SBP advises increasing wellhead price

Pakistan's central bank has flagged the risk of encountering circular debt in the imported gas sector and advised the government to withdraw cross subsidy in LNG pricing to avoid the situation.

Besides, it has advised the government to increase wellhead price to make exploiting shale oil and gas feasible and invite new local and foreign investment in the sector.

It also advised the government to ramp up reliance on clean and cheaper renewable energy (wind and solar power) to overcome energy shortfall amid sticking to its policy of increasing use of clean energy in the country.

“The government has to start passing on the impact of higher LNG prices to the consumers via an appropriate price pooling mechanism; otherwise, it risks the formation of a circular debt situation akin to the one prevailing in the electricity sector," State Bank of Pakistan (SBP) said in its second quarterly report on the state of Pakistan's economy for FY21 issued on Thursday.

The residential sector and fertiliser sector (for feedstock) are subsidised heavily at the cost of commercial and transport sectors, it said.

Given that the domestic consumption of natural gas is expected to increase sharply going forward, an increase in prices would help cut down extravagant household consumption, which would in turn help reallocate the cheaper fuel to the power and industrial sectors to decrease the cost of energy generation and increase the fuel’s usage in value-addition segments.

“The impact of subsidy rationalisation on the low-income quintile can be compensated via targeted cash transfers, which is a more efficient way of providing social protection," it suggested.

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In addition, the relevant authorities also need to develop a long-term strategy that, among other aspects, also focuses on expanding the indigenous reserves base of natural gas.

According to the US Energy Information Administration (EIA)'s 2013 Technically Recoverable Shale Oil and Shale Gas Resources report, Pakistan held sizeable shale gas reserves of 105 trillion cubic feet (Tcf).

Pakistan's Ministry of Energy (Petroleum Division) also completed a study in 2015 on the evaluation of shale oil and gas resources in the Lower Indus Basin and the Middle Indus Basin with the help of USAID. The results revealed that Pakistan's shale gas geological resources amounted to 95 Tcf recoverable reserves.

However, the exploration companies face many challenges in developing these resources because of complex geography, environmental constraints, and low natural gas prices in the country. "Thus, the country needs to develop preferential policies - increasing the wellhead prices to begin with – and conduct pilot projects as early as possible, to encourage domestic and foreign oil and gas companies to plan investments," SBP said.

Beyond gas, the government also needs to take an all-inclusive view of the energy mix in the country, given that renewables, especially solar, have appeared as low-cost and crucial alternatives in the midst of worsening climate change situation.

At present, the renewables’ share is only 4% in Pakistan’s installed power generation capacity and 2% in power generation. "However, the incentive to switch to these sources is significant."

According to the World Bank’s 2020 Global Photovoltaic Power Potential report, utilising just 0.071% of geographical area of Pakistan for solar photovoltaic (solarPV) power generation would be sufficient to meet the country’s current level of electricity demand.

Furthermore, bringing the share of renewable to at least 30% of the total generation during the next 20 years would also lead to a reduction of $0.002 for every kWh consumed in Pakistan, or around $5 billion (in today’s discounted terms).