Friday, January 6, 2012

The Gas Crisis I


We are going through a gas crisis along with a Power crisis, both are inter-related; one causes the other. Pakistan’s energy balance sheet has long relied on Gas as a fulcrum or main asset. That asset has been dwindling in relation to the demand. Today the gas production is 1.3 TCF per annum (4 Billion Cft per day) as against a demand of 2.0 TCF per annum ( 6 Billion Cft per day). It is a cheap local resource that used to be abundant for several decades. According to reliable estimates, there is still lot of gas underneath waiting to be explored and exploited; six times more than the presently known reserves. Unfortunately due to both, neglect and circumstances, exploration activities could not keep up pace with the growth in demand. Another factor that has led us to this stage is the lack of timely diversification away from local gas. We will explore in this space, some of the possible options.

Possibly, there are no immediate solutions, except load management to which government has been resorting to, and perhaps opening up and facilitating LPG truck supplies from Iran and Central Asia. Second immediate step could be to drop taxes temporarily from, Petrol and Diesel, to make it cheaper and competitive with CNG, thus alleviating pressure away from CNG. This would obviate the more contentious and politically difficult step of completely stopping CNG for the cold months.


Slow death of CNG

CNG station and CNG transport have resorted to strikes and protests .On the other hand, government is reportedly considering closing down CNG stations for the month of January at least. The genie of CNG has been strengthened, if not created, by the present government by adopting a policy of making Diesel more expensive and levying more taxes on it than petrol. In almost all economies of the world, Diesel is kept cheaper than Petrol due to the obvious reason of its use in the public transport system. It also shows how quickly the market adapts to the price signal. Public transport system appears to have converted itself to the CNG, Diesel having been made expensive both due to taxation policies and as well as due to higher international market prices.


It is not, however, easy for government to absorb the loss in revenue, keeping in view the already low receipts and budgetary deficits. It finances the subsidies on Electricity, partly, from the oil taxation and levies. Petroleum taxation has been considered desirable in most countries as a source of revenue. It has been classically considered taxation on luxury, pollution and road user charge. This has worked earlier when international oil prices were low. In that regime, sometimes importing countries’ governments earned more revenue than oil producing and exporting countries. No more, today oil prices affect the lives of the poor more than any body else. In the longer run scenario, barring transitional periods such as those prevailing these days, it may be advisable to adopt zero-energy taxation, whereby for example, oil taxation income balances subsidies elsewhere, say in electricity and perhaps vice versa.

It may be worthwhile to have a fresh look at the petroleum pricing policy. Taxes and levies on Diesels may be reduced and eliminated making it cheaper. Also a seasonal pricing policy making Diesel further cheaper in winters than in summers. One may have to revert to quarterly or half yearly revision of petroleum pricing as opposed to the monthly one, in order to implement a seasonal policy. There are limits to the enhancement of CNG tariff, as the recent CNG strikes and later negotiations have shown, as a result the CNG tariff enhancement had to be halved.CNG business interest would, however, resist reduction in margin which would decrease their market share. On the other hand government’s right and role of making public policy in the interest of larger good cannot be done away with under political pressure. Political conditions may be different next time. However, quick reversal in an entrenched market is neither feasible nor politically advisable. Long term signals should be recognized by the CNG business interests and refrain from bribing their way into getting more licenses despite a ban. Ban in fact increases the margins of the graft.


Towards a sustainable gas policy
______________________________________________________________________________
1) Implement Iran –Pakistan Gas Pipeline project counseling Iran on more agreeable pricing and the U.S. to refrain from opposing it. South Asia is an eventual and natural market for vast Iranian gas reserves.
2) Shun LNG
3) Pay attention to E&P for new gas finds; Re-energize OGDC ; encourage Shale and Tight gas resources.
4) Let cooking needs of homes are to be the first priority. Also facilitate LPG for this sector.
5) All thermal Power be moved away from natural gas and be substituted by Coal (from Thar). Existing NGCC combined cycle plants be allowed to complete their economic life on gas. All Steam Turbine power plants be converted to coal as early as possible; all new thermal power to run on coal.
6) All fertilizer plants (Urea) be converted to Coal (local).Similarly all cement plants, whereas a number of these have already successfully converted to Coal.
7) Industry located in dense urban areas to be allowed to run on Gas for pollution reasons. Industries outside be encouraged to run on coal briquettes and possibly Bio-mass.
8) Encourage Solar Heating, replacing gas heaters. Introduce District Heating and Cooling (CHP & CCHP)
9)CNG to eventually be restricted to urban area public transport for environmental reasons and the needs of an affordable commuter transport .Private vehicles( more than 800cc and less than 5 years old) be moved away from CNG.
10) Encourage LPG markets through land routes on Iran and Afghanistan border. Encourage LPG in transport, if found feasible, under varying market conditions.

