The

 Review  of  New  Energy  Policy  

 
                                                                                                                                         PROPLAN  ASSOCIATES  

The  Review  of  New  Energy  Policy  

By  Akhtar  Ali  
 
In  collaboration  with  REAP  
8/8/2013  
 

                                                                                                                                                                 Version  @1.1  

This  review  in  six  sections  has  been  conducted  based  on  the  news  paper  accounts  of  The  New  Energy  
Policy  as  discussed  and  approved  by  CCI.  No  formal  text  has  been  available  as  yet.  

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I-­‐Introduction:  Sector  Review  
 
II-­‐Transferring  circular  debt  to  provinces  and  Hydro  Royalty  issue  

III-­‐Reducing  the  COGE  (Cost  of  Generation)  

IV-­‐  Enhancing  Energy  Tariffs  

V-­‐The  Elusive  LNG  

VI-­‐Development  of  indigenous  energy  resources  

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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I-­‐Introduction:  Sector  Review  
 
 
Energy  consumption  in  Pakistan  has  virtually  stagnated  over  the  last  five  years,  growing  at  a  dismally  low  
rate   of   1.3   %   p.a.,   lower   than   the   population   growth   rate,   with   obvious   implications   for   per   capita  
availability   of   Energy.   One   need   not   lament   the   reasons,   for   these   are   too   obvious.   Energy   consumption  
cannot  increase  in  the  milieu  of  energy  crises  and  shortages  and  consequent  economic  malaise.  Electric  
Power  supplies  have  stagnated  as  a  whole  and  no  rise  in  electricity  consumption  has  been  noted  in  any  
sector;   domestic,   industry   or   others.   Total   generation   stood   at   98.664   Million   kWh   in   2012,   only   0ne  
million   units   or   so   higher   than   in   2007.Share   of   thermal   Power   remained   as   it   was   around   65.7%,   Hydro  
at  29%  and  nuclear  4.94  %.  
 
Gas  consumption  has  also  stagnated  at  a  constant  level  of  around  1.22  TCF  per  year.  Household  sector  
increased   its   share   from   15.9   %   in   2007   to   20.34%   in   2012   .Industries   shared   remained   as   it   is   at   22.2   %  
and   constant   in   absolute   terms   as   well,   and   similarly   fertilizer   sector.CNG   consumption   more   than  
doubled  itself,  from  a  share  of  4.46%  in  2007  t0  9.24%  in  2012,  registering  a  phenomenal  growth  rate  of  
16.1   %   p.a.   This   has   been   achieved   at   the   expense   of   the   Power   sector,   which   share   reduced   from  
35.42%   in   2007   to   only   27.8   %   in   2012.A   hefty   74   Billion   Cft   per   year   has   been   diverted   which   almost   all  
of  it  went  to  the  CNG  sector.  In  the  current  year  2012-­‐13,  CNG  share  should  have  further  increased  in  
the   wake   of   Supreme   Court   intervention   and   reduction   in   CNG   prices   with   further   deleterious  
consequences   for   the   power   sector.   In   just   one   year,   the   oil   consumption   in   power   sector   went   up   from  
43.84%  to  55.12  %  in  2012,  while  gas  consumption  in  power  sector  did  the  reverse,  it  decreased  from  
55.9%  share  to  44.78%  in  2012.  
 
Oil  consumption  has  increased  from  18  Million  Tons  p.a.  in  2007  to  20  Million  Tons  in  2012,  giving  an  
average  growth  rate  of  1.9%  p.a.  Although  the  increase  appears  to  be  nominal,  due  to  oil  price  increase,  
there  is  a  huge  impact  on  balance  of  payments.  The  oil  import  bill  has  gone  up  from  7.5  Billion  USD  in  
2007   to   14.5   Billion   USD   in   2012,   almost   double..Furnace   Oil   price   increased   from   Rs   21,000/-­‐   per   ton   in  
2007-­‐8   to   Rs.73,   000/-­‐   in   2012,   with   obvious   implications   for   power   tariff   and   circular   debt.   Gasoline  
retail   price   increased   from   Rs.53   per   Liter   to   around   Rs.   100   or   so.   Diesel   price   increased   even   more,  
from  Rs.38/-­‐   to   Rs.   108-­‐110,   almost   three   times   the   2007   level.   No   wonder,   HSD   consumption   remained  
static   in   that   period.   There   was   an   en-­‐masse   shift   of   public   transport   to   CNG.   However,   Gasoline  
consumption   has   doubled   itself   from   a   market   share   of   7.1   %   to   15.48   %   in   2012.The   reason   is  
understandable  as  there  has  been  steep  increase  in  two  and  four  wheeler  population.  
 
Remarkable  differences  in  fuel  consumption  and  fuel  costs  have  come  up;  Uch  Power  Combined  cycle  
power  plants  has  a  fuel  cost  of  Rs  1-­‐2  per  kWh  due  to  its  higher  thermal  efficiency,  while  other  plants    
have  4  times  as  much  fuel  cost,  the  reason  differences  in  Thermal  efficiency  as  we  shall  see  and  discuss  
later.  Typical  fuel  cost  in  gas  power  plants  is  Rs.  4.00  per  kWh  which  is  almost  the  same  as  that  of  coal,  if  
we   go   by   the   recently   approved   upfront   tariff   of   coal   power   plants.RFO   run   power   plants   in   private  
sector  cost  Rs.13-­‐14  per  kWh,  while  HSD  plants  have  fuel  cost  of  Rs.17-­‐18  per  kWh.  Their  counterparts  
in  public  sector  have  fuel  costs  ranging  from  Rs.24.7  per  unit  to  even  Rs.  50  per  unit.  A  lot  of  theft  of  

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expensive   oil   is   camouflaged   under   low   thermal   efficiency.   Former   Minister   of   Water   and   Power   Ahmad  
Mukhtar   admitted   in   a   TV   interview   that   I   personally   heard   that   there   is   oil   theft   in   GENCOs,   be   it   in  
Transport   stage   or   otherwise.   NEPRA   could   take   measures   to   curb   it   ,despite   the   constraints   and  
limitations  of  cost-­‐plus  regime.  
 
