A gas crisis in the offing

October 23, 2022

The risks associated with the gas crisis in the European Union will have implications for countries like Pakistan as well

A gas crisis in the offing


eorge RR Martin, the author of A Song of Fire and Ice, which was adapted for the successful TV series, Game of Thrones, famously used the phrase ‘winter is coming’. I think it depicts a situation the world faces right now. The coming of winter, as depicted in the series, as an explanation for a contraction in economic activity.

The recent high global inflation and disruptions in economic activities on account of the conflict in Europe and the Covid-19 pandemic have led us to the brink of a deep recession.

For the last twelve decades abundant energy resources have been a driver of economic development. Petroleum products have had a major role in this. The energy needs of the world comprise electricity, transportation and heating.

According to ourworldindata.com, 84 percent of the energy consumed nowadays comes from fossil fuels – coal, oil and natural gas. Besides the climate change impacts of these energy sources, the economic price and the market dynamics are serious threats to the sustainability of the world economy.

Not all parts of the world are blessed with fuel reserves. Those having easier access to natural resources have created an oligopoly in the form of the Organisation of the Petroleum Exporting Countries (OPEC) and the OPEC+.

These petroleum-exporting countries decide the quantity and the price to be offered to the importing countries. The importers are always adversely impacted by the terms and conditions devised for the trade by the exporting countries. The reciprocal exporting strength of the importers has a major role in reaching these trade agreements.

One such agreement was reached between the Soviet Union and West Germany for the supply of natural gas and the reciprocal supply of steel in the 1960s. In the history of energy deals, this has been one of the longest-standing agreements despite the demographics changing on both sides with the dissolution of the Soviet Union and the merger of West and East Germany. The supply of gas from Russia to Germany and to the European Union through Germany has continued.

An engineering milestone was reached in 2011 when the Nord Stream gas pipeline was followed up by the Nord Stream 2 which runs through the Baltic Sea from Vyborg and Ust-Luga in Russia to Greifswald in Germany. These pipelines are the major source of natural gas for Europe, particularly, Germany.

The supply of natural gas from Russia to Europe has been used for geo-political leverage by the Russian government on several occasions. This year, asserting its claim to the Russian-speaking areas in Ukraine, Russia has attacked the country. The move has been vastly condemned. A number of Ukraine’s citizens have migrated to other European countries. Several EU member countries, particularly Germany, have, however, continued to receive natural gas from the pipelines.

With winter around the corner, the EU countries’ reliance on gas for space heating is making them even more vulnerable to the political economy of natural gas. At the end of September, it was reported that a part of pipeline had been damaged in the Balkan Sea. A difficult winter is expected in the EU states. Several EU member countries have already developed plans to curb energy use.

Humans, it seems, are better at reacting to situations than proactively managing risks. Even though the EU states are the frontrunners in the ride toward a clean energy transition, almost half of their energy needs are met through fossil fuels. This makes them vulnerable this winter.

Pakistan is one of the 80 countries for which the EU is the primary export market. A loss of purchasing power in Europe may result in a loss of orders. Our exports to the EU mostly comprise textile and leather-based goods. These exports could decline next year.

The high inflation, in addition to the limited energy availability and eventually affordability will cause a dent in the EU societies’ purchasing power. The largest EU economies like Germany need to continue use of fossil fuels to sustain their status.

The EU is an important player in international trade and economics. The adverse impact on its economy will affect the global economy in many ways. The demand for natural gas and oil from alternate sources will increase and disrupt supplies worldwide. The market will tilt towards low-risk selling to developed countries and away from high-risk sales to the developing ones.

The closest alternative to pipelined gas is liquified gas. It requires significant investment in infrastructure development for the storage and processing of liquified natural gas (LNG) to be made useful. The infrastructure has either been planned or is under construction in the EU. Once the developed EU countries get on the LNG importers’ list, the LNG market will become more stringent and might refuse credit-based payments.

The risks associated with EU gas demand have implications for countries like Pakistan as well. Pakistan is one of the 80 countries for which the EU is the primary export market. A loss of purchasing power in EU may result in a loss of export orders. Our exports to the EU mostly comprise textile and leather-based goods. These exports could drastically decline during the next year.

On the other hand, our dependence on oil and LNG will significantly impact our day-to-day work. Declining foreign exchange reserves might force us to purchase high-price fuel. The new players in the market can come up with more attractive payment offers to contractors. This may raise the energy prices and impact the energy supply. While the short-term outlook is bleak, medium and long-term strategies can help countries like Pakistan develop into sustainable economies.

Firstly, development of indigenous resources should be prioritised. We need to start working towards extensive technology adaptation and best practices to prepare the most efficient wells and use our refineries to produce high quality petroleum products indigenously.

Thar coal-based power plants are a step towards this indigenisation of the energy mix. The inauguration of the extension of the coal mining facility in Thar is a positive step in this regard. This suggestion is only for the medium term. In the long term we have to get rid of fossil fuels.

Secondly, we need to set sector-wise priorities in an apolitical way. The primary focus must be on sustainable development. The priority should be the industry, followed by residential and commercial units. Prioritisation within the industries should favour exports. We need to diversify our exports.

There might be options for low-energy consumption products. ICT-based exports can help us build useful dollar reserves.

Thirdly, we need better diplomacy with the petroleum-producing countries in the near vicinity. The establishment of economic corridors linking the Arabian Sea to the various neighboring countries including the China-Pakistan Economic Corridor (CPEC) and the Central Asia Regional Economic Cooperation (CAREC) are opportunities that need to be used to tap into the opportunities for energy sustainability as well as effective trade relations.

Prioritisation of projects like the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline can help in the long run. This will require effective diplomacy with all regional players and international powers.

Fourthly, Pakistan must shift towards renewable sources. There is great potential in the form of perennial rivers, solar irradiation and wind corridors.

Let’s think of Pakistan as a technology developer in this field, instead of a mere technology user. We need to make policies that enable renewable energy companies transfer their technology and develop research and development centres in Pakistan. We need to stress sustainability in our power plant development practices. Development of energy storage technologies at a macro level can also reduce the import dependence.

The winter heads the Centre for private sector engagement at the SDPI and tweets at @ahadnazir783

A gas crisis in the offing