Energy challenges

We no longer have the luxury to exist in an isolated ecosystem where we can pre-determine the effect of international events on our policies and strategies. It has, instead become a live biosphere where regional collaborations and active war zones have significant potential to influence and change global dynamics. The Russia-Ukraine conflict that escalated in 2021 has had a significant economic impact, driving commodity prices, particularly fuel, to record highs. This impact has been especially severe in Pakistan, where a financial crisis led to an almost 80% devaluation of the PKR, above 30% inflation, and a doubling of energy prices.

Political instability, increased smuggling from Iran, and security issues in Afghanistan have further exacerbated the situation for consumers.

Pakistan’s heavy reliance on imported energy has highlighted multiple challenges, including limited domestic resources, and an expensive fuel mix for power generation. Additionally, power generation and distribution have not kept pace with economic growth, leading to a significant energy shortfall.

This insufficiency and high energy costs have constrained economic growth and employment opportunities.

The crisis has been further aggravated by skyrocketing circular debt and reliance on fossil fuels, especially oil and natural gas, which generate 80% of its energy. The single-buyer model through the Central Power Purchasing Authority Guarantee Limited (CPPA-G) hampers competition and strategic planning, leading to inefficiencies. As a result, Pakistan’s power tariffs are significantly higher than its peers, undermining regional competitiveness and export potential. The sector’s critical state threatens the entire economy, necessitating urgent reforms to ensure sustainable and efficient energy management. The discussion around the challenges of energy sector has gained strength in the wake of inflation, and widening gap between production and supply, creating a huge space for resolute deliberations.

The recently concluded Pakistan Energy Symposium in Islamabad, organized by the Overseas Investors Chamber of Commerce and Industry (OICCI) and Shell Pakistan Limited, provided just that opportunity, by not only bringing together stakeholders and thought leaders to discuss the causes and solutions to Pakistan’s energy crisis, but also delving into strategies for lessening Pakistan’s reliance on imports and developing alternative resources, aiming to pave a sustainable path forward.

Pakistan’s domestic oil market is segmented into Upstream (Exploration & Production), Midstream (Transportation of oil from production sites to refineries), and Downstream (Refineries and Oil Marketing Companies) sector. Dr. Nazir Abbas Zaidi, Secretary General of the Oil Companies Advisory Council, in his keynote address, pointed out six key aspects of the oil industry’s upstream, refinery, and downstream sectors with specific mention about oil production trends, which peaked at 94,000 barrels per day in 2012-2014 but declined to 73,000 by 2022-23, and similar declines in gas production from 4.3 BCF per day in 2012 to 3 BCF by 2021-22. He attributed this to depleting fields and insufficient new exploration.

To address financial crises faced by foreign investors in the upstream sector, timely payment of gas sale invoices is crucial, with current defaults exceeding USD 600 million. Recommendations by experts included increasing consumer gas prices to cover revenue shortfalls, providing grants or subsidies to clear outstanding invoices, and prioritizing foreign exchange allocation for prompt payments. These measures aim to restore investor confidence and ensure continuous production and exploration activities.

To ensure a stable gas supply and attract foreign investment, the establishment of new private LNG terminals must be expedited, along with expanding existing ones. This approach avoids government off-take guarantees and addresses winter gas shortages. Recommendations included operationalizing Third-Party Access (TPA), forming an LNG Task Force to streamline approvals and unify gas licensing rules, and deregulating the LNG value chain. This will encourage competitive gas pricing and improved services, facilitating entry of private players. An onshore LNG terminal is suggested for long-term gas supply security.

LPG is increasingly important as an alternative fuel due to natural gas depletion. However, its potential is limited by regulatory conflicts and inadequate infrastructure, with significant imports against minimal storage capacity. Enhancing regulatory coordination and infrastructure is necessary to leverage LPG’s role in the energy landscape.

To streamline downstream operations, comprehensive reforms in policy and governance are essential. A strong regulatory framework is also necessary to curb illegal product flows impacting revenue and supply of the existing and new projects. The updated “Pakistan Oil Refining Policy 2023 For New Greenfield Refineries” has been approved which is aligned with current sector developments and through incentivizing investment will potentially bring investments of USD 10-15 billion in new world scale Petrochemical/refining complex.

Another positive step in this direction has been the approval of the Oil Refining Policy for the ‘Upgradation’ of Brownfield Refineries. This policy has presented an excellent opportunity to bring in huge investment and ensure a substantial increase in production while meeting the latest environment-friendly specifications. Three refineries namely Attock Refinery Ltd, National Refinery Ltd, and Pakistan Refinery Ltd have already given consent to sign the upgradation agreements under the revised Policy with Ogra. PARCO and Cnergyico are also likely to join after the resolution of their issues taking the total investment to USD 5-6 billion by the refineries. A mutually agreed upon view was that of GOP/OGRA, and their need to expedite the signing of agreements with consenting refineries to lock the development for good.

Reinforcement is needed on the other side of the downstream oil industry. Major issues being faced need to be addressed urgently, specifically about adherence to policies independent of political changes and strict controls on illegal inflows/outflows of Petroleum products and of course, phase-wise deregulation with defined milestones.

The rollout of the Refining policy (Green and Brown- both) will only impact 30% of the production after 3 to 5 years but control in illegal inflows/outflows will reap instant benefits/revenues to the government exchequer.

Despite recent momentum, renewable energy growth in Pakistan is hampered by low private sector participation, delayed competitive bidding processes, inadequate transmission infrastructure, and the intermittent nature of renewables. Recommendations to address these issues include promoting hybrid wind-solar farms, identifying arid regions for solar park development, improving the bidding process, accessing global funds to lower costs, and incentivizing local manufacturing of renewable energy equipment.

Considering the sector’s challenges such as circular debt and outdated infrastructure, the need for comprehensive measures and modernization efforts was highlighted, with clear and consistent policy frameworks. Additionally, a robust regulatory support to facilitate development of sustainable, modern infrastructure will be required with significant financial commitments (USD 340 billion by 2030) and incentives.

While the Symposium highlighted the importance of fostering public-private partnerships to leverage collective expertise for large-scale sustainable projects, encouraging private sector investment in renewable energy, and diversifying the energy supply by prioritizing renewable sources like solar, wind, hydro, and biomass – the overriding sentiment was for the crucial need to reduce reliance on fossil fuels.

In navigating this transition, it becomes evident that focus should be directed towards four key areas: first, robust demand planning strategies must be implemented to ensure efficient energy utilization; second, diversifying the fuel mix to incorporate renewable resources is essential for long-term sustainability; third, market deregulation can foster competition and innovation within the energy sector, driving efficiency and affordability; fourth, the role of distribution companies (DISCOs) emerges as a key, necessitating reforms to enhance their efficiency and effectiveness in energy distribution.

Acknowledgment of all stakeholders is required for the urgent need to completely restructure and overhaul both the transmission and distribution sectors, moving away from the ad hoc and makeshift arrangements that have persisted for over three decades. This transformation should not only involve structural reforms and a mindset shift at the top, but also align with the best and most relevant practices from Third World countries. Additionally, it is crucial to embrace the global transformations initiated in the post-COVID era, such as digitalization and AI, and apply them locally. This can only be achieved by integrating young, innovative, and fresh perspectives throughout the entire energy value chain in both the public and private sectors.

Copyright Business Recorder, 2024