_____________________________________________________________________________

CNG sellers should see the writing on the wall. At current prices they enjoy a gross margin of 100%; natural gas is sold to them at Rs 651 per Million Btu , which they sell at Rs 1384 per Million Btu. If imported LNG is sold to CNG stations , it would cost the latter around Rs.1600/- per Million Btu. Assuming a gross margin of 100%, CNG price would be Rs.3200/- per Million Btu, as against the current retail price of Diesel at Rs.2739/-,16.8 % higher than Diesel. If by some magic, their gross margin is kept constant at Rs 650/- per MBtu, CNG price would come down to be Rs.2250/- per million Btu, 17 % lower than Diesel. Practically, there would be no CNG-Diesel price differential, as the gross margin would go up. By the same token, LPG may not be able to acquire a reasonable market share at the prevailing price differential, unless Auto-LPG chain becomes more efficient. It appears that LPG has been successful in Europe due to high taxation on Gasoline and Diesel, making LPG attractive. Due to low income of consumers, high taxation on Petroleum should not be expected or recommended. In India also, high taxation on Gasoline and cross subsidies have, perhaps, made LPG viable.   Also, GOP may have to develop an Exit policy for CNG stations. For example, CNG stations which have already worked for ten years may be delisted from supplies, so as to give opportunity for newer investments to recoup their money. Such stations may be given licenses for Auto-LPG, if it becomes viable.



Comparative Fuel Prices in Pakistan as on Ist Jan 2012
Fuel Name
Mn Btu /Tonne
S.G.
Price
Effective Price(Rs/MnBtu)
Natural Gas(for CNG)
980
0.6
651
664.2857
24.25242
CNG
50.58
0.6
70
Rs/Kg
1383.946
50.52652
LNG
50.58
0.6
18
USD per Mn Btu
1566
57.17312
LPG
45.326
0.5
110
Rs/kg
2426.863
88.60239
Kerosene
43.218
0.8
89.24
2581.1
94.23344
Gasoline
44.761
0.74
89.54
Rs/Liter
2703.246
98.69286
HSD
44.541
0.81
98.82
Rs/Liter
2739.049
100
HSD(FOB)
44.541
0.81
0.54
Euro/liter
1766.163
64.48087
Furnace Oil
40.792
0.95
74021
Rs per Tonne
1814.596
66.24912
Crude Oil
43.313
0.805
107.2
USD per bbl
0
Crude Oil
43.313
0.805
58.6566
Rs/Liter
1682.297
61.41902
Coal
40
USD/tonne
1 USD
87
Rs/USD
1 Euro
118
Rs/Euro




CNG businessmen, however, have a valid point. They argue that CNG sector would accept its share of burden and difficulties as other users would in case of hire prices and lesser availability. It should be done proportionally and that CNG sector should not be closed down arbitrarily. Investments have been made on the instance of the government policy. It may, however, be noted that only a few countries have followed the CNG band wagon in a low price and abundant  gas regime and most of the world has stayed away from it .In fact ,countries like New Zealand have opted out of it. There is, however, a redeeming and legitimizing feature of CNG which falls in the domain of public transport in urban areas. CNG is a clean fuel. Under subsidies, it can be a vehicle for organizing an affordable and pollution free public transport. Eventually CNG appears to be surviving in that limited role.


