Transparency in Oil & gas sector

Transparency in Oil & gas sector

In this article, I wish to uniform my readers of something in Petroleum pricing which is almost scandalous. OGRA regulates and periodically announces Petroleum prices that includes Diesel, but that is Light Diesel Oil (LDO) which forms to be a negligible portion of the consumption. The real Diesel, HSD which is used in road transports, trucks and buses, is apparently and clearly out of OGRA’s purview. Ministry of Petroleum is fixing these prices without regulation through its own notification posted on PSO’s web-site. As mentioned earlier, LDO and its pricing are hardly of any consequence. It is such loopholes and gaps in regulatory regime that are the focus of this piece. Also the bipartisan committee which is holding session these days on economic reforms must look into this.

HSD’s latest price is Rs.78.33 per liter as compared to the regulated Rs.66.61 for LDO and Rs.72.96 for Gasoline (premium grade petrol).That means that the real Diesel (HSD) is 7.36% (higher than the ordinary petrol) and 17.59% higher than the regulated Diesel price. There are two problems here. Except in the US, Diesel is priced much lower than the Gasoline, for a very reasonable and understandable logic that the Diesel is used in public transport and thus should be priced cheaper. Those who argue against cheaper diesel normally base their argument for environmental reasons. However, in Europe where the environmental lobby is the strongest, Diesel is priced lower than gasoline. Are we trying to be more loyal than the king? No wonder we have galloping inflation, especially in the sensitive price index. Pricing although very important, however, is not the focus of this article, which has been discussed at length in an earlier piece in this newspaper by this scribe. The issue is lacking transparency and persistent attitude of the ministry of petroleum against regulation and transparency. OGRA declares no Petroleum Levy on Diesel and no dealer margin and people believe it so. But the ministry circular builds in Rs 5.00 per liter as Petroleum Levy in the basic price and adds up another Rs 14.00 to a Liter for all kinds of margins All of which outside the not so watchful eyes of our OGRA. Transparency is in order.

Ideally all prices should be determined through unhindered market forces and their competition. It requires a large number of buyers and sellers. In Pakistan and other similar developing countries, sellers are usually not in high numbers and usually collude in price fixing and hoarding and manipulation of all kind. Sugar is a good testimony to the afore-mentioned. In the case of utilities such as electric power and oil and gas, there is a strong case of due regulatory process due to the monopolistic character of this sector. NEPRA and OGRA have been formed in this perspective.

Transparency in regulated sectors is measured by the following factors;

1) Independence and reasonable domain of the regulatory agencies.

1) Written and publicly available policies, rules and regulations.

2) Public participation in Tariff and pricing.

3) Un- restricted publishing of data

Measured on the above yardsticks, Oil and gas sector in Pakistan appears to be quite lacking. On the other hand, Pakistan’s electricity sector and NEPRA’s performance in this respect appear to be far better. An examination of the websites of NEPRA and OGRA would amply demonstrate this. While NEPRA website is full of petitions and determinations, public hearings and data, OGRA website publishes tariff without any pretension of public process. We will examine transparency issues in oil and gas sector and OGRA’s role and performance in some detail in this article.

OGRA’s regulatory process seems to be only concerned with the determination of Tariff for the Transmission and Distribution of natural gas that is supplied by the two companies, SSGC and SNGPL. Measured on the above transparency criteria, the performance in this limited respect appears to be relatively much more acceptable. On the technical side (standards) also, there appears to be a reasonable OGRA activity and performance.

Oil and gas sector is worth more than twenty billion US dollar in terms of sales and output. Except for the aforementioned exception of Gas T&D and mere posting of petroleum retail prices and gas wellhead prices, there isn’t much to show by OGRA. The sector is almost totally regulated, except LPG where there is confusion as to the regulatory domain. Admittedly OGRA works within the framework of the role assigned to it by Ministry of Petroleum (MPNR) and the GOP. It cannot arrogate powers to itself, although it can build pressure towards higher domain and role for itself. The due process is lacking in the following areas: Surely there are and must be rules in the following areas which in itself is not enough. The actual application and adjudication of those rules is to be the subject of due public process, where price is not determined by the market forces. International transparency moves and initiatives these days even go beyond public tariff and pricing determinations. They are demanding Publish what you pay(PWYP)policies and regime, for it has been found that the actual payments vis-à-vis publically determine tariff may be deviating for legitimate and not so legitimate reasons. Following areas should come under some process of public input and scrutiny through the regulatory process of OGRA and the latter should not restrict to posting of results but invoke the whole regulatory input and process into these.

1) Well-head prices of oil and gas.

2) Ex-refinery prices of petroleum products such as gasoline and diesel, including crude oil imports

3) Oil pipeline tariff

4) PSO imports of petroleum products (50% of the total demand is met through imports valued at around 8 billion dollars)

5) Furnace oil pricing despite claims of being in the open sector; and most importantly

6) High Speed Diesel (HSD) pricing.

On the other hand, what little powers have been granted to OGRA, successive leadership of that organization have not chosen to make use of those. For example who stops OGRA in holding public hearing for discussions on the other constituents of petroleum prices, if the ex-refinery (wholesale or producer price) is made an untouchable tree for it?

