Between a rock and a hard place: Security, regulated pricing squeezing opportunities for gas sector

Gas sector facing rising costs and is unable to sell their product to the market at global prices.

KARACHI:

Pakistan’s energy industry – despite operating in a country with a large and rapidly expanding demand – has been struggling for two reasons: even as the deteriorating security situation in the country keeps raising their costs of new explorations, the government refuses to deregulate prices, forcing them to sell their product at below-market rates.

The country’s declining gas reserves, however, mean that the country is losing time and needs to take swift action if it is to prevent a severe crunch over the next five years, according to a study conducted by the Petroleum Institute of Pakistan, an industry lobbying group.

Pakistan’s current gas demand is met entirely through domestic production, which is currently 4,000 million cubic feet per day (mmcfd). This level has been stagnant for the last four years as new gas field discoveries have been scarce and the cost of exploration keeps rising, and has risen faster in Pakistan owing to the added burden of security.

The Petroleum Institute estimates that domestic production will decline to less than 1,000 mmcfd by 2026 as the existing fields are exhausted and the energy industry fails to find new ones to replace them.

While new fields such as Zamzama and Manzalai have come online, they are much smaller than some of the older fields, such as Sui and Qadirpur, which are now seeing their production levels decline.

On the demand side, the power sector is the single biggest user, consuming 1,000 mmcfd on average, or about a quarter of total production. Domestic consumers use between 300 and 400 mmcfd, though this number does not include the compressed natural gas used by many consumers in their cars and other modes of transportation. The CNG sector consumes around 300 mmcfd.

Gas pipelines in Pakistan also suffer from theft of between 300 and 500 mmcfd on average, of about 12.5% of total production, a ratio that is significantly lower than line losses in the power sector, but still high and rising.

The Petroleum Institute report recommends declaring natural gas theft a “non-bailable offence with a high penalty” to discourage the rising gas theft in country.

Yet the primary problem identified is not theft or rising demand, but pricing. Gas is the single cheapest fuel in Pakistan, which has resulted in gas now accounting for over half of the country’s energy needs. The price, however, is lower than global market rates and not high enough to justify investments by foreign companies who might otherwise be attracted to Pakistan as a marketplace.

The report recommends eliminating all cross-subsidies in gas pricing and making its similar to liquefied petroleum gas (LPG) and liquefied natural gas (LNG).

The lack of foreign investors is particularly debilitating in a sector that is reliant on increasingly sophisticated technology to extract hydrocarbons from fields that are getting smaller and more difficult to access.

“Without the assistance of foreign partners like investors, drillers and other experts’ local companies cannot swiftly improve exploration and production in country,” said Atif Zafar, an analyst at JS Global Capital, an investment bank. He added that the security situation in Balochistan puts far too large an area of the country off-limits to most oil and gas companies.

One of the options currently being explored by the government is importing gas from Iran, which will add about 750 mmcfd to the country’s supply. Nonetheless, analysts warn  that consumers must be prepared for the fact that this gas will be at least three times more expensive than domestic production costs, which will cause overall gas prices to rise.

“A lot demands upon government on how it deals with the current gas crisis,” said Farhan Bashir Khan, an analyst at Invest Capital, an investment bank.

Published in The Express Tribune, July 25^th,  2011.