The  good  news  is  that  there  has  been  a  reduction  in  T&D  losses  of  electric  power,  if  figures  have  to  be  
believed.  The  bad  news  is  falling  thermal  efficiencies  in  generation,  which  we  will  discuss  a  little  later.  
The  claim  is  that  in  the  PEPCO  system  T&D  losses  have  come  down  from  23  %  in  2007  to    only  18  %  in  
2012.In  Punjab  DISCOs,  the  T&D  losses  are  comparatively  low  around  12  %  ,  the  only  bad  boy  is  widely  
dispersed   MEPCO   with   losses   of   18   %.However,   this   is   small   if   compared   to   HESCO   at   28.58%   losses   and  
PESCO   at   37.25%   losses.   But   then   why   are   DISCOs   bankrupt?   Is   it   because   of   showing   performance   in  
reducing   losses   and   losing   money   in   NEPRA   determinations?   It   is   quite   plausible   in   the   public   sector  
system?  Even  KESC  has  distribution  losses  of  29.71  %  in  2012  down  from  a  staggering  34.12  %  in  2007,  
although  KESC’s  improvement  at-­‐least  partly  appears  to  be  coming  from  over-­‐billing  and  slapping  extra  
charges   on   helpless   consumers.   And   NEPRA   looks   the   other   way,   when   all   of   this   happens.   More   on   this  
at  a  later  opportunity.  
 
Ironically,   unit   gas   consumption   in   gas   fired   power   plants,   as   estimated   by   NEPRA,   has   gone   up   from  
12.43  Cft  per  kWh  in  2007  to  13.7  in  2012,  while  it  should  have  been  the  other  way  round  in  times  of  gas  
shortage.  Gas  is  consumed  in  Combined  Cycle  power  plants,  single  cycle  gas  turbines  and  IC  engines  and  
in  a  mix  mode  in  steam  turbine  power  plants.  Average  efficiency  is  low  around  25%,  in  some  cases  it  is  
only  12  %.In  2012,  about  5700  MW  electricity  (28  .99  GWh@5000  hrs  of  operations)  was  produced  with  
358.381  BCft  of  gas.  With  new  and  efficient  combined  cycle  power  plants,  this  figure  can  be  doubled.  If  
5700   MW   extra   power   may   appear   to   be   too   ambitious,   one   could   aim   at   around   3000   MW   easily.  
Fortunately,   new   CC   plants   are   in   pipeline   e.g.,   Chichonkimalian(525   MW),Nandipur   (425   MW)   and  
Guddu  BMR(747  MW).There  is  a  scope  of  a  few  more  which  could  be  added  while  undertaking  BMR  and  
Revamping  of  existing  GENCOs.  This  could  perhaps  be  the  fastest  approach.  However,  the  move  can  be  
compromised   by   privatization   talks.   It   is   not   easy   to   privatize   in   Pakistan,   as   we   have   seen   the   history   of  
the  past.  
 
There  is  another  avenue  for  increasing  power  production.  If  by  some  magic,  CNG  consumption  can  be  
brought   down   to   its   2007   level,   68   Bcft   of   gas   would   be   released.   And   if   fertilizer   sector   ‘s   100   Bcft   is  
taken  away,  as  they  have  been  provided  with  a  dedicated  field  with  100  BCft  of  gas  output  per  year,  a  
total   of   168   BCft   can   be   diverted   to   the   Power   sector.   This   would   mean   2584   MW   of   extra   power   at  
prevailing  low  thermal  efficiency  levels.  One  can  add  another  40%  through  higher  efficiencies.  
 
Utilizing   gas   efficiently   will   become   unavoidable,   once   LNG   or   IP   project   are   implemented   which   are   3-­‐4  
times   more   expensive   in   terms   of   gas   price.   If   gas   is   wasted   in   the   fashion   it   is   being   done   now,   it   would  
cost  as  much  as  Rs.20  per  kWh,  almost  the  oil  based  electricity.  It  is  therefore  essential  that  new  more  
efficient  thermal  plants  are  installed,  while  these  expensive  imported  gas  projects  are  implemented.  
CNG   would   be   ultimately   eliminated,   if   and   when   expensive   imported   gas   and   LNG   is   imported.   If   the  
cost   is   passed   on   to   users   instead   of   burying   it   in   the   common   kitty,   CNG   would   become   expensive.  
However,  would  it  be  politically  feasible?  The  problem  is  that  a  lot  of  public  transport  is  on  CNG  now.  
Public   transport   in   Karachi   becomes   thin   on   days   when   there   is   CNG   problem.   We   have   discussed   in  
earlier   articles   on   curbing   the   CNG   menace.   Caretakers   took   the   right   step   of   banning   use   of   CNG   in  
large  private  cars.  
 

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As   per   budget   documents   (2013-­‐14)   of   PMLn   Government,   circular   debt   stands   at   Rs   580   Billion.   This  
means,  a  power  subsidy  of  about  Rs.5.8  per  unit,  assuming  generation  of  100  billion  units.  NEPRA  SOI  
report   2012   puts   the   subsidy   estimate   at   Rs.3.1   per   unit,     up   from   Rs   2.1   in   2011.It   appears   that   the  
circular  debt  is  more  than  one  year  old.  If  this  is  not  the  case,  the  situation  is  really  dismal  and  out  of  
proportion.   Somehow,   the   new   government   intends   to   clear   it   in   60   days.   The   new   one   would   start  
piling  up.  For  a  popularly  elected  government  depending  on  the  goodwill  and  votes  of  people,  it  is  not  so  
easy   to   enhance   tariff   immediately   after   coming   into   the   saddle   of   power.   Remember,   circular   debt  
issue  started  on  the  rein  of  General  Musharraf,  who  did  not  need  votes.  There  is  now  another  dimension  
to  the  circular  debt  in  addition  to  expensive  oil  .At  reduced  level  of  generation,  the  fixed  cost  per  unit  
should   also   have   gone   high,   although  I   do   not   have   data   to   support   it.   Thus   a   costless   and   immediate  
solution  (marginal  and  partial)  appears  be  to  enhance  supplies  of  low  cost  sources  like  gas  fired  units.  
Near  term  solutions  are  conversion  of  oil  fired  steam  turbine  plants  to  coal,  up-­‐gradation  of  Guddu  and  
extension  of  Tarbela  by  1000  MW.  These  would  take  three  years  to  complete  and  have  been  provided  
for  in  the  budget.  
 
Wind  Power  can  be  the  fastest  solution.  Excluding,  preparatory  operations,  a  wind  power  plant  of  100  
MW   can   be   executed   in   six   months   and   100   MWS   can   be   added   every   three   months.   A   Wind   power  
auction  of  500-­‐1000  MW  can  induct  power  into  the  grid  in  24  months,  at  a  cost  of  under  8  cents,  if  top  
political  support  is  applied  and  rent-­‐seeking(  a  euphemistic  term  used  by  economists  for  corruption)  by  
all  is  avoided.  For  this  all  existing  cost-­‐plus  approvals  of  16  cents  would  have  to  be  cancelled.  Ironically,  
more  or  less  the  same  parties  and  their  coalitions  (although  with  marginal  share  in  equities)  would  be  
able  to  combine  with  large  international  IPPs  to  cause  this  revolutionary  change.  What  my  local  investor  
brothers  should  understand  is  that  a  smaller  pie  of  a  big  and  expanding  market  ultimately  brings  in  more  
profit  than  a  one  time  wind  fall.    
 