MPNR has traditionally being reluctant to cede powers to OGRA. In all the above areas, the closed offices of oil bureaucracy have the sway. There has been much controversy regarding the self pricing role of OCAC (Oil Companies Advisory Committee) which has since been disbanded or depowered. It is ironic that OGRA is not considered adequate enough for the role of OCAC .Who does not like power and authority? Public process absolves responsibility and implication of public servants in scams and others in a highly skeptic Pakistani society today. They should support the expansion of public process. Transparency would also encourage and promoted much needed direct foreign investment in this vital sector. And finally, it is the responsibility of legislature and public representatives to intervene and write laws and require regulation in this respect.

The writer is a former Harvard University fellow and is the author of ,”Pakistan’s Energy Development; the road ahead”.

Converting Oil-fired Power Plants to Coal

Converting Oil-fired Power Plants to Coal

By Akhtar Ali

There is some merit in this proposition. Oil has become quite a risky fuel, as the recent oil price hike has amply demonstrated. While apparently , there is no substitute to oil in transportation sector , the recent trend of installing oil based power plants(IC Engines mainly) has been rather unfortunate. Pakistan now has a dubious distinction of being10th largest importer of Oil and also the 10^th largest user of Oil in Power sector in the world. This may prove to be a very costly and tragic distinction indeed, if indigenization of fuel is not pursued seriously.

It is almost certain that oil would be extinct in the next fifty years and as its extinction phase starts, as it already has; its price behavior is projected to be quite volatile. Future price hikes ala 2008 cannot be ruled out. These would occur more frequently in future. Recent reliance in oil has perhaps been for no other short term alternative. Earlier oil-fired power plants have been installed in 30 USD per barrel regime.

Even Earlier oil fired power plants have suffered from low capacity utilization, although these were quite capable of running as base load power plants. A classic example is of HUBCO , which capacity utilization has improved very recently due to the power crisis. Otherwise, oil being expensive, HUBCO came in a low merit order and thus the low capacity utilization, which is ironic indeed for capital scarce countries like ours.

For the reasons discussed , oil fired power stations have been converted to Coal in Europe and ASEAN region in the wake of oil crisis of 1973 , and the trend continues. Despite general environmental dislike and opposition to coal, for instance, Italy’s major power utility ENEL has gone for conversion of a 2500 MW oil fired capacity to coal, as reported by NYT. There are other examples as well.

In the U.S already, coal based power is abundantly installed to the extent of 50 % of the total installed power generating capacity , providing cheap power ( 5 cents or lesser per unit) from cheap coal .Apparently ,the U.S. has no reason to increase the already high predominance of coal , while other resource options are there like gas and nuclear.

Coal , however, is not immune to unruly price behavior. Recently, its price also hiked in the international market in sympathy with oil, to three times its usual level. Therefore, while imported coal could be a short term option, the longer term option has no escape from utilizing our domestic Thar Coal (lignite).Optimally Lignite is better utilized at mine-moth power plants. However, Lignite can be transported to a few hundred kilometers quite economically, comparatively speaking, as is being done in (hard) coal scarce northern regions of India like Gujrat and Rajhastan. We can therefore look forward to utilizing Thar coal up to southern Punjab like Muzaffargarh.

Transportation is an important and significant component of the total received cost of coal and can add as much as 50% to the at-mine cost. Interestingly for some coastal towns, imported coal and its transport can be cheaper than domestic coal. This is one of the major reasons in India today for resorting to imports of coal. Unfortunately, Pakistan will ultimately be having two major energy resources at two geographical extremes, while most of the market may be around the center; hydro power in the north and coal (imported or domestic Thar) and Wind in the South. There would be no other option, but the universally available solar energy , which may ultimately balance out the situation in due course. Reportedly Afghanistan has significantly large Hard Coal resources. Both Pakistan’s and Afghanistan’s economies are going to benefit immensely, if these resources are developed also. These ideas should be kept in view, while planning for reconstruction in Afghanistan and returning of normalcy in the region.

For a variety of reasons, Thar coal cannot be adequately utilized with Thar based installations alone. By 2030, our famous Energy Security Plan (2005) envisages 25000 MW to come from Thar Coal; even more, if the unrealistic projections of gas are taken into account. All of this capacity cannot possibly be installed at one location, whatever be the dictates of transport optimality. There are many issues like security based dispersal, water, ecological limitations, demand location, manpower etc.

For the time being, it is imperative that the proposition of converting Oil-fired power stations to coal be given consideration. It is a long cycle issue, and may take some 3-5 years to materialize .Already, new power plants based on imported coal have been proposed for Balochistan coast, near Hub Power Plant, and regulatory approval obtained in this respect. However, keeping in view the eventual potential conversion to Thar Coal, it is suggested that coal power plants be based on Sindh coast. There was a proposal earlier, mooted earlier in 1988, to install imported coal power plant at Keti-Bandar under the auspices of ADB. Infact, whole of Sindh coast extending from Bin-Qasim to Keti-Bandar is quite opportune for such siting keeping in view the closeness to Thar Coal.

Technically speaking, there are no limitations to the proposal. This is possible in today’s technology. In steam turbine based power plants, Oil fired boilers are to be replaced with coal fired boilers, although not a cheap proposition, as 30 % of the power plant investment may be in the boilers itself. Capital cost component in the unit product cost, do not exceed 15-20 % , bulk of it being the fuel cost. In the long run, even Gas fired combined cycle plants could be converted to coal based IGCC, a technology that would be commercially available in next five years. But let us not just delay action today for options of tomorrow.