Unfortunately all other options require time and money, some more and come less. There are no quick fixes. However, some near term measures are possible to dilute the impact of lack of supplies. Some of the measures are as follows; a) encouraging or forcing consumers to switch to other fuel sources, where such conversion is feasible and affordable. We have already discussed the price and taxation measures. The top most users in this category are cement, partially textile and affluent car owners (1000 cc and less than five years old) and unauthorized public transport which has illegally switched to the CNG. Also come in this category are the CNG stations which have been installed illegally despite the ban on CNG stations for the last two years.

A number of cement plants have converted their system to Coal. There is no reason; others should not be obliged to convert to coal also. It should be the Cement plants which should be the first candidates or victims of curtailing or stopping the gas supplies for the crisis period. Similarly, Textile sector can afford to switch to oil. They say, it would hurt our exports and competitiveness. This sector has been a great supporter of LNG, which is going to be 4-5 times more expensive than or as expensive as oil. Competitiveness built on cheap and underpriced energy resources is a very weak foundation. Energy, gas or otherwise, is not going to be cheap in Pakistan anymore. Natural Gas was cheap due to highly underpriced gas from Sui, one of the major sour points in Balochistan-Federation relationship. Sui resource has been thoroughly consumed by now and also the prices and thus royalty on gas from Sui has been enhanced. New resources are costing more and newer one still more. They are all linked to price of Oil one way or the other. Even Pipeline gas from Iran is to cost almost 75-85% of the price of Oil and LNG even more.

Encouraging LPG

In the short run, gas supplies could be enhanced through facilitating commerce in LPG. Government has already taken the right step in energizing an existing LPG import terminal. Making projects and storages cost time.LPG could be and is being transported in Trucks and trailers from Iran and Central Asia. Imported LPG is sometimes slightly more expensive than the locally produced one. Taxation measures can equalize the prices or policy and market measures can enable to maintain the price differences without making LPG imports commercially unattractive. These days, LPG is smuggled into Pakistan through land routes. If barriers are removed, considerable amount of LPG can enter into the Pakistan market, especially in the northern parts, where the crisis is more acute.

Steps would also be required to change LPG logistics in Pakistan. Currently, all users practically utilize cylinders for transport and as well as storage.LPG distribution to transport sector should be through Petrol Pumps, where filling pumps have to be installed on the style of Petrol, Diesel and CNG. This is a universal practice including India. In Pakistan, LPG cylinders are moved and removed physically instead of filling LPG in the vehicle fitted cylinders. The practice is costly and dangerous and inhibits separate pricing and taxation measures for domestic and transport use. If LPG is brought into mainstream filling station business, it would provide some replacement to CNG sellers and buyers, although separate filling equipment and storage (bullet-type) cylinders are required for this mode. Perhaps more investment of CNG stations is in real estate than in equipment; the latter can be sold off and exported to other countries like Bangladesh where CNG owners can enter into JVs, although it may require some scale of operations. It requires a policy in this respect .Thus CNG curtailment, if accompanied by LPG facilitation, would be more acceptable to the CNG stake-holders than a simple throttling of their business, investments and livelihood. It should be added that it may be possible to use LPG in CNG vehicles with some adjustments as well, bringing CNG users in the net as well.

It would be of interest here to point out that in major European countries like, France, Germany, Spain, Italy and Netherlands, a differential of 50% is maintained between the prices of Petrol and LPG and in India the differential is about 30%.In India, there are separate prices for LPG for Automotives and home use being respectively equivalent to PkRs. 160 per kg and Pk.Rs.56 per kg, under a cross subsidy arrangement. In Pakistan, it is PkRs. 100 + per kg irrespective of the use. Auto LPG Stations would also solve the perpetual dilemma in LPG pricing issue; LPG imports have been thwarted by cheaper local product .Under the proposed arrangement, more expensive imported LPG can be marketed through LPG
Pumps collocated with Petrol and CNG stations. There is already an Auto- LPG Policy. One has to see what has thwarted its implementation. One ready answer is the competition from CNG. With the changing situation in CNG supply, a new rationale can emerge.

Gas Storage

Also some kind of cheaper storage, both for natural gas and as well as LPG, would have to be built, in order to meet the increased demand of heating fuels in Punjab ,KP and the other northern areas. Large storages can be inexpensively built in exhausted oil and gas fields. The newly exhausted ones or depleted ones would have their equipment and infrastructure intact and conversion would be almost instantaneous.
There are some other solutions as well like the use of stranded or flare gas for CNG. Existing CNG pumps can be transferred to the sites of stranded and flare gas and CNG transported and sold to the nearby markets. Flare gas proposal has been reportedly mooted by the CNG association. I would not be too sure about it. Both the options need to be explored and studied.