The   good   news   is   that,   as   reported   in   SOI   2012   of   NEPRA,   there   are   5000   MW   of   Hydro   projects   at  
various  stages  of  implementation  and  are  destined  to  be  completed  by  2018.This  is  other  than  Bhasha  
or   Bunji,   the   large   projects   which   are   always   subject   to   uncertainties   of   various   sorts.   The   new  
government   would   be   doing   well   in   facilitating   and   following   up   these   projects   for   their   earliest  
completions.  Most  of  these  projects  are  costing  around  5  Rs  per  unit,  much  lesser  than  any  other  source  
other  than  the  dwindling  local  gas.    
 

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II-­‐Transferring  circular  debt  to  provinces  and  Hydro  Royalty  issue  

 

No   formal   text   has   been   released   yet   and   we   must   therefore   rely   on   newspaper   accounts   to   do   the  
necessary   analysis.   The   new   Energy   Policy   has   been   approved   by   the   CCI   (Council   of   Common  
Interest).We   would   like   to   examine   and   discuss   the   policy   in   a   series   of   articles,   taking   up   the   issues   one  
by  one.  In  this  first  article  of  this  series,  we  would  focus  on  the  NHP  (Net  Hydel  Profit)  or  simply  speaking  
royalty  dues  of  KPK  on  Hydel  Power.  And  in  subsequent  installments  ,we  would  take  up  the  other  issues,  
especially   the   decision   to   enhance   electricity   tariff   rather   steeply   up   to   70%.albeit   with   one   issue  
deferred,    

We   have   selected   the   NHP/Royalty   issue   for   discussion   for   the   following   reasons.   Under   the   new   policy,  
Federal  government  wants  to  shift  the  load  of  electricity  subsidies  to  the  province.  It  has  been  proposed  
that   the   subsidy   would   be   deducted/   adjusted   by   the   Federal   Adjustor   from   the   provincial   revenue  
shares.  WAPDA  has  been  given  one  month  to  work  out  a  feasible  formula  acceptable  to  the  parties.  In  
this   formula   setting,   I   speculate   that   the   KPK   government   would   raise   the   issue   of   NHP/Royalty   from  
Hydel  Power  generation.  

As   it   is   the   formula   setting   would   be   quite  difficult,   for   there   could   be   three   or   four   criteria;  population,  
consumption  and  losses  (theft  and  receivables).Population  factor  may  be  rejected  on  justifiable  grounds  
especially  by  Punjab.  In  Punjab,  the  electricity  theft  is  the  least  among  all  the  provinces(However  ,Punjab  
leads  in  the  theft  of  gas).Electricity  theft  in  KPK  is  of  the  order  of  35%  including  some  technical  losses  
may  be  of  5%.It  is  doubtful  that  KPK  government  would  bear  the  burden  itself.  It  may  like  to  pass  this  on  
to  the  consumers.  On  top  of  it,  Federal  government  would  be  raising  the  electricity  tariff  as  mentioned  
earlier.  The  provincial  government  is  controlled  by  not  so  amenable  PTI,  the  main  rival  of  government  
party  in  the  current  political  scene.  The  only  bargaining  chip  I  the  hands  of  the  KPK  government  would  
be  the  issue  of  NHP.  

The   issue   of   NHO/hydro   royalties   is   almost   more   than   two   decades   old.   T   here   is   a   constitutional  
provision  for  paying  NHP  to  KPK,  The  1973  constitution  uses  the  term  Net  Hydel  profit,  however,  it  has  
not  been  easy  to  develop  a  consensus  on  how  to  calculate  NHP.  The  late  AGN  Kazi  developed  a  formula,  
which  was  contested  by  WAPDA  and  the  GOP,  and  a  Tribunal  was  formed,  which  also  upheld  AGN  Kazi  
formula.  The  Tribunal  gave  an  award  in  favor  of  KPK,  asking  WAPDA  to  pay  arrears  which  the  tribunal  
calculated  as  Rs  110  billion  against  a  claim  of  Rs.595  Billion  submitted  by  the  GoKPK..The  amount  should  
have  swelled  significantly  due  to  the  interest  component  of  the  award.  The  annual  NHP  dues  are  Rs  24  
Billion  .WAPDA  pays  Rs  8  billion  annually  to  KPK  on  account  of  NHP  and  does  not  recognize  the  tribunal’s  
award.GOP(in  the  initial  euphoria  of  PM    Raza  Gilani’s  government  in  2008)  has  assumed  the  liability  of  

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Rs.   110   billion   and   some   30   Billion   Rs   have   reportedly   been   paid   on   account   of   NHP   arrears.   But   new  
arrears  should  have  piled  up.  

Now   instead   of   paying   their   NHP   dues,   KPK   government   may   respond,   the   Federal   government   is   asking  
to  pay  on  account  of  electricity.KPK  consumes  some  8  billion  units  of  electricity.  Its  share  in  losses  are  
roughly   about   2.4   Billion   units   which   are   valued   around   Rs   24   Billion,   an   amount   exactly   equal   to   the  
annual   NHP   dues   as   determined   by   the   Tribunal.KPK   would   lose   the   payments   of   Rs   8   billion   that  
WAPDA  has  been  making  annually.  

The  issue  is  quite  contentious  as  WAPDA  is  only  prepared  to  pay  what  it  has  been  paying.  Moreover,  the  
issue   is   further   complicated   because   WAPDA   does   not   recognize   Ghazi   Barotha(run-­‐of-­‐the-­‐river   Hydro  
Power   plant)   to   come   under   NHP,   as   according   to   its   interpretation,   the   power   plant   is   located   in  
Punjab,   which   may   be   legalistically   true,   as   the   power   plant     is   located   in   Punjab,   and   all   other  
infrastructure  and  components  are  in  KPK.  

It  is  amazing  that  in  these  days  of  judicial  activism,  no  body  went  to  the  Courts  on  Ghazi  Barotha  issue.  
.It  is  an  ideal  ground  for  a  legal  battle.  GoP  itself  avoided  going  to  the  Supreme  Court  against  the  ruling  
of   the   tribunal.   In   nutshell,   the   issue   is   far   from   settled.   Although,   those   who   wrote   the   1973  
Constitution,  in  their  own  right,  defined  the  accounting  formula  for  calculating  the  profit  (NHP),the  issue  
continues   to   be   elusive.   One   can   use   the   constitutional   wordings   to   elucidate   two   or   more   diametrically  
opposing  conclusions;  one  is  that  there  is  no  profit  that  WAPDA  is  making.  It  is  under  loss,  so  where  does  
NHP  stand;  Thus  no  NHP  due.  On  the  other  extreme,  one  can  reject  the  existing  Hydel  Tariff  of  Rs  1.30  to  
be  preposterously  low  and  may  demand  a  reference  sales  price  equal  to  the  Furnace  oil  based  electricity  
of  16-­‐20  Rs  per  unit  or  giving  some  concession  may  be  prepared  to  agree  to  the  average  price  of  Rs  10  as  
a  reference  price  for  calculating  the  NHP.WAPDA  expenses  on  Tarbela  are  hardly  more  than  a  Rupee  per  
unit.  One  can  imagine  the  kind  of  money  that  can  be  demanded.  

