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April 20, 2019

Time for energy competition


April 20, 2019

Every winter, there are gas shortages despite induction of LNG. Our local gas resources and production are going down, or barely remain constant, while demand has been increasing steadily and is expected to double in ten years.

There is LNG but it is costly and costs foreign exchange as well and has other procurement and contract issues, including take or pay contracts. Hence, it is vital that we do our best to find new local gas resources and increase production and availability. We will examine in this space how to do that. Although, the focus is on gas, some of the discussion is equally applicable to oil.

There are three possible ways to increase gas supplies — find new gas resources, increase existing resources output, and undertake demand management including finding alternatives to gas .Oil and gas production is heavily regulated and E&P companies have always complained about the delaying and growth-reducing aspects of the governmental and regulatory process. Although the new government, under its economy-wide programme of improving Ease of Doing Business rating, is taking steps to streamline the approval and permissions processes ,inefficiencies are bound to persist. And then there is always a question of the right pricing, which one is never sure of.

Creating a gas market may be a part of the solution. The gas market has helped other countries find new gas resources and increase supplies. However, there are possible risks in opening the market and freeing the prices. The market may be manipulated by vested interests. Local gas has been produced under reasonably low prices. The other option is of using LNG, which costs almost twice the local gas. This is good and bad. It increases the average gas price but also enables policymakers to play with the situation and optimize its options.

The gas market can be created with some safeguards. Existing resources may continue to be regulated except some exceptions like marginal or depleting fields, tight gas, stranded gas fields etc. Not all but designated new areas may be put under gas market and the afore-mentioned exceptions. Band by the gas market, what we mean here is that gas prices would be free to be negotiated between the buyer and seller and a producer would be free to sell the gas to the customer of his choice.

Thus, between the existing cheaper rates and expensive LNG, a third mid-of-the way option may emerge in the short-to-medium term .And in the long run, if the market performs and resource geology permits, gas supplies may become even cheaper than today. Other safeguards and incentives can be built in, like limiting the gas market to the existing LNG volumes, and taxing the windfalls. Along with gas market creation, feasibility of a risk fund may be investigated. Such a fund may be financed through PDL/GIDC, which provision is already there. There is GIDC as well.

One of the major bottlenecks in oil and gas exploration and development activities has been the poor law and order situation in Balochistan (which has a lot of resource potential). Tribes in the province have a claim on natural resources found on their land and demand compensation and royalties. Under our laws, the resources belong to the government and no such claim is acknowledged. Our laws are consistent with majority international practices. However, there are exceptions. One may be able to undertake some legal innovation and settle these issues. Some controls can be built in on how the income is to be spent and shared with local governments. If successful, this can solve a major problem in exploring and developing oil and gas and other mineral resources, and can also boost national cohesion.

Third, biogas can take some burden as well. Small-scale family units have been promoted with success and failure over the last few decades and there has not been much impact there. Elsewhere in Europe, USA and even in India, commercial biogas has met with quite some success. In Europe, biogas is being used in CNG and is being fed to gas networks after cleaning and processing. BioCNG, converting biogas to CNG, is being used successfully in Sweden in Buses and in India. Pakistan is one of the largest milk producers in the world and is an agricultural country producing surplus biomass, all of which can be utilized for producing commercial biogas. LPG-Air-Mix plants can be fed with biogas. Rural households can be supplied with biogas through isolated local gas networks.

The other approach is of demand management, some of which may occur inexorably through international technology development. Electrical vehicles may reduce oil demand significantly starting in year 2030. Coaland chemicals are being made out of coal. China, India and South Africa are doing it. In India, a coal-to-fertilizer plant is being actually built in Talcher with an APEX of $1.3 billion; it is meant to produce 1.1 million tons of urea per annum besides other products.

Lignite is planned to be used in steel-making, utilizing Australian technology. We have abundant lignite/coal resources — more than we can think of consuming in a century. Thar coal can be gasified to produce SNG which can be fed to the grid. Coal gasification has come under great controversy due to the Underground Coal Gasification (UCG). We want to avoid that controversy here and focus on above-ground gasification which is being widely practised elsewhere, especially in China. The Ministry of Petroleum (MPNR) had earlier commissioned a feasibility study in this respect which could not be pushed through to implementation for a variety of reasons: lack of an operating lignite mine at Thar at that time, high cost of production etc. However, induction of LNG at $10-12 per MMBtu has changed the scenario altogether. Today, fertilizer plants are utilizing expensive LNG. Existing plants can be converted to coal gas (SYNGAS) and new plants can be built.

Lignites can be used in industry widely, especially in extractive industries like cement, brick-kilns, steel-making and even in textiles. In Indian Gujarat, lignite is widely used in the textile industry. Thar coal briquettes, under correct and competitive prices can play a major role for the energy needs of the rural poor. Currently, it is more expensive than charcoal. Coal imports by industrial users should be discouraged through higher tariff and other barriers. However, the current high-priced and monopolistic production in Thar has to be reformed.

It is time to introduce market and competition in the energy sector, even if gradually. The market size is expanding and regulatory and other controls cannot continue to meet the requirements. Other imperfections, as indicated in the case of Thar and elsewhere, have to be removed so that energy supplies increase at reasonably competitive prices.

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

Email: [email protected]

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