In the part-I of this article, we discussed the long-term future of oil due to the projected emergence of Electrical Vehicles and a very significant elimination of fuel vehicles in almost next two decades. However, the immediate problem faced by Pakistan is that of furnace oil. It is a good omen that expensive and pollutant FO is being replaced with cheap and clean LNG.
About four million tons per year of furnace oil is produced by local refineries as an associated product along with the production of gasoline and HSD. This will continue to be produced, irrespective of its local usage possibilities. Ironically and amusingly, a decision was made by the PM unilaterally without any consultation to stop all FO-based power plants which created a crisis. Local refineries’ stocks went high to the overfill levels. Refineries were on the verge of stopping their production altogether creating a spectre of a motor fuel crisis. PSO’s imported FO ships could not be loaded off due to lack of storage. Knee-jerk and unilateral decisions should have been avoided in a mode displaying undue overconfidence. Unfortunately, this happened after the merger of the two ministries of power and of petroleum into one unified Ministry of Energy. It was expected that one integrated ministry would promote better coordination. In the meantime, a decision has been made to stop Furnace oil imports, which is a welcome decision. Most probably, FO would have to be exported at a loss. We have mentioned earlier that it would be hard to attract investments in the refinery sector due to poor prospects of oil beyond two decades. However, refinery investment proposals are being made and entertained. KPK government is negotiating for an investment of a refinery of 30,000 barrels per day. There is a case for installing an oil refinery in KPK based on local crude, due to increasing production of crude oil in KPK. It would, however, be advisable to study augmentation (by adding Coker component) of the large refineries to enable these to stop producing FO and start producing equivalent amounts of Lighter products such as Gasoline.
It may be pointed out here that ‘Oil Doomsday’ does not mean that of gas as well. In fact, despite increased role of renewable energy, a larger role of gas-based electricity (NGCC) has been indicated worldwide. There is a technical requirement of NGCC to balance and neutralise grid stability issues posed by the renewable energy.
Investment in other oil sub-sectors may be advisable, especially, in transportation. 61 percent of oil is transported on trucks and 37 percent by pipelines. Truck transport has become very problematic. There is high incidence of accidents. There are other vices as well promoted by the transport mafia. Oil transport sector resists and even refuses to modernise and implement safety guidelines and threatens to go on strike frequently. The only solution is to increase the market share of pipelines and restrict truck transport to in-city and far-flung areas. Fortunately, Ministry of Energy has already launched projects in this respect. The subject would need substantial investments to alter the present precarious situation.
The focus should be on E&P targeting natural gas finds. No major discovery has been made after 2012.There is a considerable potential which has to be exploited. We can become self-sufficient in oil and gas, if a genuine effort is made with considerable reform in the sector as we shall discuss.
There have been only two periods when large and significant discoveries were made; first period is of 1950-1965 when gas fields like Sui, Mari and Uch were discovered; it was followed by almost a blank period of 20 years extending from 1965 to 1985; from 1980-85 to 2012, discoveries like Qadirpur, Kunar, Bhit and Zamzama were made in case of gas and Adhi, Mayal, Dhurnal, Pasaki, Nashpa and Chanda were made in case of oil and condensate. A significant drilling effort has been made in the last 5 years and some smaller discoveries have been made which were not good enough to arrest the dwindling level. Some production will be added as it takes quite some time to develop and connect, especially, the gas fields. The major issues are well known and have been put together by the PIP report cogently.
Firstly, there is an issue of incentives of tight gas for which a potential of 35-40 TCF has been indicated. There has been an incentive of 40% over conventional zonal wellhead gas prices, which PIP maintains has withered away over time due to changes in conventional gas rates. They have proposed a 25 percent increase in tight gas rates so that net incentive develops. An upper limit for incentives has to be the LNG price parity beyond which it may be counter-productive to announce incentives. They have also recommended streamlining of the tight gas rate award process to shorten time and remove complications.
Secondly, it has been proposed to hold concession auctions more frequently and in smaller packages. The last round of auctions was made in 2012 when 65 blocks were awarded. Many awardees usually sit on their Licenses like real estate investments. MoE has cancelled many licenses and more should be done.
Thirdly and perhaps more importantly, new technology like 3D Seismic investigations and other tools have been recommended. The investment has to come from PSDP as the results of such investigations will go to a national depository which already exists. GoP may recoup the investment by levying a user charge once production starts. RLNG power plants have been financed under PSDP. There is a strong case for funding this data gathering and investigation effort which can go a long way towards successful oil and gas finds.
Fourthly, despite potential Shale resources and Offshore appear to be a distant possibility. PIP report does not show much enthusiasm in this respect except proposing pilot projects and incentives. As has been mentioned in the forthcoming, foreign investment prospects to bring technology and finances may be little.
Fifthly, PIP is apparently not a believer in ‘Oil Doomsday’ and has argued for investments in all aspects of oil for good reasons, this writer is personally inclined to propose more selective approach. If investors are ready to take the risk it may be allowed. However, take or pay contract may be avoided except in Gas and LNG, wherein no ‘Doomsday’ is being forecast.
Finally, as this writer has argued earlier, that oil and gas sector is almost dominated by the two public sector companies – OGDC and PPL – that are happy and making money. Appetite for growth appears to have dwindled and plateau has set in due to large bureaucracies. Out of a total of 99 wells drilled in 2016, private sector drilled 49 wells which only hold 30% of concessions. Private companies do not have as much resources and foreign investment and interest may not be forthcoming due to ‘Doomsday’ forecasts for oil. Some competitive element has to be introduced and some shaking of these two companies is required. More E&P companies may be started in public sector with JVs from private and foreign companies possibly with shares of OGDC and PPL also. Also service companies may be subsidised and encouraged. In KPK, we are seeing the good impact created by the emergence of KPOGCL.
Concluding, one has to go with the flow and avoid trying to sail against the tide. This is not feasible for a small and poor player. Renewable Energy and electrical vehicles are the order of the day and of the future. Pakistan has not done the required work until now, while others have already made strides in this respect. A renewable energy plan of inducting 10,000MW is in order in addition to some hydro projects. In fossil sector, local gas and local coal appear to be the sustainable options, and both will last longer than oil. Local coal would be the saviour and an insurance against high oil and gas prices. The challenge is how to manage the transition while increasing the local production. (Concluded)
(The writer was Member Energy at Planning Commission until recently)
Published in Business Recorder, February 04th, 2018.