Therefore,  one  has  to  revisit  the  case.  There  is  more  data  and  more  evidence  has  come  forth  from  other  
countries.IN   Brazil,   for   example,   there   is   a   flat   royalty   rate   system,   of   6%   of   the   sales   price   which   is  
distributed   in   the   ratio   of   10:45:45%   to   the   Federal,   provincial   and   local   governments   respectively.   In  
India,   a   federation   like   us,   gives   12%   free   electricity   to   the   producing   province,   along   with   a   quota  
allocation  of  25%  for  electricity  supply  to  that  province  on  payment  of  full  tariff  as  determined  by  the  
regulatory  commission.  Besides,  there  is  an  option  of   provincial  equity  in  the  project.  Thus  Indians  have  
simply   eliminated   the   issue   of   determining   sales   price   or   profit   by   paying   12   %   free   electricity.   The  
producer  province  can  sell  that  much  electricity  in  the  open  market,  if  there  is  one,  or  resell  to  WAPDA  
itself.   It   may   choose   to   subsidize   electricity   in   its   controlled   area   or   pay   off   the   subsidy   /theft  
apportionment  or  utilize  the  revenue  in  developmental  activities  or  a  mix  of  these  all.  

Although,  there  seems  to  be  a  lot  of  merit  and  simplicity  in  the  Indian  approach,  and  presumably  there  
would   be   more   practical   and   political  acceptability,   if   the   Indian   formula   is   adopted   as   it   is,   we   need   not  
follow   it   literally.   We   can   be   creative.GOP   should   send   a   team   of   experts   to   study   India’s   royalty   system  
and  investigate  its  pros  and  cons  from  their  counterparts  who  are  managing  the  system.  Beyond  broad  
policy,   there   is   always   a   fine   print   and   difficulties   are   always   in   details.   For   example,   instead   of   giving  

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12%   free   electricity,   one   may   compute   the   amount   that   is   to   be   paid.   The   reference   sales   price   could   be  
taken  from  the  new  Tariff  determinations  of  hydro  IPPs  by  NEPRA.  Suki  Kinari  and  other  projects  have  an  
average  of  Rs.5/-­‐  per  unit  as  selling  price  of  electricity.  This  yields  a  Royalty  of  Rs  0.60  per  unit.  If  one  
takes  the  average  cost  as  a  reference  sales  price,  it  is  Rs.  10  per  unit  and  the  royalty  comes  out  to  be  
RS.1.20  per  unit.  In  fact  this  is  equivalent  to  the  12  %  free  electricity  formula.  

There   are   three   aspects   to   the   problem   of   subsidies   and   the   circular   debt;   T&D   losses   with   theft   and  
non-­‐payments   as   a   major   component;   Cost   of   generation;   and   the   tariff.   The   new   government   has  
started  with  paying  of  the  accumulated  debt  which  is  a  step  in  the  right  direction.  It  would  soon  come  
back   with   a   vengeance,   if   the   corrective   steps   are   not   taken.   Reliance   on   only   tariff   increase   may   be  
counterproductive  and  politically  very  damaging  to  the  government  which  has  come  to  the  saddle  only  
recently.   Improvements   have   to   take   place   in   all   directions.   Many   small   steps   cumulate   to   give   a   big  
result.   Unfortunately,   in   energy   sector,   there   aren’t   many   short   term   options.   It   is   all   medium   to   long  
term  cycle.    Improvement  (partially  only)  in  governance  can  be  brought  about  to  yield  some  results  in  
the  short  run.  Skeptics  argue  that  social  issues  are  the  most  difficult  one  to  tackle  and  are  a  long  term  
process.   Governing   Pakistan   at   this   juncture   of   our   national   life   is   the   most   delicate,   arduous   and  
difficult  task.  It  deserves  all  the  sympathy  and  support  that  we  can  lend  to  them.  

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III-­‐Reducing  the  COGE  (Cost  of  Generation)  

 

Reducing  the  cost  of  generation  along  with  boosting  sustainable  energy  supplies  is  to  be  the  cornerstone  
of   the   new   energy   policies   and   initiative.   The   nemesis   of   PM   Nawaz   Sharif,   General   Parvez   Musharraf  
gave  us  the  gift  of  oil  fired  expensive  electricity.  Almost  all  IC  Engine  based  power  plants  consuming  oil  
with   a   vengeance   have   been   installed   during   his   reign.PM   Nawaz   Sharif   has   visited   Gadani   and  
announced   an   Energy   Park   to   be   installed   with   several   power   plants   (4-­‐5000   MW)   based   on   imported  
coal.  He  also  announced  that  the  first  plant  would  be  installed  by  the  government  itself.  This  is  mixed  
news   for   Pakistan’s   energy   scene.   We   will   examine   the   pros   and   cons   of   this   announcement   in   this  
article  along  with  a  discussion  on  reducing  cost  of  generation  options.  

It   is   good   news   as   it   indicates   the   thrust   of   the   new   government   towards   launching   cheap   energy  
projects  having  a  large  generation  potential.  Despite  the  rumblings  of  the  environmental  lobby,  Coal  is  
still   the   most   widely   used   energy   resource.   It   is   widely   available   in   the   world   in   quantities   that   are  
expected  to  last  for  two  centuries.  Allah  has  not  excluded  from  this  bounty  and  has  given  us  Thar  Coal.  
These  are  sad  days  for  Thar  coal.  Sindh  government  should  ponder  over  as   to   why,   the   foreign   investors  
and  as  well  as  a  government  which  is  hard  pressed  to  solve  electricity  and  energy  problem,  are  thing  in  
other   directions?   Sindh   had   to   even   belabor   the   point   of   inclusion   of   Thar   Coal   in   the   new   energy   policy  
that  has  been  recently  approved  by  the  CCI  (Council  of  Common  Interest).  

Sindh   government   wrested   full   control   of   the   Thar   Coal   in   a   rather   long   and   wasteful   process,   when  
World  Bank  was  apparently  willing  to  finance  the  project  and  extended  its  technical  assistance  and  grant  
which   financed   some   major   studies   and   the   planning   effort.   It   could   not   deliver   in   one   of   the   ideal  
circumstance   and   opportunity   they   had   of   having   the   same   PPP   in   saddle   in   Sindh   and   as   well   as   the  
centre.  There  has  been  and  there  is  a  black  box  around  Thar  coal  as  administered  by  Sindh  government  
and  its  highly  politicized  bureaucracy.  Why  doesn’t  it  move  at  all?  

