Cracks in the pipeline: why Pakistan’s energy sector is in turmoil?
The energy landscape in Pakistan has long been troubled by inconsistencies and short-term policies motivated primarily by political objectives. The result of this short-sighted approach is not just a threat to the country’s energy security but also endangers its overall economic stability. These fleeting strategies and policy inconsistencies have left the energy sector vulnerable, directly impacting the wider economic well-being of the nation.
While indigenous gas has historically been a crucial energy source, its reserves are dwindling due to policy inconsistencies, regulatory issues, security concerns, and political challenges. Meanwhile, bureaucratic obstacles and poor indicators related to the ease of doing business have further hampered the energy sector in Pakistan.
The country has transitioned into a net importer of fuels, notably embracing LNG imports since 2015 when the ruling party at the time, Pakistan Muslim League-Nawaz, shifted its focus in that direction. Its rival and successor in government, the Pakistan Tehreek-e-Insaf, has consistently accused the PML-N of not awarding any exploration blocks during its time in power. The party, instead, pivoted towards LNG, prioritising terminals and entering long-term contracts with Qatar and other traders, such as Eni and Gunvor.
A recent report by Bloomberg underscored the unintended but devastating impact LNG reliance had on Pakistan’s energy crisis and subsequently its current economic predicament. Facing a surge in global energy prices due to geopolitical tensions, Gunvor and Eni cancelled LNG deals with Pakistan and redirected the shipments to more profitable markets, causing severe shortages in the country. This crisis, in turn, led to factory closures, job losses, and economic hardships, pushing the country close to default.
Struggling with mismanaged economy and subsidies, Pakistan faced further challenges as it tried to secure replacement LNG at much higher prices, depleting its foreign reserves. The cancelled deliveries and subsequent effects exposed the vulnerability that left Pakistan in a dire energy situation with no immediate solutions.
But are there lessons to learn from this harsh episode? As exploitative as the actions of foreign traders were, could the country’s leadership have done more to secure its energy needs?
Inconsistencies in policies
Policies in the petroleum sector have been plagued by uncertainty, leading to a halt in oil and gas exploration activities. The Qadirpur gas field stood as a significant discovery before 2000. However, the implementation of the petroleum policy in 2001, specifically its decision to cap gas prices, resulted in a standstill in exploration efforts.
This particular policy, aimed at price capping, was notably detrimental, causing a cessation in exploration activities across the country. Despite the government awarding 84 contracts at lower prices, only two discoveries were made, largely due to gas prices plummeting to as low as $2.80 per MMBtu.
Subsequently, the government proposed converting 77 of these contracts to the 2011 policy, offering a rate of $6 per MMBtu. Later iterations of petroleum policies in 2009 and 2012 also set the gas price at $6 per MMBtu.
However, since 2000, there hasn't been a significant gas discovery. Instead, gas reserves have continued to deplete by approximately nine per cent annually. Up until that time, gas production has remained below four billion cubic feet per day (bcfd).
Bureaucratic hurdles
The bureaucracy's handling of exploration companies has been unsatisfactory. The Director General Petroleum Concession within the Petroleum Division acts as a regulator for these companies. However, this regulator has failed to offer a streamlined process, such as a one-window operation, to address the concerns and issues faced by exploration companies.
Due to difficulties encountered in navigating bureaucracy and inconsistencies in policies, numerous foreign companies, including British Petroleum, opted to exit operations in Pakistan.
Recently, Pakistan’s caretaker government initiated bids for awarding licenses to exploration companies. Surprisingly, not a single foreign company participated in these bids. Instead, only local companies, primarily state-owned entities, took part and secured blocks.
Political waste
Political agendas have heavily influenced gas sector policies, leading to a concerning trend. While the country's gas reserves continue to deplete, successive governments have consistently initiated gas schemes in constituencies of influential politicians.
Gas utilities are obligated, under licensing conditions, to provide gas to existing consumers. Despite an ongoing shortage, the oil and gas regulatory authority (Ogra) permits these utilities to launch new gas schemes.
Compounding the issue, gas prices are tied to a guaranteed rate of return on assets. Consequently, as gas utilities expand their pipeline infrastructure, gas prices rise. This exacerbates the gas shortage by integrating more consumers into the network.
Flawed gas supply policies
The government's gas supply policy prioritises the domestic sector in its merit policy order, something that is not followed in other countries. Pakistan boasts an extensive pipeline network specifically geared toward supplying gas to domestic consumers.
In a contrasting setup, domestic gas prices are lower while industrial prices are higher. This differs from Bangladesh, where industrial consumers pay less for gas compared to domestic users. Reports indicate that Bangladeshi industry has outperformed Chinese exports in the US market due to this difference in pricing.
Pakistan's situation is the opposite, with cheaper gas for domestic users and higher prices for industries. There's a missed opportunity in utilising indigenous gas for power generation, which could significantly lower electricity costs. Currently, the highest share of gas goes to the domestic sector, causing electricity prices to soar while denying supplies to power plants.
Today, 70 per cent of consumers are retail consumers, compared to 30 per cent bulk consumers. Decades ago, this ratio was inverted, with retail consumers at 30 per cent and bulk consumers at 70 per cent.
This policy has led to gas wastage and has severely impacted industrial growth. Recently, the All Pakistan Textile Mills Association (APTMA) raised concerns about the soaring electricity prices, particularly affecting the textile industry—a key sector driving a significant portion of the country's exports.
LNG imports
Currently, Pakistan relies primarily on LNG imports to alleviate its gas crisis. The country has inked LNG deals with Qatar, pegged at up to 13.7 per cent of the Brent price. Additionally, contracts with foreign entities Eni and Gunvor were established. Legal disputes arose over increased shipping charges, leading to these companies diverting LNG cargoes meant for Pakistan to other nations to fetch higher prices. Penalties were paid for breaching these contracts.
Despite possessing two LNG terminals, the country has only been able to import around 12 LNG cargoes monthly due to the second terminal's underutilisation, mainly caused by LNG unavailability. Pakistan LNG Limited (PLL), a state-owned entity, attempted long-term contracts but was unsuccessful. The private sector sought to import LNG, but state-owned companies obstructed their efforts to maintain a monopoly.
While the LNG terminal capacity remains untapped, inefficiencies in state-owned firms have led consumers to foot the bill through capacity payments worth millions of dollars—an unfortunate cost of these companies' inefficacies.
Pipeline woes
European nations secured their energy via agreements with Russia, despite opposition from the US. Pakistan, too, has commercial deals with Iran and Turkmenistan. However, Iran's gas supply agreement with Pakistan faced obstacles due to opposition from Saudi Arabia and the US. Recent normalisation between Saudi Arabia and Iran could pave the way for executing the IP gas pipeline project.
With the Taliban in control in Afghanistan, there have been assurances that they will not disrupt the TAPI gas pipeline project. LNG, while in use, remains susceptible to supply disruptions in case of maritime panic or blockades.
To ensure energy security, Pakistan should explore mega pipelines as an option. Additionally, the government ought to halt gas schemes in villages, redirecting gas supply to industry and the power sector. Encouraging the use of LPG and offering subsidies for cheaper gas could be beneficial. Otherwise, there's a risk of all pipelines becoming obsolete as indigenous gas reserves dry up.