A new gas transmission pipeline to transmit imported RLNG from Port Qasim to Lahore is under active discussion; it is even implementation for the last six months. The project was conceived in 2015 under which Russia was to build this pipeline under a BOOT arrangement. For a variety of reasons, including lack of agreement on transmission tariff probably delayed the project implementation. Lack of immediate gas demand and LNG controversy perhaps contributed to lack of progress in this project.
Original gas pipeline capacity was proposed at 1.2 bcfd with a diameter of 42 inch which is the most popular dia in its category in the world. However, the Russians have proposed to have a higher diameter of 56 inch. This would increase the capacity to 2.54-3.4 bcfd depending upon the design and compression. The issue is whether there would be enough demand of gas over the life time of the project and whether the project would be economical in the new proposed size and other issues of indigenization, self-reliance, project timings, etc.
Gas demand
Long-term future of gas is uncertain worldwide. It is no more an attractive fuel. It used to be a sought-after low CO2 fuel for replacing coal and nuclear. In Pakistan, it has been and continues to be a high demand fuel. However, in power sector, its use has been projected to be going down due to high cost LNG. All combined cycle power plants are projected to be out of merit order due to the induction of base load coal and nuclear power plant which fuel cost is lower than LNG, even before the rise in LNG prices. Only power plants based on gas from dedicated fields such as Uch, Kandhkot and Mari, etc., are and will be in merit order. Only residential and industrial, CNG and fertilizer will be the demand sector. Even in fertilizer sector, bulk of the gas is coming from dedicated fields.779 mmcfd is coming out of dedicated fields and only 196 mmcfd is supplied from the pipeline system.
According to Ogra’s Petroleum Industry 2019-20 Report, actual gas demand in FY-20 was 4,616 mmcfd which has been projected to increase to a level of 5,597 mmcfd by FY-2031; an increase of 981 mmcfd or 21.25%, (which may be easily handled by a pipeline of 1.2 bcfd capacity). The demand is slightly exaggerated due to higher projection for power sector which is not consistent with IGCEP (Power Plan). IGCEP predicts LNG-based combined cycle power plants to be going out of the merit order due to induction of coal, nuclear and renewables. 400-600 mmcfd gas demand will be curtailed under this head. Local gas production has been projected to go down from FY-2020 actual of 3,267 mmcfd to only 1,369 mmcfd. The gap is to be filled by 1,297 mmcfd LNG and IP and TAPI 2092 mmcfd. If IP and TAPI do not come by, LNG can be assumed to take its place, making its total going up to 3,389 mmcfd.
Here, it may be pertinent to point out the need for some degree of coordination among power and petroleum division. Nepra and Ogra scarcely meet in an institutional manner and the two regulators operate mostly in silos. IEP (Integrate Energy Plan) has not been in the priority of things. SAPM Tabish Gauhar has proposed formation of a coordination cell in the ministry of energy to effect the required planning and coordination among the two divisions. In most jurisdictions, there is one regulator for both Petroleum and Power, although this may not be an urgent issue.
The low demand LPG scenario, in the medium term, is supported by viewing the prevailing market appetite. PGPL terminal remains under-utilised. LNG terminal investors and other marketing licensees could not find customers and are only in the pursuit of stealing existing large customers of the SSGC and SNGPL which the latter are not prepared to surrender. Rising LNG prices are expected to suppress LNG demand and thus it may militate against the large dia and capacity transmission pipeline.
Supply side
Although, gas/LNG use in power sector is projected to be out of merit order, there are other uses in domestic and industrial sector which will continue. Currently, there is no substitute for gas in the industrial sector. On supply side, biogas, bio-CNG, and coal-based SNG are the options that need to be developed. Yet Hydrogen is another option that is coming up and may be viable by 2030. This would diversify the transmission load away from a central trunk and LNG.
Pipeline capacity controversy
Keeping in view the low demand for expensive LNG and some potential for enhancing the existing network capacity, there does not appear to be much utilization potential of a high capacity transmission 3-3.5 bcfd pipeline of 56 in dia by FY 2031 as proposed by Russians. It is twice or more of the additional capacity required by FY 2031. It appears that a smaller dia pipeline of 42 inch with 1.2 bcfd capacity may do the job adequately. For two LNG terminals that are currently under discussion, a pipeline capacity of 1.2 bcf is sufficient. A third can be accommodated through optimizing existing network. Due to depleting gas fields, segments of existing network are getting redundant or under-utilized. This will continue over the next decade. There is a need to undertake network simulation and optimize the existing network by enhancing segment capacities.
There are knowledgeable people who oppose the increase in diameter and capacity for a variety of reasons. They would like to stick to the 42 inch dia. Their argument is that this is the standard size on which Pakistan’s transmission network is based. Pakistani companies have experience and capability in this. Shifting to higher size would make them dependent even more on foreign expertise. Only recently (2015), Pakistani gas companies implemented a similar project of 1.2 bcfd capacity (42 inch dia and 1142 kms) at a highly competitive cost of USD 1 billion which is half of what Russian proposed CAPEX for the same capacity. At current prices, a 33 to 50% increase in project cost is expected of local project. Pakistan has funding available in the form of GIDC of Rs 300 billion which would enable it to finance it out of its own resources, although foreign exchange component may be an issue. They also argue that world market is of 42 inch dia and lower. Pakistan gas companies’ portfolio would be enriched by sticking to 42 inch dia and would enable them to participate in the pipeline construction contracts abroad, i.e., in the Middle East and Africa.