There  may  be  several  reasons.  Skeptics  cite  that  the  largest  one  is  the  intermediating  interest  that  puts  
off  every  potential  investor.  Sindh  government  put  all  its  eggs  in  one  basket  of  Engro  and  provided  all  
kind  of  impossible  concessions  like  a  return  on  equity  rate  (ROE)  of  20.5  %,  something  unheard  of  in  the  
utilities   sector   anywhere   in   the   world.   The   result   is   an   asking   tariff   of   almost   12   cents,   twice   as   much   as  
Sehua   (Chinese)   offer   a   decade   back   and   also   twice   as   much   as   generally   and   widely   recognized   and  
prevalent  tariff  of  5-­‐7  cents.  Naturally  with  all  kinds  of  interests  provided  for,  the  asking  tariff  would  be  

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so  high.  Who  would  be  interested  in  that  expensive  electricity,  Thar  or  no  Thar.  They  wouldn’t  want  to  
to  be  caught  in  from  pan  to  fire  syndrome?  Those  who  have  cooked  this  bad  dish  of  Thar  Coal  possibly  
accommodating   all   interests   are   now   have   joined   a   political   party   that   is   struggling   for   Insaf.   It   is   this  
kind   of   tariff   demands   that   put   off   the   federal   policy   makers,   along   with   more   than   necessary  
proclamations   of   provincial   autonomy.   Even   the   federal   bureaucracy   has   a   lot   to   be   desired   in   expertise  
and  acumen,  what  to  talk  of  provincial  bureaucracy  which  is  usually  less  well  endowed  and  trained.  One  
would   suspect   that   the   mutual   disdain   and   mistrust   of   the   two   parties   PML(n)   and   the   PPP   has  
something   to   do   with   the   announcement   for   going   to   Gadani   than   to   Thar.   Federal   ministers   hardly   visit  
Sindh.  Should   national   interest   suffer   due   to   ego   and   petty   political   issues?   PML(N)   has   cooperated   with  
PPP  government  in  the  past  in  national  interest,  Why  shrug  them  now?  

The  idea  of  installing  coal  power  plant  on  the  coast  like  Keti  Bandar  and  Gadani  is  not  new.  There  is  an  
appeal  of  imported  coal  due  to  simpler  ocean  transportation  of  coal  from  a  wide  variety  of  competitive  
sources.AES,  a  major  actor  in  the  international  power  scene  ,did  a  feasibility  study  on  a  1000-­‐1200  MW  
project   and   got   its   tariff   approved   by   NEPRA   at   around   7-­‐8   cents   in   2008-­‐9.MITSUI,the   Japanese   giant  
also    submitted  a  similar  proposal.  The  common  jetty  facilities  could  also  be  utilized  by  Hub  Power  which  
is  to  be  converted  to  Coal  as  well.  I  have  the  honour  of  being  associated  with  the  project  as  a  consultant.  
I  am  not  sure  if  AES  or  MITSUI  would  still  be  interested.  However,  PM  is  talking  of  Chinese  investment.  
Nothing   would   be   better   than   them.   They   are   cheap   and   efficient   and   willing   to   take   initiatives   and   risk.  
They  are  number  one  in  Coal  Power  from  almost  all  perspectives.  

Knowing  of  Engro’s  failure,  the  PM  has  announced  installing  the  first  plant  by  the  government.  Power  
sector   is   too   much   for   the   local   companies.   It   is   beyond   their   financial   and   management   prowess.   Engro  
is  recovering  from  a  billion  USD  investments  in  fertilizer  sector  where  it  has  the  expertise.  Government  
has   the   resources   and   wherewithal   to   go   into   new   and   virgin   sectors   and   areas.   Once   Ice   is   broken,  
many  unknowns  discovered  and  risk  becomes  measureable  and  is  reduced,  local  and  foreign  investors  
come  in.  The  question  is  why  not  invest  in  Thar  as  well  as  a  government  investment?  The  answer  may  be  
the   same   inter-­‐governmental   disdain,   possibly?   Why   has   Thar   coal   been   made   such   a   taboo,   one  
wonders.   Sindh   government   would   be   well   advised   to   come   up   with   proposals   for   attracting   federal  
interest  and  investment  and  shun  its  go-­‐it-­‐alone  policies.  It  is  in  every  body’s  interest  to  develop  Thar  
coal,  more  so  for  Sindh  and  its  people  than  anybody  else.  In  Sindh,  one  has  to  ponder  over,  an  unfair  
attitude   to   federalism.   The   demand   that   resources   should   meet   the   demand   for   producer   province   puts  
the   other   provinces   off.   Why   should   then   the   other   provinces   and   the   Federal   government   take   interest  
in   resource   development   of   other   provinces,   one   wonders.   A   reasonable   allocation   formula   than   the  
broad  undefined  demand  has  to  be  worked  out.  

Federal  government  should  also  analyze  the  impact  of  imported  coal  on  the  balance  of  payment.  Rupee  
has  been  going  down  due  to  the  huge  trade  deficit.  It  is  not  easy  to  boost  exports.  It  is  easier  to  reduce  
imports   and   produce   locally.   A   1000   MW   plant   would   impose   a   foreign   exchange   drain   of   about   500  
million  USD  per  year.  The  employment  and  income  generation  and  boosting  of  businesses  are  some  of  
the   potential   impacts   of   local   coal   production   of   coal.   Germany   in   the   heart   of   Europe   is   burning   Lignite,  
although   it   could   import   better   coal.   Greece,   Turkey,   Poland,   and   other   European   countries   are  
consuming  dirty  coals  and  avoiding  imports  to  the  extent  possible.  As  a  short  term  one-­‐time  measure,  it  

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may   be   tolerated,   if   local   obstacles   in   Sindh   prove   to   be   paramount.   Alternatively,   the   plants   should  
utilize  versatile  technologies  to  be  able  to  utilize  locally  produced  coal,  as  and  when,  it  is  available.  

