The gas fix

Low gas pricing has made us accustomed to view gas as cheap, abundant fuel, while it’s a precious, scarce resource.

It’s never pretty watching an addict in the throes of withdrawal. But it’s something else to watch an entire society go through intense withdrawal together.

For about 15 years now, Pakistan has been addicted to natural gas. I don’t invoke the metaphor of addiction lightly — it is in fact the single best metaphor to describe the manner in which we have consumed this most precious natural endowment of ours.

Over the past 15 years, our consumption of what is called ‘primary energy’ has increased by 80 per cent, an increase sharper than the previous two decades combined. Primary energy basically refers to raw fuel, before it has been processed or transformed into electricity or fertilizer or any other finished form of energy.

The single largest source of our primary energy is indigenous natural gas, accounting for a little less than half of our total primary energy consumption. And over the past 15 years, we have been extracting and consuming our endowment of natural gas at an alarming rate.

Fuelling this spike in consumption is the way we price our gas. The Petroleum Institute of Pakistan, in its latest annual report says that “a low gas price has become a significant disincentive in attracting new gas supplies, either through increased domestic exploration activities or via imports of liquefied natural gas (LNG) or regional gas pipeline imports”.

The meaning is simple: nobody wants to invest in exploration or imports if the price at which the gas is sold is far below the world market price. The only other way to encourage someone to make the investment, therefore, is for the government to offer a ‘subsidy’ on the final price, offering to pay the difference from government funds. But nobody has faith that our government will be able to meet these obligations, especially since the circular debt is a living example of non-payment before us all.

The net result of this low price is that we’ve become accustomed to seeing gas as a cheap and abundant fuel, whereas in reality it’s a precious and scarce resource.

Another result of this artificially low price is the unseemly manner in which we have been relying on cheap gas to fill the gaps where our economy has failed to deliver. If gas was perceived as a precious resource, we would have been more judicious in how we utilised it. It was a smart move to use gas to produce fertilizer to fuel our agriculture. It was a remarkably stupid decision to use it as a vehicular fuel, expecting cheap gas to compensate for our failure to arrange urban mass transit. It was equally stupid to encourage industry to move into captive power generation using cheap gas as a way to make up for our failure to arrange power generation capacity for the growth rates of mid-decade. Need I mention that both of these stupidities were gifts of the Musharraf regime?

If the present state of affairs continues, our production of natural gas will decline sharply over the next decade. Again, the Petroleum Institute estimates that our production of natural gas will be a quarter of what it is today in about 15 years if we don’t act quickly to arrange alternate supplies.

For perspective, consider this: our shortfall in gas supply today is about one billion units per day. Look around you and see what this means in reality. In about 15 years this shortfall will hit eight billion units a day. Now imagine where that puts you. And please consider that 15 years will fly by very quickly indeed, especially if present levels of excitement keep up.

The agitations in the streets, the strikes, the bitter wrangling between the industrial sectors — fertilizer versus textiles versus vehicular — all speak of a terrible addiction that we have developed to cheap natural gas piped directly to the point of consumption. The agitated and paralysed state of affairs that grows out of all this is a microcosm of what happens inside the body of the addict as it yearns for its next fix.

All paths out of this state of affairs begin with a hike in the price of natural gas. There is no alternative. This bears repeating over and over again and the government must find a way to get this message across to the society, just like an addict has to realise that the time has come to kick the habit or let it kill you. Otherwise a terrible and inevitable sequence of events gets underway.

If we fail to embark on pricing reform of natural gas, we will fail to arrange additional supplies. If we fail to arrange additional supplies, we will be left chasing mirages and myths such as the Iran Pakistan pipeline, or Thar coal, the massive hydel projects dreamed up by Wapda, or offshore gas or mythical reserves that are believed to be lying undiscovered in Balochistan or Kohat or wherever.

All those are viable ideas, for sure, but they either have such huge financial requirements as to require outside support, or they require so much more exploratory work before they can be considered viable alternatives, that it will be over a decade before we can even start working on them. They are very long-term projects at best.

The question is what to do in the meantime. The only medium-term alternative that is at all viable is imports of Liquiefied Natural Gas (LNG). This gas can start to flow 18 months from financial close. In the meantime, infrastructure already exists to import LPG, which can be easily adapted to handle LNG instead.

But here it is hard to figure out what the government is really doing. Contrary to popular perception, the Supreme Court never killed the original LNG deal involving Mashal — the law ministry did. That project could have been up and running by now, bringing the shortfall under control.

It’s not fair to blame this government entirely for the gas shortfalls. This is a situation more than a decade in the making. But we are entitled to wonder why no credible and strenuous efforts have been made by the government to mitigate the crisis thus far.

Published in The Express Tribune, January 5^th, 2012.