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January 24, 2019

Storing oil and gas


January 24, 2019

PM Imran Khan visited Qatar to get even more LNG on credit, possibly at lower prices. By the time these lines are read, the PM will have been back and hopefully with success.

On another front, work is speeding up in Gwadar. It is time to discuss the allied infrastructural issues pertaining to the oil and gas sector, of which storage appears to have been neglected. Some would argue that in a situation where the country does not have money to pay for current consumption, how will storage and inventories be financed? That would be a legitimate question and we would take it up and other allied issues in the following space.

Storage and inventories are required for all materials that are consumed. They are required in case of sudden or expected increase in demand or interruption in supply. We have recently witnessed a recent gas emergency and are passing through a gas shortage period, in which storage could have played an important mitigation role. There is no gas storage in Pakistan. It is difficult to build gas storage, but it is not impossible. Most gas-consuming developed countries have built gas storages. Even developing countries like Turkey, Iran, and Brazil have built them and India is building them now, although LNG terminals are providing some cover there in this respect. Among gas consumers, Pakistan has a ranking of 23 – ahead of France, Australia and Spain, all of the latter having gas storage. Thus, we should explore the possibilities of gas storages and inventories.

On the oil front, the situation is not that bad but there is still a lot to be desired. Reportedly, oil marketing companies (OMCs) have maintained storage of up to 11-13 days of consumption as against a standard of 21 days. A requirement of 45 days has been indicated by security institutions. India has launched a government-owned storage company to build strategic reserves which may enable it to have aggregate storage of some 100 days, closer to the 120-day IEA recommendation for its member countries.

Pakistan has a consumption of 25 mpta (million tonnes per annum) of finished products and 12 mpta of crude oil, which partly meets the aforementioned requirement of the finished product. Thus, the storage and inventory requirement is tilted in favour of finished products, while elsewhere in countries that are self-sufficient in local refining capacity, the storage requirement is more for crude oil for which strategic reserves are built and advised. It is relatively easy to build underground storage for crude oil.

Finished product storage is usually built in conventional steel storage tanks, in diversified places, at sources of supply, alongside transport network and pipelines to the consumption points in geographically dispersed areas to enhance and provide for country-wide fuel availability. Used or rented oil tankers are also being used to store oil and oil products, mostly for market operations. In Pakistan, it is called black marketing, but elsewhere, it is a legitimate capitalist activity, of course operating without cartels and anti-market conspiracy.

There are two aspects of costs required in storage – construction cost and filling cost, the working capital. Fortunately, we live in a region close to the major oil producing and oil shipping lanes. Producers always have some surplus oil left out of business operations, in addition to planned inventories they would like to keep. The Gulf States have special problems of diversifying the placement of cash or in-kind inventories. Such actual or planned inventories can be utilised, mutually, both for the producer/owner and the consumer.

A similar arrangement has been made by India with ADNOC of Abu Dhabi, wherein ADNOC’s oil would be kept in storages in India under the ownership of ADNOC, which means India does not have to pay for it. India only pays, when it procures from this storage on an emergency basis or otherwise. The latter has first right of use. This is good for both. Such storages can be built around Gwadar, along the other areas on the Balochistan coast or around Karachi. It can serve the storage needs of China as well, as an oil pipeline is being built from Gwadar to China to meet the needs of its western regions. Iran may be encouraged to build oil storage within its own boundaries, closer to Gwadar, to participate in the regional storage initiative, if and when its problems with the US are resolved. Even otherwise, an exemption from sanctions may be possible, as it is an emergency-preparedness measure. The Gulf States would have a diversified place away from Hormuz.

Coming to gas, which is a difficult issue, depleted gas fields can be utilised for gas storage as these already have the transport infrastructure and are cheapest to build. This would cost $10 million per billion cubic feet (bcf). We have a daily demand of 4 bcf actual and 6 bcfd potential. A one-week supply may be attempted and can be affordable. Here also, one may expect participation of gas suppliers such as Qatar and others and free gas storage. Near the market areas in Punjab, smaller storage can be built at Khewra and other spaces. These are costlier to build but require lesser gas inventories to operate and have other short-cycle features etc.

Finally, there are no free lunches. All of this will cost money, which will be paid by the consumer. The consumer also pays when supplies are interrupted, directly or indirectly. The gas distribution cost in Pakistan, to the astonishment of many, is quite low as compared to elsewhere, in Europe or even as compared to India. In Pakistan, the distribution tariff is of the order of $0.5 per mmbtu and if gas losses are added another $0.5 may be added. In India, it costs almost $4 per mmbtu. Domestic gas tariff there is $10-11 per mmbtu, while being supplied from cheaper locally produced gas of $5 per mmbtu. Hopefully, gas losses can be eventually reduced – making way for storage investments in consumer tariff.

In the meantime, it is good to see two LNG sips docking at two terminals at the same time. But gas supply management needs to be improved through better planning and coordination. One does not need sophisticated econometric or demand modelling to be able to predict that gas demand is high in winter and winter comes after a long summer. The current gas shortage is unjustified in the presence of all the LNG supply arrangements and infrastructure. It is one thing to have infrastructure, and another to operate and utilise it. All investments including the proposed ones would remain wanting, if not properly managed.

The writer is a former member of the Energy Planning Commission and author of ‘Pakistan’s Energy Issues: Success and Challenges’.

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