Another winter of energy crisis

Pakistan may soon be facing its third successive winter of gas shortages and rationing. With depleting local gas reserves and our failure to procure sufficient quantity of liquefied natural gas (LNG), this winter promises to be no different from the previous ones unless we take urgent measures. This year, the problem might exacerbate further due to the prevailing high LNG prices in the international market. Last month, Pakistan imported two spot cargoes at $20 per MMBtu. This is the highest price paid by the country so far and it is more than double the price of country’s long-term contracts. For some of our tenders, there were no offers even at this inflated price.

While rising prices of gas may have many consequences, the increase in fuel prices hikes the cost of Pakistan’s energy production because almost two-thirds of our electricity is generated from fossil fuels. Recently, the government increased the electricity tariff by Rs1.68 per unit, or nearly 14%, to reduce the circular debt and meet the conditions laid down by the International Monetary Fund (IMF). The revision would lift the per unit cost to Rs24.33 for most domestic consumers which is almost double compared to the average per unit cost of generation at Rs12.96.

The availability and cost of LNG is just one factor in the worsening energy crunch. Another is the sharply rising international crude oil prices, which recently hit $86 a barrel or the highest in the last three years. As a result, the domestic price of gasoline rose by Rs10 per litre to an all-time high of Rs137. For Pakistan, high prices are more damaging compared to many other countries because we face a severe balance of payment problem. Our heavy reliance on the import of petroleum and LNG is one major reason behind this imbalance. In the first quarter of the current fiscal year, our oil import bill doubled to $4.59 billion (out of the total imports of $11.29 billion) from $2.32 billion during the corresponding period of the previous year.

In April 2020, when the prices of petroleum products had plunged to their lowest level ever, several experts advised the government to take advantage of the situation and consider the use of hedging against any future rise of prices. Heeding this advice, the Cabinet reportedly allowed hedging of prices of some portion of oil imports. Besides, it also constituted a high-level committee to select an appropriate strike price above the prevailing Brent. Unfortunately, the decision was not followed through. The failure could have stemmed for three basic reasons. First, the government had no previous experience of hedging its oil imports and there was no certainty as to who should lead the process. Secondly, there was a fear of accountability in case the prices stayed low in the foreseeable future. Finally, the decision could have been shelved because of the rapid turnover of decision makers at the petroleum and finance ministries.

An even bigger opportunity was lost for LNG contracts. According to several press reports, during the pandemic glut, Trafigura – one of the world’s largest independent LNG traders – had made a written offer to convert our existing contracts to a fixed price of about $4 per MMBtu and to supply additional LNG around this price for a three-year contract. Had the government accepted the offer, it would have been paying a fraction of what it is currently spending and saving billions in foreign exchange.

Those opportunities were lost but we need to learn from the experience. The government’s own energy companies, such as PSO and PLL, have the relevant expertise however they are severely handicapped with respect to taking decisions because of their experience with unfair process of accountability and massive government control in their boards.

It is therefore essential for the government to allow its energy companies to run their operations independently and without any fear of being held accountable for any decisions taken in good faith. In the earlier successful era of industrialisation, government-run corporations such as PIDC or PICIC played a role in establishing industries in areas where the private sector was reluctant to enter. After the initial phases, such companies were sold to the private sector. The government needs to follow the same success formula. If it does not want to go that far, it should free its commercial enterprises from the high bureaucratic interference. To remove a significant bottleneck in decision-making, the government should also consider giving these companies the same protection against accountability as it has recently granted to financial institutions through amendments in the NAB ordinance.

The author has served as Pakistan’s ambassador to WTO and as FAO’s representative to the United Nations at Geneva.

Published in The Express Tribune, October 25^th, 2021.

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