The impending gas crunch

Published: September 19, 2014
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The writer is a graduate student at the University of Notre Dame in the US and a former financial journalist. He tweets @FarooqTirmizi

The writer is a graduate student at the University of Notre Dame in the US and a former financial journalist. He tweets @FarooqTirmizi

For those of you who hate the rising costs of fuel and electricity (read: everyone), the following sentence will sting: energy in Pakistan is actually too cheap. It actually needs to be even more expensive than it already is. For the moment, I am not talking about your electricity bill or the cost of fuelling your car (though those should probably rise too). No, I am talking about your natural gas bill. It needs to go up. And not just by a little bit. It needs to go up by a lot, to the point where it actually hurts you to pay it.

That the country is running out of natural gas is by now a fact that is painfully obvious to most people, with the persistent rationing that has hit almost all parts of the country in one form or another. How and why did we get to this point? Mostly, by selling gas too cheaply for too long, resulting in an enormous amount of waste, which caused our reserves to dwindle too fast. The year 2014 is actually going to be the last year for the foreseeable future when Pakistan’s gas production rises compared to the previous year. It is all downhill from here. Our reserves and our production capacity are both set to decline rapidly for the next decade, and demand is set to exceed supply by four times by the year 2022.

If that scenario scares you, it should. We have built a massive energy infrastructure that is heavily dependent on cheap, abundant natural gas to make it work, from power plants, petrochemical plants, captive power generation in industrial units, to even transportation. Running out of domestic gas supply could bring that entire infrastructure to a screeching halt.

Now, of course, Pakistan can and will soon start importing natural gas from other countries. But that will be far more expensive than what is currently being supplied. To put things in context, the cheapest option for gas import currently even being considered is the Iran-Pakistan pipeline, which would supply gas at over $11 per million British thermal units (mmbtu). The most expensive rate charged by Sui Southern Gas Company to its consumers is $5.3 per mmbtu, and most customers actually pay a lot less than that. If liquefied natural gas is imported from Qatar, it could cost as much as $18 per mmbtu.

The only way to pay for this new, expensive source of gas is to raise everyone’s gas bills. To their credit, the government has already started doing that. Average gas prices for consumers in Pakistan, until just a couple of years ago, were in the range of two to three dollars per mmbtu, much lower than they are today. But this is still not enough. The price charged to consumers needs to equal the price that we will need to pay for the new supply of gas or else the government will end up creating a whole new category of energy subsidy after we have just barely started reducing the burden of the last one (electricity).

What about Pakistan’s new-found shale reserves, one might be tempted to ask? Shale gas has completely revolutionised energy production in the United States and dramatically increased gas production there, and could do the same in Pakistan. It is certainly true that Pakistan’s shale gas reserves could potentially be more than double the amount of recoverable gas reserves in the country from 30 trillion cubic feet to just over 80 trillion cubic feet.

There is, however, one very big problem with shale. Extracting it relies on a process called hydraulic fracturing (‘fracking’) which, as the name implies, relies on water. Not just a little water, but a lot of it. A flood is probably not the best time to say this, but Pakistan is actually a very seriously water-stressed country. We do not have the water supply to be able to begin fracking at any serious scale just yet. The technology would have to change dramatically to become less water-dependent for shale to become a viable option in Pakistan.

What about cracking down on gas theft? Yes, that is a serious problem and that would help alleviate the shortage for a year or so, but not much longer. Gas theft only account for about 10-12 per cent of the total gas production. If the need was for just a 10 per cent or 20 per cent increase in gas price, theft would be a material concern. But the required increase is several orders of magnitude higher. Theft is important, but it will not move the needle. There is no getting around the fact that your gas bill needs to skyrocket.

Published in The Express Tribune, September 19th, 2014.

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Reader Comments (4)

  • Parvez
    Sep 19, 2014 - 12:31AM

    If today the people chant ‘ go Nawaz go ‘ or bad mouth Zardari or give to hoots as to what really happens to Musharraf ………do you really blame them. They are the ones who will have to suffer the consequences for our leaders bad decisions.

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  • Oily
    Sep 19, 2014 - 1:32AM

    How about a forensic audit of supplies and sales???the truth will come out and UFG will reach the right levels….all are involved.Recommend

  • asim
    Sep 19, 2014 - 9:34AM

    The statistics presented in the article are not correct;
    Both Iran and Russia were offering a far better rate $ 9-10 mmBTU to Pakisstan while PMLN concluded deal with Qatar at the rate of $13 mm btu which while adding other costs would be around $ 18 mm BTU. China has handled this decision every prudently protecting the national interests of its citizens while dealing with Qatar and Russia both

    The government’s LNG imports from Qatar are likely to cost Pakistan $5 billion reference Sustainable Development Policy Institute (SDPI) report. The cost would be $ 18 /MMBTU which is no way less than oil import cost. A better rate could have been negotiated keeping in view Iran and Russia both are willing to supply energy needs.

    The most compelling argument offered by the Ministry in favor of buying LNG has been that it is a cheaper fuel for electricity. But at anything more than $ 14/MMBTU, LNG loses its competitive advantage against oil, the report says.

    Iran and Oman have sealed a $60-billion agreement under which Muscat will purchase natural gas from Tehran over the next 25 years. The project includes laying a pipeline costing $1 billion across the Gulf

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  • OA
    Sep 19, 2014 - 10:19AM

    @Asim: The Iran-Pakistan gas pipeline cannot be built as long as there are sanctions on Iran that would prevent Pakistan from paying Iran for the natural gas. There’s also the question of how that pipeline is going to be built, and of who is going to finance it. Let’s also not forget that someone will have to keep that pipeline secure through Balochistan.

    Nevertheless, this doesn’t take away from the author’s point that the price of natural gas must increase. Even at $9-10/mmBTU, we are looking at doubling natural gas prices for end consumers. And I’m not sure how you think we would even get natural gas from Russia. Their reserves are in the Caucus, the Arctic and Siberia. How exactly do you propose we transport that from there to Pakistan? As for China, well the country really doesn’t have a choice. Once North America becomes fossil fuel sufficient, the country will have to deal with both the Middle East and Russia to secure its fuel sources. Their energy deficit is absolutely huge and they need to diversify.

    $18/mmBTU is pretty much market rate for LNG in our region unfortunately. LNG loses competitive advantage against fuel oil (assuming you don’t take into account efficiency gains of running on natural gas – which can be substantial), but is certainly still cheaper than high speed diesel. Also, a lot of the country’s fossil fuel capacity is offline because we don’t have the fuel to run it. So, would you rather have expensive electricity or no electricity?

    And for all the infrastructure projects you mention: Pakistan hasn’t been able to raise financing the GB dam in a decade. With the political uncertainty in Islamabad, no investor wants to take on long-term risk at the moment.

    @Oily: Yes, the author’s point is simple: even if ALL losses were magically eliminated, you would still be under-pricing gas.

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