It is estimated that due to falling local production, certain transmission segments are falling unutilized or under-utilized. Balancing and expansion of the existing network may also be able to create an additional transmission capacity of 500 mmcfd at a reasonably low cost. This would provide a cushion for the interim period and would make the aggregate additional capacity to 1700 mmcfd (1.7 bcfd).
Due to a variety of risks including the rising price risk of LNG, all investment resources cannot be diverted to one trunk line of LNG from Karachi to Lahore. There are other sources that may come up including Iran-Pakistan pipeline and TAPI. Iran-Pakistan would require Gwadar-Nawabshah link. Coal gasification may become attractive due to high LNG prices and would require a different transmission route.
Transmission tariff
Higher gas demand in the longer run and lower unit cost is the argument in favour of higher capacity/dia of 56 inch. There is purported scale economy in higher diameter. With 50% increase in CAPEX from 2 billion USD to 3 billion USD, gas throughput may be increased by more than 100%.The 3 billion USD figure may be brought down also resulting in a cheaper tariff. Russia has been demanding 81 USc/mmBtu earlier almost twice the existing tariff of the local gas companies.
Pipeline economics
Pipeline economics is a complicated issue. In the West, one-third of Capex goes to material and the remaining to all other cost components; often labour costs are 50% of the total Capex indicating its labour intensive nature. In Pakistan and the region, reverse tends to be the case; a two-thirds being material and a one-third other costs. Local pipeline Capex are therefore more sensitive to steel prices. Chinese steel plate prices in the UAE market these days are 1060 USD per ton. These are due to hot commodity markets in the aftermath of the Covid recession which depressed prices earlier. Today high energy and commodity prices are a rebound from the earlier low level.
For reference purposes, Indian costs can be more realistic and comparable. In Nawabshah-Gwadar pipeline project, Capex was a major issue of controversy in which German consultants had been employed. Their estimates were found unacceptable and the projects could not be approved, although there were possibly other reasons as well for the project’s closure. International tariffs are market-based on take and pay basis, while most projects here are on take or pay basis putting all the risks on the buyer and thus of necessity should be lower than international tariff apart from high labour cost issues in the west. These issues can cause considerable delays in a mutually agreeable cost and tariff, unless the Pakistani side surrenders totally.
There has been a trend in Pakistan of allowing liberal tariffs without due diligence either by the regulators or by the government which has resulted in 40% higher power tariff, causing circular debt and many other difficulties. An independent third-party consultant may be able to determine the Capex and tariff. Upfront power tariff policy can be a useful reference based on which recent investments for about 10,000MW have been made. Apparently, Ogra does not have that kind of framework; it has been dealing with operating projects which have a different dimension.
Concluding, it appears that 56-inch-dia high capacity gas pipeline proposal would be capital intensive, uneconomical and beyond the realistic needs of the prevailing and projected gas market in Pakistan. Excessive power capacity at high tariff is a painful reminder of mistakes that have been committed which should not be repeated. Also, it may take too long to negotiate and implement the larger 56-inch project. As it is, the Russians had initially proposed a time period of 4.5 years even for a smaller project.
Admittedly, it is a delicate and sensitive project marking the beginning of relations with a new Russia in changing political environment. However, agreeing to terms which we may not be able to honour later may create even a worse bottleneck. Reportedly, China is patiently tolerating payment delays. Thus a balanced and realistic approach is required. Even in 42-inch-dia project, a significant share of Russian involvement is possible by the way of providing all the imported materials and supplies. There are many other options to accommodate trade with Russia including oil and gas exploration, LNG and oil supplies contracts, oil refinery, steel mill and others.
(The writer is former Member Energy, Planning Commission and author of several books on the energy sector. The views expressed in this article are not necessarily those of the newspaper)
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NATURAL GAS
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Table 3.29: Sector-wise Gas Consumption during FY 2019-20
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(MMCFD)
Sector SNGPL SSGCL Independent Total Percentage Share
System System System Country (Net of Own Use
& Losses)
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Residential 604 284 0 888 24
Commercial 48 26 0 74 2
General Industry 180 147 0 327 9
Fertilizer 143 53 583 779 21
Cement 0 0 0 0 0
Captive Power 110 180 0 290 8
Power 530 194 474 1,198 33
Transport 88 39 0 127 3
Sub-total 1,703 923 1,057 3,683 100
Own use 33 0 0 33 -
T&D Losses 170 198 0 368 -
Grand Total 1,906 1,121 1,057 4,084 -
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Total SSGCL volume excludes 34 MMCFD volume due to JJVL shrinkage and RLNG Swap
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(Source: SNGPL SSGCL and Independent Systems)
Copyright Business Recorder, 2021
The writer is former Member Energy, Planning Commission and author of several books on the energy sector
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