices or 10 USD per MMBtu which is the usual price in Europe.

—- Lure cheaper American LNG (shifting the redundant LNG re-gasification plants with its LNG arrangements in arbitrage) in as a bargain, if IP gas pipeline is opposed.

—- Issue notices to Fertiliser plants to switch to Thar coal in a maximum of five years. Fertiliser industries diversification to Low Btu gas is a step in the right direction.

—- Reorganise Gas companies and open up the gas sector, creating a market outside the regulated framework for large consumers.

Finally, let me conclude at an amusing yet ironic note after having elaborated a dry narrative. After Judiciary, now NAB has started taking notice of the energy situation and the chairman NAB has recently opined on such technical issues as CPP. It would be high time for the relevant departments to take steps in the right direction before SHOs start taking interest in it. Earlier Ogra had started playing politics with petroleum prices. The earlier Secretary (Water and Power) started visiting homes of the aggrieved consumers like constituency politicians instead of trying to put her department in order – a department which suffers from a myriad of problems. May Allah save our homeland and its patient and innocent people!