The  shortest  and  equally  cheaper  other  option   is   Wind   Power.   Brazil   has   installed   1000   MW   of   Wind  
Power   in   one   year   at   an   unbelievable   price   of   6-­‐7   cents   per   unit.   A   Chinese   company   has   reportedly  
offered  1000  MW  of  Wind  Power  installation  in  one  year.  In  Pakistan,  Wind  Power  projects  have  been  
approved  at  the  exorbitant  and  impossible  and  unaffordable  tariff  of  15-­‐16  cents.  No  wonder  we  have  
not  heard  the  views  of  the  new  government  on  the  subject.  They  must  be  in  a  fix,  as  to  how  to  correct  
and   rectify   the   situation.   A   good   price   can   be   negotiated   with   Chinese.   There   are   several   reference  
prices  which  could  assist  in  price  settlement.  In  India  the  prevailing  Wind  Power  tariff  is  8  cents.  There  is  
a  recent  deal  between  a  Chinese  company  and  Reliance  Industries  of  India,  which  provides  for  a  tariff  of  
6  cents.  There  is  Brazilian  Auction,  which  GE  won  and  supplied  at  the  prices  mentioned  earlier.  If  success  
is  not  achieved  in  1000  MW  wind  Power  proposal  with  the  Chinese,  GOP  should  go  for  an  auction.  We  
have  discussed  and  explained  the  modalities  of  such  auctions  in  these  pages  earlier.  I  would  not  blame  
the  Sindh  government  for  the  lack  of  a  breakthrough  in  Wind  Power,  as  the  subject  is  under  purview  of  
the  federal  government.  It  is  a  systemic  failure.  

Wind  and  Coal  are  two  cheap  and  affordable  options  to-­‐date.  It  would  take  a  few  more  years  that  Solar  
becomes   competitive   as   Grid   Power.   In   specialized   applications   limited   to   day-­‐time   use   and   displacing  
Diesel,   it   is   competitive   even   now.   Hydro   is   cheap   but   takes   almost   a   decade   to   implement.   There   are  
possible  sites  where  run-­‐of-­‐the–river  hydro  plants  can  be  installed  in  2-­‐3  years  which  should  be  identified  
and   pursued.KPK   government   can   play   a   major   role   in   such   projects   with   some   assistance   from   the  
Federal  government.        

   

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IV-­‐  Enhancing  Energy  Tariffs  

 

There   is   news   all   round   that   the   power   tariff   is   being   increased   by   30-­‐70%.We   only   hope   that   such   a  
large   increase   in   tariff   would   not   be   done   abruptly   and   in   one   go.   Apart   from   damaging   the   economy  
and   badly   affecting   people,   it   would   be   politically   very   costly   .Government   has   already   initiated   the  
process  of  shifting  the  burden  of  subsidies  to  the  provinces.  It  is  hoped  against  hope  that  some  amicable  
formula  emerges.  As  a  part  of  managing  the  circular  debt  issue,  increase  in  tariff  has  been  proposed.  We  
have  mentioned  earlier  that  the  circular  debt  has  three  dimensions:  theft  and  system  losses,  high  cost  of  
production  and  lower  tariff  that  does  not  cover  the  cost.  We  will  explain  the  link  in  the  following  and  see  
what   other   steps   would   have   to   be   taken   by   the   government   along   with   imposing   affordable   and  
reasonable  increase  in  tariff  ?  

Circular  debt  means  non-­‐payment  of  dues  to  the  IPP  sector.  It  is  bad  not  only  because  it  creates  financial  
problems   for   IPP   restricting   and   impairing   their   power   generation   capabilities   further   aggravating   the  
electricity   shortages,   but   also   because   the   country’s   image   gets   tardy   among   investors   and   lenders  
which  reduces  investment  flows  in  power  sector  creating  long  term  problems  for  medium  term  and  long  
term   capacities.   The   least   damage,   it   causes   is   that   debt   gets   more   expensive   which   increases   future  
power   generation   costs.   The   new   government   has   done   well   to   take   on   the   problem   in   an   upfront  
manner.   Circular   debt   is   essentially   created   by   selling   electricity   at   rates   cheaper   than   its   cost   of  
production,  promising  by  the  government  to  pay  the  difference  as  subsidies  and  not  paying  it.  Cost  of  
production   is   high   because   almost   one-­‐third   of   electricity   is   lost   in   the   distribution   system   as   theft,   non-­‐
payment  by  government  agencies,  thugs  and  the  powerful.  Subsidy  requirement  is  almost  the  same  as  
these  losses.  This  means  that  if  these  losses  are  eliminated,  there  would  be  no  subsidy  requirement  and  
no  circular  debt.  This  also  means  that  subsidy  is  actually  a  compensation/deduction  for  the  bills  of  the  
ordinary  user  who  pays  his  dues  regularly  and  does  not  steal.  If  and  when  System  losses  (theft)  go,  the  
subsidy   requirement   goes.   Should   the   government   then   remove   subsidy   by   increasing   the   tariff   or   by  
reducing   and   eliminating   theft   and   losses.   The   answer   is   both,   as   it   would   take   time   to   reduce   and  
eliminate  losses,  as  an  interim  measure,  tariff  may  have  to  be  increased.  However,  it  has  to  be  moderate  
and   graduated   to   let   the   economy   and   consumer   absorb   the   shock   in   a   bearable   manner.   It   should   be   a  
smooth  curve  and  not  an  erratic  saw-­‐tooth  pattern.  Simply  speaking,  it  has  to  be  gradual.  

Large   and   abrupt   increases   must   be   avoided.   In   one   year,   the   increase   should   not   be   more   than   15-­‐
20%.The  figures  of  30-­‐70%  increase  that  are  being  discussed  are  rather  horrendous  and  unrealistic.  Even  
more  scandalous  and  problematic  would  be  the  management  of  cash  subsidy  that  has  been  proposed.  
Some   foreigner   wrote   this   in   his   report   and   our   bureaucracy   keeps   recommending   it   whenever   they   get  

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the   opportunity.   What   is   the   harm   in   the   present   system   of   subsidizing   the   small   and   poor   consumer  
consuming  100-­‐200  units  ?  Change  just  for  change.  It  would  be  wasteful  creating  another  Pandora  box.  

Some  serious  and  target  based  effort  would  have  to  be  made  to  reduce  theft  and  non-­‐payment.  A  20%  
reduction  per  year  should  be  possible,  say.  Some  tough  and  rough  methods  may  have  to  be  adopted.  If  
one  gets  the  due  punishment,  100  get  lessons  and  are  prevented  from  the  crime  .Charity  starts  at  home.  
It   has   to   start   from   Lahore   and   from   the   party   supporters   and   members.   On   a   more   systemic   and  
technical   levels,   Smart   Meters   should   be   installed   at   the   sub-­‐stations   and   transformers   to   be   able   to  
identify  the  areas  where  theft  is  occurring.  Identifying  the  culprits  would  then  be  easier.  Reducing  the  
standard   of   service   and   increasing   the   load   shedding   hours   for   these   areas   can   be   another   solution.  
General  Parvez  Musharraf  used  force  without  planning  and  tracking  and  could  not  achieve  much.  There  
is  a  theft  of  about  30  billion  units  valuing  about  3  Billion  USD  per  year.  Investing  5%  of  this  amount  per  
year     and   getting   a   20-­‐25   %   reduction   in   losses   would   amount   a   ROE   of   400   %   per   year,   not   a   bad  
investment.   Fortunately,   SAID   is   assisting   on   the   technical   side   of   T&D   losses.   There   should   be   more  
support  and  enthusiasm  for  such  projects.  

