111 510 510 libonline@riphah.edu.pk Contact

The FO ‘imbroglio’

LNG has become expensive exceeding USD 15.0/mmBtu and price scenario remains uncertain for the coming winter. Furnace Oil (FO), which was almost replaced by LNG, has become cheaper and seems to be emerging once again. Will LNG-FO price ratio remain to the disadvantage of LNG for a long time? There is confusion now whether FO-based power plants should be shut down or not as opposed to a consensus earlier for its closure? What are the other fuel alternatives? What is the future of combined cycle power plants?

LNG was introduced in Pakistan for two reasons: (i) Local gas fields are depleting and local chapter gas production has been going down; and (ii) HSFO has been expensive (by 20% on the average) than LNG and HSFO power plants were much less efficient than combined cycle power plants running on gas/RLNG. Highest efficiency of new oil-fired power plants has been quoted at 40%.Older oil-fired power plants such as GENCOs and KE are even less efficient (28-30%). A decision has been made by Power Division and power regulator Nepra to close down such plants. However, this could not happen initially for demand reasons and later due to transmission constraints. Nepra has been reprimanding NTDC, CPPA-G and PCC for repeating the usage of oil plants but they have continued it. Hubco has been on the agenda for a long time now about which we will discuss later in this space.

HSFO is a co-product of a number of oil refineries in Pakistan, although most of the oil refineries are switching to deep conversion which eliminates/converts production of HSFO. HSFO was used to be imported as well due to a high share (40%). Import of HSFO is no more. However, HSFO continues to be produced some of which continues to be used in continued running of oil power plants. There has been an installed capacity of 7500 MW of oil plants out of which 1500 GW has been used irregularly on the need basis.

It appeared earlier that finally the time of these plants is over. However, recent price increase of LNG has made oil plants and HSFO relevant again. SPOT LNG prices have been quite low for the last three years going down even to 2 -3 USD/mmBtu level, albeit briefly. Average RLNG prices including about 2 USD overheads remained at 8-10 USD. In winters, however, LNG prices did touch the 15 USD/mmBtu mark. This time, LNG prices crossed the 15 USD mark even in summer. It is being projected that winter prices may even be higher.

All commodity prices are at high prices these days. This is the classical capitalist cycle. Low demand pushes the prices lower than even cost which discourage investments in capacity which when demand increases pushes the prices due to lower capacity and supply. This is a 5-7 years cycle usually, unless there is change in technology as has happened in the case of Shale gas in the US.

Recently, the price of HSFO remained at 10 USD/mmBtu while LNG price crossed the 15 USD/mmBtu mark. The price difference has come down but still HSFO remains cheaper.

In winters, residential sector’s demand increases to 2.5 times the summer demand in the SNGPL region. Thus it appears that in the coming winter, oil power plants could emerge as viable and needed ones.

The PPA contract of Hubco oil-fired plant (1200MW) is expiring in 2027. Due to higher oil prices, Hubco hardly runs at more than 1%. CPPA-G will pay an estimated Rs 260 billion in terms of fixed capacity charges. The present value of these future payments comes out to be Rs 65 billion. The government is said to have been proposed to buy out this plant. There has been a proposal made by Hubco to convert the oil-fired power plant to Thar coal which also involves some valuation of the present value of the future series of payments. The problem has many dimensions. Firstly, the government is not flush with cash so as to retire future liabilities earlier. Secondly, there is an excess capacity. Thirdly, even newly-built combined cycle power plants are projected to be almost redundant due to high LNG prices and due to the induction of relatively cheaper base load power plants like coal and nuclear. Fourthly, there are Genco FO power plants which are of low efficiency and are on ‘Take or Pay’. Shouldn’t such GENCO plants be the candidates for buy-out by government as also emphasized by Nepra? Fifthly, there are ten other oil-fired power plants which are producing electricity regularly, although at a lower load factor. What is wrong with Hubco? Why isn’t it working like others? If it has some problems, why should the government bail it out through public funds? Why to have a specific treatment for one power plant?

It may be noted that it was only recently that Nepra had to extend PPAs of two oil power plants—Gul Ahmad and Tapal—with a combined generation capacity of about 300MW, while the PPAs of the two plants were expired. Now KE will be importing LNG (probably more expensive than HSFO) for a new LNG power plant of 550MW. Capacity payment of Rs 240 billion will have to be made by the government for an under-utilized Hubco! Separation of generation, transmission and distribution has been on the cards for a very long time.

In passing, it must be mentioned here that Thar coal’s fate has been compromised by those who manipulated its tariff to a very high level. Its production cost elsewhere is 20-25 USD/t at the comparable mine characteristics. It has not required elsewhere scale economy argument to be able to mine and sell at a reasonable price. Small mines in Eastern Europe are producing at afore-mentioned cost, while Thar coal’s cost is more than double. Fortunately, Thar coal board has become alive to this and has taken steps to reduce these costs. There are other investigations that are purportedly going on in this respect. International opinion against coal is building fast. Only a reasonable Thar coal price may compensate the externalities that may come to be imposed. Furthermore, Railway link for transporting Thar coal has been put into jeopardy by ambitious businessmen who are asking a subsidy in CAPEX for installing this link. The simpler solution would have been to give it to Pakistan Railways under a normal tariff system and financed under the Public Sector Development Plan (PSDP).

For high demand and price reason of gas/LNG in winters, alternate solutions may have to be found out. Combined cycle power plants can be run on Naphtha and as well as condensate. These are currently being exported. There are logistical problems in its exports as well. If these two fuels are stored for winter period, LNG problem can be partly resolved for winter season. We have earlier written a full length article (RLNG: no panacea) in this regard. The reader is referred to it in case of interest. Biogas, bio-CNG and coal gasification can improve gas supplies and stabilize prices, reducing the impact of uncertain LNG prices.

(The writer is former Member Energy, Planning Commission and author

of several books on the energy sector)

Syed Akhtar Ali, "The FO ‘imbroglio’," Business Recorder. 2021-08-21.
Keywords: Social sciences , Furnace oil , Energy sector , Power plants , Pakistan , LNG , NTDC , HSFO , PCC , RLNG , PSDP

Leave a Reply

Your email address will not be published. Required fields are marked *