Solar heaters to replace gas heaters

Solar water heating has become quite common in many countries ;China, Turkey , and parts of the US.A sizeable capacity solar water heater, used for space and water heating, is today costing under 20,000 Rs. Installing a heat-exchanger and piping may cost another 20,000 Rs. Or even less. A Bungalow of 250-500 yards may require an investment total of Rs 100-200.000/- for installing a complete solar water and space heating system. For Bungalows costing more than 10 million, this is a pittance. Similarly, posh schools, hospitals, Office buildings, government offices and facilities could switch to solar heating without having to wait for any thing. Sun is there, even in winters in Pakistan. Awareness campaign and policy facilitation is required. For other solar solutions, we may have to wait may be for another decade or slightly lesser to be affordable.


Finally, it is the domestic (household) sector gas needs that are the most urgent and should get the highest priority. No demand is more sacrosanct than this. Already, hundreds of thousands of homes are suffering due to gas shortage. Government has already decided to shut CNG stations during household demand hours which must receive wider support.

Concluding, Energy diversification is the name of the game. Smaller measures on a wider front may bring more security and stability in Pakistan’s Energy scenario. Till longer term supply measures and projects such as Iran –Pakistan Gas Pipeline project or Thar coal project are implemented, the afore-mentioned measures have a potential to bring some relief to the general public and other consumer.

Lack of sustainability of LNG

OGRA has, untypically, rejected the LNG option in its recommendations to ECC. There is apparently a sound logic behind it. LNG would result in gas prices which will be four times the existing gas prices. People are resisting the 14% proposed increase in existing gas tariff. What will happen when LNG arrives? It would be as expensive as oil, and would be marred with transparency problems and issues. OGRA has recommended going for local and foreign coal. They have estimated local coal energy cost to be 3.23 cents per kWh and imported coal to be 5.56 cents per kWh. Furnace Oil based power plants produce electricity at 15 cents and LNG would be producing almost the same as Furnace Oil. In that case what is the logic of LNG?  Monopoly capitalist circles are pushing for soft options which are not only costly but would increase dependence and would negatively affect Pakistan’s energy security. The existing cost-plus approaches are the bane of the problem. Commercial companies push for all kind of impossible projects, being assured of a fixed and hefty return.LNG interests are asking for all kind of incentives and guarantees. If LNG has some worth in it, it should compete in the free and unregulated market. No body would have or should have any objections to the imports and use of LNG. However, importing coal in a country which has one of the largest coal deposits in the world would be a pity. Coal imports can be justified only as an alternate for balancing and emergency or blending requirement. Or in the intervening period, when may users especially oil-fired power plants are planning to convert to coal.

Coal Gasification and  substitution

On the other hand, people talk about importing coal because Thar coal project does not move despite window dressing announcements by the relevant bureaucracy and departments. Provincial autonomy does not appear to have helped. There appear to be lingering political, legal and financial issues or the capacity and inertia problem. The infrastructure projects (water and transmission) have not even crossed the PC-1 stage. Without cooling water, there is no power. However, it is good to come to know of creative approaches adopted by government functionaries. They are developing LBOD saline water for Thar coal power usage. LBOD water’s salinity is one-tenth that of the sea water that is normally desalinated and thus it should cost much less than conventional desalination, in addition to providing water that is getting scarcer by the day. There is no escape from developing Thar coal resources on a fast track, which has unfortunately not being done.

Besides producing power from Thar coal, gas and fertilizer could be produced as well. Up to now, focus has been only on electricity. The idea of coal gas is not new. It used to be widely practiced before the advent of natural gas and oil. It has been improved since. Dr. Samar Mubarakmand is working on it and is expected to demonstrate its feasibility. In fact, only yesterday TV reported a breakthrough in this respect. The demonstration should yield vital data that must be safeguarded as a vital output of the project. Up scaling would remain an issue. It would be too much to expect Dr.Samar ‘s organization to go beyond this, and thus contracts with experienced foreign companies must be made.

