This crisis is a moment; Part - III

The current business-as-usual model continues to delay deregulation by repeated extensions, issuance of new/amended refinery policies. It will one day improve competitiveness, reduce demurrages and build our strategic and commercial reserves. But time is uncertain and not on our side.

The estimated investment of over $4 billion to $5 billion under the ‘new’ refinery policy by existing refineries with their 1960s technology, despite their history of delaying upgrades over the last 15-25 years and even more knowing the changing fuel landscape of the country, will reduce fuel oil and enhance refined products including gross refinery margins.

But the elephant in the room is why Pakistan is not expeditiously progressing a new and efficient refinery with local refinery owners participating with PSO and Aramco as equity partners in the $10 billion to $12 billion refinery/petrochemical project (new policy expected soon) instead of upgrading.

Change is difficult but Pakistan does require a reset sooner than later and the alternate requires reinventing, integrated planning and SIFC intervention for evolving a strategy with a 15-year horizon of building an oil and gas ‘city’ (refinery, petrochemical, storage, pipeline) in Gadani and/or Gwadar based on regional play and energy security of the country. Third party participation in CPEC will assist the cause further.

Collaboration of the SIFC with industry and its associations in the form of guidance to undertake bankable feasibilities of projects for gas and fuel pipelines, refinery and petrochemical complex, oil and gas storage, oil city development at Gadani and Gwadar, logistics/supply chain and coal gasification with knowledgeable international consultants hired by them, is critical to define home-grown approaches and encourage FDI.

Thus, regional economic cooperation is essential and requires a review of our policies with our neighbours to develop an energy network like the EU, Africa and be part of initiatives with Afghanistan, India, Iran, Bangladesh, Middle East, China and Central Asia to enable us to deal with repercussions due to international events that are beyond our control.

This will also allow balancing export of surplus winter power capacity, build flexibility in import of oil and gas in the winter, and ensure procurement of energy directly from producers.

Building winter consumption of electricity necessitated by our dwindling gas reserves and increasing dependency on imported gas requires building electricity transmission networks in Balochistan and Khyber Pakhtunkhwa, which will also later support regional energy trade.

The south-north pipeline timing needs revisiting knowing that our existing pipeline available capacity will increase by reducing local gas production and consumption as we switch consumers to electricity and due energy conservation.

If it is to be built, then it should be the mandate of the ISGS which is responsible for imported gas infrastructure including the Iran Pakistan Gas and Turkmenistan Afghanistan India pipelines with the SSGC and SNGPL as subcontractors. This will build local talent and expertise as well.

As a nation, we need to appreciate the benefit and success of a vertical utility. K-Electric took 15 years of focus, spines of steel and team commitment to achieve deliverance of reliable power and improvements in customer service. It is a private monopoly and a transformed KE is now willing to compete in the distribution segment and the unbundled licence has been approved by Nepra. In parallel, it has initiated a vision to achieve 30 per cent generation of 1182MW through renewables and investment of Rs484 billion by 2030. The company reduced T&D losses from 34.2 per cent to 15.8 per cent over the past 17 years and the target is 12.8 per cent by 2030. Lesson: turnaround requires time, patience, and endurance.

A similar approach is required instead of provincialism of DISCOs or privatization as FDI will not be forthcoming. It needs to be a 3P between province, federal government and IPPs of the DISCO franchise area. The majority equity be of IPPs and public including a staged 30 per cent free float, loss reduction including target of increasing recovery from low 92.7 per cent in FY23 to 96 per cent by FY25 with priority focus on improvement in operational efficiency at Pesco, Sepco, Tesco, Hesco, Qesco, AJK (83 per cent electricity losses).

There has to be an unbundling of SNGPL and SSGC into transmission and despatch companies with import of gas undertaken by PSO by building gas storage infrastructure at port and transmission responsibility to be of Interstate Gas Systems (Private) Limited.

Development of Pakistan gas hub at Multan with PMEX for energy trade with pricing of fuel at imported gas average price and not weighted average cost of gas (WACOG) has to be the norm.

WACOG is an interim step that delays competitive market pricing. The WACOG bill envisaged allowing Ogra to charge weighted average on cost of indigenous gas and imported RLNG (regasified liquid natural gas) to consumers. That has to change to encourage investment in the gas sector.

The confidence building of Exploration and Production firms (E&Ps) includes allowing new find gas sale directly with the government guarantee offtake for five years to the extent of 95 per cent of production. E&Ps should be obligated to sell directly to the despatch company, city gas distributors or through wheeling to their own customers. ‘GASDISCOs’ may also be integrated with E&Ps instead of forming provincial gas companies.

Ogra has to focus on Third Party Access (TPA) without becoming a ‘policeman’ in determining an entrepreneur’s business model and capability – for example: small Scale LNG (SSLNG). The investor needs to follow Ogra rules but Ogra’s role is only to enforce them.

Furthermore, Nepra should have started Competitive Trading Bilateral Contract Market (CTBCM) with Pakistan Mercantile Exchange (PMEX) with Gencos and at expiry of Kapco, Gul Ahmed and Tapals’ Power Purchase Agreements (PPAs); an expanding slate is expected as PPAs of IPPs expire in the coming years and they revert to the fold of NTDC/Gencos.

Third-party open access in distribution and transmission in the power and gas sectors will encourage a projected $150 billion FDI in the sector over the next decade.

Policy measures need to ensure that circular debt (Rs5 billion in gas and electricity) is not created and financed off the federal books nor is there delay in settlements of IPPs due to impact of changes in LIBOR, KIBOR and devaluation.

Multi-tariff, fuel adjustment charges, WHT, circular debt interest etc could possibly be determined upfront every year based on future projections and then adjusted every six months. Belatedly raising tariff as per current practice to catch up to past delays needs to end.

Painfully, the enforcement of the 18th Amendment is required with provincial pricing of energy mandated with a target of five years hence.

Net metering needs continued encouragement and could help overcome delays faced by the 600MW solar project and a holistic roadmap is required from Nepra that takes into account evolving power system needs and prioritizes affordability, reliability, sustainability and customer focus.

Risk due to intermittency of renewable energy and water shortage in the early months exists due to climate change despite our summer energy margin of about 18 per cent in 2021 ends being maintained in 2030 after remaining high in the interim per a LUMS study due to low/delayed hydro and 30 per cent share of wind, solar and hydel per the ARE policy added in FY2026.

Risk is catered by installed capacity of 40,813MW with peak demand this summer of 25,500MW vs computed demand of 30,000MW due to 3500MW load shedding of high loss feeders. It is to be noted that actual availability is lower due to seasonality impact of wind, hydel and mothballed Genco plants.

Thus the wrong narrative of idle capacity payment can end with capacity additions based on winter demand and acceptance of loadshedding in the summer.

To be continued...

The writer is an experienced professional who has served as managing director of Pakistan State Oil (PSO) and chairman of the Petroleum Institute of Pakistan and OCAC. He can be reached at: ihaque58@gmail.com