The Petroleum Institute of Pakistan (PIP) has released its annual publication recently which contains useful data, analyses and recommendations. We would like to examine the main issues raised by PIP and would like to mix it with my own views to enrich (or degenerate!) their effort. An important feature of the PIP publication is that it has made projections for the future which most data references tend to avoid. Let us look at some of the projections first
Oil consumption has been projected to come down to 17 percent of total energy consumption in 2030, from the present proportion of 37 percent (2016); gas consumption will also go down from 42 percent to 30 percent in the same period; gas consumption will be dominated by imported LNG component of 67 percent of total, if no major gas discovery is made in the meantime, which may not be the case. However, coal consumption is destined to grow from 5 percent (mostly used in industrial sector presently,2016) will more than triple its share to 17 percent, wherein the increase will be mostly due to installation of coal power plants, based both on imported and domestic coal. The bad news is that domestic Thar coal may have a 40 percent market share while imported coal will have a market share of 60 percent within the coal sector. Hydro and Renewable energy has been projected to grow from 11 percent to 25 percent. It should be noted that these are percentages of total energy consumption and not of electrical consumption only. Total primary energy supplies have been projected to almost triple in the forecast period from 72 MTOE in 2016 to 199 MTOE in 2030.
Total energy imports will have a dollar value of 47 billion USD in the year 2030 as opposed to about 10 billion USD presently (2016); 26.7 billion USD of oil and 18 billion USD of LNG imports have been projected. Oil imports may come down due to renewable energy impact and that of electrical vehicles. This may cause increase in LNG demand further, which necessitates more drive and investment in local gas development. These projections are based on an energy growth rate assumption of 5.5 percent (business as usual scenario) consistent with the same rate of growth of GDP in the forecast period. A good oil price forecast has also been assumed which may or may not be there due to the oil ‘Doomsday’ forecast discussed elsewhere in this space.
However, the main focus of the report is oil and gas and not the total energy including electrical sector. As mentioned earlier, oil has a market share of 37 percent presently, next to only gas (42 percent). Present oil consumption stands at 23.63 MMT (2016). Power sector consumes 33 percent (furnace oil mainly), while transport sector has a share of 56% and industry is at 9 percent. Oil consumption has grown at a rate of 3.04% per year over the decade ending 2016. gasoline has grown fastest and has almost quadrupled over a period of last 10 years (2007-2016). This makes a growth rate average of 15.65 percent per year. Indications are that the rate may continue over short to medium-term, unless CNG acquires its earlier status which does not appear very likely due to higher prices based on LNG. HSD consumption has almost stagnated over the last ten years and has varied between 6 and 8 million tons per year. Gasoline consumption is expected to be the same as of HSD in near future. This indicates a higher growth of personal transport at the expense of commercial goods transport indicating a slower growth of the industrial sector. Motorcycles also appear to have a higher market share due to exponential induction of motorcycles.
In the medium to long-term, however, the future of oil does not appear to be bright. Oil prices will increase continuously to acquire almost the earlier level in a matter of next ten years. Furnace oil will disappear from the local market scene. The PM has already ordered earlier closure of furnace oil power plant most of which have a thermal efficiency of less than 40 percent as against the new NGCC power plants running on LNG with a thermal efficiency of 60 percent. This will create problems for local refineries which produce furnace oil which cannot be helped as the net cost differential would be very high. RLNG is only 20 percent cheaper than furnace oil, but it is the efficiency factor which makes FO quite uncompetitive. Nepra has issued its regulatory approval of December fuel cost of RLNG-based electricity to be Rs 6.33 per kWh vs Rs 9.80 per kWh for FO-based electricity.
In transport sector, electrical vehicles (EVs) are projected to almost replace (although not totally) petrol vehicles in the next 20 years. Five countries, including India, have already announced that they will shun production of petrol vehicles by 2030. Deadlines may be missed, but intentions are clear. More countries are expected to announce such decisions and targets in favour of EVs. Even in Pakistan, there are already hybrid cars reporting almost double fuel economy. In Pakistan, as in India and elsewhere, by 2025, a considerable market share is expected of EVs and by 2035, most automotive are expected to be EVs. New automotive would dominate in the new purchases much earlier. GoP should commission a study in this respect based on which a strategy and policy may be prepared. There is a case for launching pilot projects of electrical buses in congested areas of major cities in the country to take care of pollution and as well as paving the way for the new technology. Fortunately, ample electricity supply should be available in the next two years and onwards.
Furnace oil gone in the short term and POL in the medium to long term, is a dire forecast for the local and as well as international oil industry. EVs will, however, increase the demand of natural gas, coal and renewables. This scenario places much importance to the local production of gas, as unlimited LNG imports may not be sustainable. And much role of renewables also appears to be in sight due to highly competitive prices of solar and wind. Nepra has issued a tariff of Rs 5.30 per kWh for solar PV (Zorlu) and around the same for others. Competitive bidding, once large market appears to be in sight, has a potential of bringing these rates down to Rs 3-4 per kWh. This aspect has not been considered qualitatively or quantitatively by the PIP report.
This scenario has an implication for future investments in oil sector, especially in the oil refining business. There is already a refining capacity of 400,000 bpd which is 4 times the local crude oil production and should be sufficient to process local oil for quite a while. The PIP report has made recommendations for investments in this respect. However, investors may find it risky. It may almost take 7 to 10 years to implement a refinery project which means that when the refinery comes into operation, market decline may have already begun. One may, however, see a scope for geographical shift of old refineries which may still have a working life of 10-20 years.
(To be continued) (The writer has been Member Energy at Planning Commission until recently)
Published in Business Recorder, January 31st, 2018.