 Theft   and   adulteration   of   furnace   oil   at   the   GENCO   power   stations   is   an   open   secret.   This   not   only  
causes  oil  losses  but  damages  the  plant  and  machinery  as  well  along  with  degradation  of  output-­‐a  three  
pronged  loss.  Both  technical  and  administrative  management  is  required  to  tackle  these  problems.  Who  
will   bell   the   cat?   A   frontal   and   wider   assault   on   corruption   is   required   which   is   a   separate   subject  
altogether.   That   is   why,   the   government   is   reportedly   taking   the   easier   route   of   increasing   the   tariff?  
That  won’t  be  easy  either,  at  least  in  the  kind  of  scale  of  increases  that  are  being  talked  about.  It  is  an  
unenviable   situation   the   government   is   in.   However,   if   persistent   and   systematic   efforts   are   applied  
sincerely,  goals  can  be  achieved.  A  thousand  mile  journey  starts  with  one  step,  but  it  has  to  be  in  the  
right  direction.  

As  said  earlier,  many  small  and  big  steps  would  have  to  be  taken  that  will  have  a  cumulative  effect.  How  
would  the  Ministers  be  able  to  handle  this  all?  Do  we  have  the  right  systems  of  planning  and  tracking  
progress.   In   another   article   of   the   series,   we   would   be   discussing   a   useful   planning   and   monitoring  
system  for  government  departments.  

Finally   let   us   see   the   larger   picture.   Reforms,   restructuring   and   investments   over   the   next   3-­‐5   yrs   would  
require  money.  But  there  is  no  money  in  the  system,  except  from  the  highly  unpopular  IMF.  The  larger  
and  structural  question,  however,  remains.  How  far  and  how  long  can  you  go  with  a  budgetary  deficit  of  
8.3   percent?   Reducing   expense   and   increasing   income   are   the   obvious   solutions,   which   has   not   been  
done.   Extracting   more   from   the   existing   avenues   and   news   gathering   reduction   of   expenditure   of   PM  
house   and   ban   on   purchase   of   new   vehicles   can   hardly   be   called   innovative   or   courageous.   Without  
reducing   the   Military   expenditure   (Rs   one   thousand   billions,   if   all   items   are   included)   and   taxing  
agricultural   landlords,   there   is   no   solution   to   the   problems;   Easier   said   than   done.   PMLn   is   not  
committed   to   taxing   Landlords,   but   it   is   committed   to   reducing   expenditure   (all   including   the   Military  
expenditure.   I   personally   heard   Nawaz   Sharif   committing   to   it   during   a   TV   interview)   by   30%.MILEX  
cannot  be  reduced  by  30%  overnight  but  a  beginning  could  have  been  made  with  a  freeze  on  escalation.    

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There   would   be   no   security,   no   independence   and   the   so-­‐called   self-­‐respect   under   budgetary   deficits   of  
8   %   plus   of   GDP.   Those   who   live   within   the   means,   individuals   or   nations,   are   able   to   maintain   self  
respect  and  dignity  despite  poverty.  A  profligate  rich  is  always  begging  to  buy  wine,  as  Omar  Khayyam  
says   in   his   famous   Rubayiaat.   History   is   replete   with   military   power   going   down   under   the   quiet   and   not  
so   quiet   pressure   of   the   masses.   The   current   law   and   order   situation   (terrorism,   daily   murders   and  
abductions  and  even  the  Balochistan  situation)  in  large  measures  emanates  from  grinding  poverty.  The  
Terrorism  leaders  are  well  fed  if  not  rich  but  the  suicide  attacker  who  wears  the  jacket  is  usually  abject  
poor.   What   more   proof   do   we   need   to   be   able   to   change   policies   towards   social   expenditure   and  
people-­‐friendly   subsidies?   It   is   hoped   that   the   new   government   would   be   able   to   enter   into   a  
constructive  dialogue  and  engagement  with  the  security  circles  and  other  stake-­‐holders  .It  is  not  easy  for  
a  party  which  has  been  dethroned  illegally  twice,  but  there  is  no  escape  from  taking  the  real  decisions.  
Also,  without  taxing  the  rich  Landlords,  the  much  wanted  liquidity  cannot  be  achieved.  Tall  order?  

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V-­‐The  Elusive  LNG  

   

LNG  is  in  hot  news  and  controversy  again.  Successive  governments  have  been  touting  LNG  projects  for  
now  more  than  a  decade  as  a  short  term  solution.  It  has  not  materialized.  But  the  enthusiasm  continues  
unabated,   despite   negative   Court   orders,   controversies   and   successive   failures.   Had   this   kind   of  
attention  been  paid  to  other  solutions,  Pakistan  would  have  been  better  off.  It  is  widely  known  that  LNG  
is   expensive,   almost   as   expensive   as   oil   and   commercial   conditions   demanded   by   the   suppliers   being  
stringent.   Irrespective   of   my   disdain   for   LNG,I   would   make   some   recommendations   in   these   lines   for  
faster  and  smooth  implementation  of  the  proposed  LNG  projects.  I  would  in  the  end  also  make  a  case  
for  approving  the  initial  local  shale  gas  projects  on  LNG  rates  as  well.  

It  would  be  a  folly  to  get  bogged  down  in  the  controversies  of  long  term  mega  deals  of  LNG  for  twenty  
years  involving  20-­‐25  billion  USD.  The  last  international  tendering  process  indicated  that  only  one  party  
Shell   (based   on   Qatar   supplies)   could   offer   20   years   guaranteed   supplies   .But   why   insist   on   20   years  
supply   agreement.   This   in   itself   is   a   competition-­‐scaring   condition.   Buyer   should   size   up   his   specs   and  
demands   to   the   average   and   general   conditions   prevailing   in   the   market   in   order   to   get   a   good   price.    
20-­‐25  years  is  a  long  time  horizon  in  which  market  and  technology  can  change  dramatically.  New  players  
may   come   in   as   we   are   seeing   US   and   East   Africa   coming   in.   Terminal   cost   of   300   Million   USD   is   a  
negligible   fraction   of   20   Billion   USD   of   LNG   cost.   In   any   case,   under   merit   order,   energy   sector   is   used   to  
partial  capacity  utilization.  There  was  a  time  when  HUBCO  had  a  capacity  utilization  of  fewer  than  20%.  
A  simple  issue  of  installing  a  LNG  terminal  ala  IPPs  has  been  unnecessarily  complicated  by  interlacing  it  
with   LNG   supplies.   One   could   go   for   spotting,   partial   short   term   and   midterm   contracts,   users   or   private  
sector  buying  their  own  LNG,  it  was  economic  for  them?    

