Pakistan: Energy Sector Victim of Incongruous Policies

A closer look at Pakistan’ energy sector reveals that exploration and production activities have remained lackluster, refining sector suffers from underutilization of capacity and country becoming more dependent on imported POL products. This becomes all the more pinching because country has enviable success record but exploration and production activities are being adversely impacted by deteriorating law and order situation.

According to the data available in Pakistan Energy Year Book 2012, crude oil production in the country remained pegged below 70,000 barrels per day. Bulk of the oil was produced by OGDC followed by MOL, UEPL and PPL. Output of MOL has witnessed over 35% increase but PPL output increased by 6% only. While output of OGDC has increased marginally, UEPL output plunged by nearly 9%.

Refining capacity in the country has remained almost flat because of dismal capacity utilization. As against an installed capacity of over 13 million tons per annum, actual capacity utilization declined from more than 11 million tons in 2006-07 to around 9 million tons. Production of energy as well as non-energy products has come down. Quantum of crude consumed by the refineries shows that two-third of total quantity was imported and local production could meet only one-third requirement.

While crude oil import by the refineries has been going down, there has been consistent and substantial increase in import of petroleum products, have grown at nearly 7% ACGR. Poor capacity utilization of refineries can be attributed to ‘deem duty’. Since refineries are not able to operate at optimum capacity utilization, average cost of production of products has remained high, paving way for import of finished products. In fact the country can earn substantial foreign exchange simply by running refineries at optimum capacity utilization.

In the past, hope were created for the construction of minimum three refineries but it seems none of these refineries will ever be constructed. In fact, Pakistan should have learnt a lesson from Singapore, a country that does not produce even a drop of oil but has the largest and state-of-the-art refineries. On the flip side it is also important to mention name of Saudi Arabia, which is the largest producer of crude oil but exports the entire production because no refinery has been established in the country.

Production data about gas is also disappointing because there has been marginal growth of 2% ACGR. The real point of concern is that the country has been over consuming gas that has depleted reserves at a very fast pace. As against this rate of new discoveries has been very low. Added to this are two contentious issues: 1) poor law and order situation in the areas where discoveries have been made and 2) lingering litigation. At present the country faces a shortfall of approximately 2,000mmcfd, which can be overcome simply by ending the litigation that has been going on for years but courts not being facilitated to give their verdict.

Pakistan has huge deposit of coal, especially those discovered in Thar, but its exploitation remains a dream. Some hope have been created with the ongoing work on mining plus generation joint venture project of Engro and Sindh Government. If policy planners are serious in bringing down cost of electricity generation they will have to work on war footings to establish coal-fired power plants and also switchover oil-fired thermal power plants to coal.

Work on Iran-Pakistan gas pipeline has run into snags due to external pressure and it seems Pakistan will abandon this project and go for LNG import, too expansive a proposal. However, its economic viability is being painted on the basis of ‘opportunity cost’. It is being said that if there would be huge economic losses due to the shortage of gas, therefore, it is advisable to import expensive LNG to keep the wheel of economy running. The most deplorable is the attitude of policy planners who seem least concerned about overcoming the looming energy crisis in the country.

Most of the thermal power plants are operating far below optimum capacity utilization due to the most contentious circular debt, which is affecting operations of the entire energy chain. Generation companies are operating at dismal capacity utilization, oil and distribution companies are unable to pay refineries and E&P companies. The result is that the country has not been able to bolster production of crude oil and gas, huge import of energy products erodes paltry foreign exchange reserves of the country and economic activities remained pegged due to extensive load shedding of electricity and gas.

Experts are of the opinion that Pakistan needs up to US$20 billion to revamp its energy sector, with bulk of the investment required in exploration and production. However, neither the local nor the foreign investors are willing to operate in areas falling in ‘red zones’. Attacks on sites, blowing up of pipelines and even abduction of workers have become a routine. As stated earlier Pakistan has enviable success record but foreign companies are reluctant to operate.

It is also necessary to point out that many of the companies belonging to energy sector operate in public sector. In an attempt to overcome budget deficit, these companies have been made to payout huge dividend. This may be helping the government to enjoy extravaganzas but severely impacting exploration and production activities, revamping of transmission and distribution networks of gas marketing companies and not allowing oil marketing companies to enhance storage facilities.

It is highly deplorable that the Government of Pakistan has been showing extreme interest in importing electricity and gas but taking no corrective steps to boost local production of crude oil, gas and electricity. It seems that the policies are aimed at keeping the country dependent on import rather than attaining self-sufficiency.


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