EDITORIAL: The energy sector mess in Pakistan has multiple dimensions. One dynamic is falling domestic oil and gas production, which is increasing the country’s reliance on imported fuel options. This will certainly worsen balance of payment situation and potentially jack up prices. To counter this, the plan should be to encourage local production through improvement in petroleum policy.
The caretaker government did some work on it and had commitments of $5 billion investment in oil and gas exploration. One key amendment in the framework was allowing allocation of 35 percent gas to the third parties. This was approved in a Council of Common Interest (CCI) meeting in January 2024.
However, the new government has reservations about it, and is mulling bringing back the third-party allocation to previous 10 percent. That is a dampener and will hinder the potential investment flow.
The E&P (exploration and production) companies are cash constrained as falling production amid growing circular debt has adversely impacted their balance-sheet strength in the last decade or so. A greater third-party stake will improve prospects of investment.
However, prima facie, there could be concerns on enhancing the third-party allocation on the availability of overall domestic supply. The petroleum ministry has run permutations and combinations on it, and there is empirical evidence that increased allocation of third-party can potentially widen the domestic demand-supply gap.
For example, our domestic gas is depleting at around 8 percent annually and the constraint demand growth is about 2 percent.
Theoretically, the overall increase in production should be higher than addition of constraint demand growth and depletion, and third-party allocation. Thus, higher the third-party allocation, higher the new increase in production required for the system to have more gas.
Furthermore, this view assumes that ‘third-party’ means new consumers. This is an incorrect assumption as most likely it would be a mix of the existing and new entrants availing the free float available at the discretion of the producer.
Let’s not delve into these theoretical discussions and state a simple fact that increasing domestic production is invariably better. Let’s focus on it and revive the domestic production through changes in the petroleum policy.
The issue is that the professionals in the caretakers were thinking differently from those in power today. The policy should not be compromised on it. Already, the refinery policy is hanging in the balance for the past four years and still the incentives are not finalized. Three governments have changed hands and in between the focus was shifted to a new refinery by the Saudis.
Now we are back to negotiating with domestic refineries to expand. In between, the annual opportunity loss due to delays is $1 billion to $1.5 billion.
Policy consistency is key to attracting investment. Policymaking should be institutionalised and should not be reliant on one person or one government. There could be vested interests or clash of egos that may delay or cause setbacks to plan.
No decision is the worst form of decision with potential for an eventual loss for consumers at large. That should not happen.
The good news is that there have been some changes in key personnel in the power ministry and hopefully 35 percent allocation will be incorporated and government will be able to attract the much-needed $5 billion investment in exploration and production of gas and oil.
Copyright Business Recorder, 2024
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