Many of us keep wondering as why we do not develop our domestic resources, which may be cheaper and more reliable and sustainable. Local production of gas is an example, which is 50% cheaper than international price. Gas resources are dwindling and no new discoveries have been made, although there is significant potential to make discoveries and increase the output, if investments and domestic climate improves. However, it is a big if. The second more feasible option is Thar coal route. Both gas and power could be produced from Thar coal.

Two-third of Pakistan’s electrical requirements is being met from oil and gas. 30% of natural gas production goes to the power sector. Power and fertilizer sector together consume almost 50% of domestic production of gas. Due to imported oil, energy is getting expensive and out of purchasing power of most consumers. GOP does not have the money to pay for subsidies of the energy sector and circular debt problem is creating supply and liquidity problems. Higher energy import bill also contributed to currency devaluation.

Many countries including China are facing the same problem as Pakistan due to dwindling gas supplies. In a number of places, existing gas fed fertilizer plants have been converted to coal. Instead of cracking natural gas and producing Hydrogen, Hydrogen is produced from burning coal with steam and Oxygen under high pressure and temperature, under sub-stoichometric conditions (constrained supply of Oxygen). With full or excessive air/oxygen, coal burns to CO2, while with lesser Oxygen, a mixture of CO+ H2 is produced in the presence of steam. In South African Company under Lurgi and other licenses and technology has produced gas and as well as gasoline from coal and markets the products competitively. China has more than 15 plants producing Ammonia/ fertilizer from coal, utilizing GE and Shell technologies catering to 60% requirement of Ammonia in that country.. In New Zealand and Australia also, coal and Lignite are being used to produce Fertilizer (Urea).Even in the US(North Dakota) where gas is cheap and abundant , there are Ammonia and fertilizer plants running on coal, in particular Lignite

These plants would cost the same as pipelines (Iran) and LNG regasification, but would result in lesser product cost due to cheap local coal. And would save precious foreign exchange and deliver us from rising and undulating oil prices. Engro and even other fertilizer plants are in an enviable situation, as Engro is located close to Thar area (100-200 kms) and also has interests in energy production. An ideal combination is a 600 MW pulverized coal power plant and a two to three million tons per year of coal conversion into Hydrogen and Ammonia. Fauji Fertilizer should also consider entering in Coal Gas business ala Engro, as they have the same portfolio.

About  20%  of our gas consumption goes to Fertilizer production. In fact we had a fertilizer plant that used to produce from coal which was closed down due to cheaper gas (then).No more, is gas cheaper. And thanks to LNG, which curse God may save us from, Fertilizer production would also become expensive. Although, currently gas is sold to Fertilizer plants literally free, which must go. Fertilizer producers should be asked to prepare themselves to convert to coal. It takes about three years to implement such conversions. Fortunately fertilizer plants are located relatively close to Thar. Coal can be taken to Fertilizer plants or coal gasified in-situ and transported to these plants. Presently, there is a strong case for negotiations with the Fertilizer (Urea) producers for a reduction in their gas supplies quota. The resulting Fertilizer shortfall could be imported.

There would be an issue of subsidies adjustment that would have to be handled. Cement industry has converted itself to coal for quite some time now, and reaping its benefits. There was a time when cement sector used to be a major consumer of Oil and gas. The remaining cement plants must be obliged to do the same. There are other initiatives which could be taken towards utilization of Thar coal and meeting the energy demand. Thar’s Lignite coal could be converted to Briquettes and be supplied to industry for its energy needs. Textile and other extractive industry could benefit from it. Some small mining can be initiated at Thar without waiting for large infrastructure projects to materialize. Greece, a tourism country, extensively utilizes its Lignite in briquette form.

Concluding quick-fix expensive approaches should be shunned in favor of sturdy local options which are very much there. These are cheaper, affordable and long lasting. This would require leadership on the part of government and its ministers and higher bureaucracy. If we continue following short term approaches, we would never be able to come out of the fire-fighting approaches.

The writer is author of Pakistan’s Energy Development; the road ahead. Another of his publication Issues in Energy Policy is in the press.

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