Steps to calm the gathering storm

Why the country needs to control unnecessary imports — and fast.

The country has faced an acute energy crisis over the last three years. Be it a supply gap in electricity generation resulting in prolonged outages, a demand surge because of unplanned growth in gas consumption or inter-corporate debt in the energy sector, we have seen it all.

On top of that the fuel logistics sector is under a cloud due to attacks on supplies to Afghanistan. In one way or the other, numerous problems have been faced by ordinary citizens and businesses. Even the government has not been spared.

Though there is immense pressure for immediate plugging of the demand-supply gap, a number of steps need to be taken by the government in order avert the inevitable storm in the energy sector.

First, the government needs to lobby with oil and gas companies and encourage them to intensify their exploration activities – there are about 15 exploration and production companies operating in Pakistan at present.

The reserves of oil and natural gas at the beginning of the current year were estimated at 303.63 million barrels and 28.33 trillion cubic feet, respectively. Oil and gas production during fiscal 2010 changed by negative 1.9 per cent and 1.56 per cent, respectively. The way our energy requirements are growing, these figures are disappointing.

Import, import, import

During the previous fiscal year, the country imported goods and services valued at $31.52 billion, with the largest share going to oil products with $11 billion worth of imports – about 35 per cent of the entire bill.

In contrast, the import of machinery and mechanical appliances (capital goods) was valued at only $3.96 billion, a little more than 12 per cent of all imports. With very little reserves, dismal growth in production and heavy reliance on imports, the situation going forward is not one to look forward to. In recent months, the dollar has been depreciating against major currencies causing commodities like oil and precious metals like gold and silver to be valued dearer.

Oil prices are up more than 20 per cent since the beginning of current financial year. If exploration (and subsequent production) is not increased, Pakistan will be a sitting duck in the days to come.

If oil prices remain in the band between $80 and $90 per barrel, an optimistic assumption to begin with in the first place, our oil import bill for the current fiscal will fare somewhere between $12 and $13 billion. Thanks to the interconnectedness of prices in today’s times, other imported items will also become more expensive and we may see the total import bill touch $35 billion in this year alone.

What now?

In short, it is time to make some tough decisions. Pakistan needs to curtail imports by between $2 and $4 billion – not necessarily within a year, but rather a phased programme.

The benefits to our economy, in terms of foreign exchange savings, will be immense if we decide to reduce unnecessary imports and possibly incentivise the import of capital goods.

Cynics are more than justified in questioning how this is possible. The solution, no surprise, lies in increasing domestic oil and gas production. And this is not as difficult as one may imagine, exploration companies have the resources at hand to do this.

As of September 30 this year, the four listed oil and gas exploration companies are sitting with retained earnings of Rs222 billion and cash and short-term investments of Rs62 billion. If we want the other 11 unlisted and foreign owned companies to expand their exploration activities, then the lead needs to be taken by the Oil and Gas Development Company Limited (OGDCL), Pakistan Petroleum Limited (PPL), Pakistan Oilfields (POL) and Mari Gas.

With strong local partnerships, foreign companies will be more comfortable in increasing investments towards exploration. The government should give a target of at least 25 per cent growth in hydrocarbon reserves as well as production to these companies. If the companies are expected to do well, then we as a nation should be willing to incentivise their efforts. If they are successful in increasing reserves and production by 25 per cent, the government could offer them the carrot of a reduction in corporate tax rate, perhaps to the tune of five per cent.

This will not only spur growth but also allow the government to earn more tax than on current productivity. With oil production increasing, we can increase growth in the country, increase government revenues, build up foreign exchange reserves and reduce unnecessary imports.

Although this may sound like a ‘pie in the sky’ plan, it is very much doable. All that is required is proper planning, involvement of key stakeholders and most importantly, political will.

The writer is an investment banker based in Sharjah.

Published in The Express Tribune, November 8^th, 2010.