The  LNG  supply  market  scenario  is  fast  changing.  Although  Qatar’s  dominance  would  remain  and  even  
may  increase,  new  parties  and  countries  are  coming  into  the  market.  Gas  discoveries  and  LNG  projects  
in  Africa,  Australian  ambitious  LNG  programme  and  most  importantly  the  North  American  LNG  exports  
rather   than   being   importers   of   yester-­‐years,   all   indicate   a   highly   competitive   LNG   market   with  
downward  pressure  on  prices.  Let  me  quote  here  from  Bloomberg:  

The  U.S.  and  Canada  together  may  add  as  much  as  77  million  tons  of  capacity  by  2020,  an  amount  equal  
to  the  entire  output  of  Qatar,  the  world’s  biggest  producer,  according  to  Barclays  and  RBC.“Australia  is  
set  to  eclipse  Qatar  as  the  world’s  leading  supplier  of  LNG,”  RBC  analysts  led  by  Greg  Pardy  said  in  a  May  
22  report.  The  wave  of  new  projects  will  probably  drive  down  prices,  enabling  North  American  producers  
to   supply  Asia  for   as   little   as   $11   per   million   British   thermal   units   by   2015,   compared   with   long-­‐term  
contracts  linked  to  crude  that  are  now  at  about  $17  per  million  Btu,  Shiyang  Wang,  a  New  York-­‐based  

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energy  analyst  at  Barclays.(  http://www.bloomberg.com/news/2013-­‐07-­‐09/iran-­‐s-­‐lng-­‐dreams-­‐vanish-­‐as-­‐
u-­‐s-­‐shale-­‐gas-­‐looms.html).  
 
There   is   yet   another   negative   side   of   LNG   that   has   not   been   discussed   in   our   public   debate   on   the   issue,  
which   is   Take   or   Pay   conditionality.   This   is   to   say   that   if   for   some   reason,   the   buyer   is   not   able   to  lift   the  
quantities   agreed   to   in   the   contract,   he   or   she   has   still   to   pay   and   not   only   the   capital   cost   of     the   assets  
and  infrastructure,  but  of  the  commodity  (gas)  also.  And  one  is  bound  for  twenty  years  for  such  terms.  
In  integrated  projects,  this  condition  can  be  implemented  with  harsh  consequences  for  the  buyer.  So,  if  
Take   or   Pay   conditions   are   applicable   in   the   LNG   projects   offered   to   us,   the   margin   of   10-­‐15   %   price  
advantage   withers   away   against   the   risks   associated   with   Take   or   pay   clauses.   Such   clauses   may   be  
swallowed   at   classical   commodity   (gas)   prices   of   4-­‐5   USD   per   MMBtu   but   not   at   the   LNG   prices   that   are  
under  consideration.  

 A   merchant   terminal   providing   services   to   importers   and   end-­‐users   may   be   ideally   suited   to   Pakistan  
market  and  circumstances.  There  is  no  need  of  tying  it  with  gas  supplies.  In  fact  there  may  not  be  any  
need  for  a  long  term  contract.  Importers  and  end-­‐users  may  rely  on  fast  expanding  spot  market.  Platts  
maintains  that  spot  market  stands  at  25  %  of  total  global  LNG  sales.  Spot  prices,  on  the  average,  are  no  
higher   than   long   term   contract   prices.   For   Example   Platt   reports(      
http://www.lngworldnews.com/platts-­‐asia-­‐july-­‐lng-­‐spot-­‐prices-­‐drop)   July,2013,   average   spot   for   LNG  
Asia(Singapore)   to   be     14.485   USD   per   MMBtu,   which   comes   out   to   give   a   slope(coefficient)   of   13.5%  
,which  is  almost  the  lowest  MPNR  got  in  their  tendering  process.  Interestingly,  Hazira  LNG  terminal  in  
India  is  based  on  this  business  model.  Hazira  is  owned  75%  by  Shell  and  25%  by  Total,  a  100  %  FDI.  We  
should  apply  our  minds  to  learn  as  to  why  Shell  invested  in  a  terminal  next  door  India  without  insisting  
in   long   term   supplies   contract,   and   in   Pakistan   Shell   did   just   the   opposite.   If   there   is   a   clear   headed  
policy  environment  and  full  openness  and  transparency,  a  similar  project  can  be  attracted  in  Pakistan  as  
well.   An   IPP   cost-­‐plus   model   should   be   good   enough.   There   is   ample   experience   in   this   model   in   the  
power   sector   in   Pakistan   .     A   private-­‐public   partnership   arrangement   may   also   be   considered,   if   FDI   is  
not   forthcoming.   The   proposed   Gas   pipeline   from   India   could   also   be   implemented   on   the   same   lines.   If  
well  functioning  markets  are  to  be  established  in  the  region,  supplies  (commodity)  have  to  be  separated  
from  network  operating  business.  

Irrespective  of  our  reservations  on  the  efficacy  or  desirability  of  LNG,  we  would  offer  some  sane  advice  
to  the  new  government,  in  implementing  the  LNG  project(s);  

1)  follow  an  unbundled  approach,  meaning  that  keep  the  LNG  terminal  construction  and  the  LNG  supply  
issue   separate.   Results   of   the   last   international   tendering   indicate   that   bundling   did   not   elicit   the  
interest  of  majority  of  parties.  Following  Shell’s  footprint  in  the  earlier  tender,  Even  Qatar  government  
has  declined  to  be  a  party  in  the  construction  of  the  terminal.  

2)Do  not  get  government  involved  in  procurement  of  LNG  except  as  facilitators  and  oversight  functions.  

3)Do   not   go   for   long   term   LNG   deals,   especially,   if   these   come   with   Take   or   Pay   clauses   and     non-­‐
diversion  stipulations  .Recent  Qatar  offer  has  the  stringency  of  both  .Long  term  deals  involving  25  billion  

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dollars  become  controversial,  especially,  if  you  want  to  avoid  PPRA  framework  which  is  found  to  be  time  
consuming.  

4)Go   for   short   term   and   spot   purchases   under   MSA(Master   Supply   Agreements)   on   the   line   of   TCP  
purchases  for  fertilizers  and  other  commodities.  

5)   Make   small   amendments   to   LNG   policy.   Bring   LNG   under   PPIB   frame-­‐work   which   allows   cost-­‐plus  
processes   guaranteeing   the   payment   of   capacity   charge   to   the   developer.   This   would   facilitate   financing  
of   the   LNG   terminals   by   the   banks.   SSGC   includes   the   capacity   charge   in   its   revenue   requirements  
submission  to  OGRA.  

 Potential   Shale   gas   resources   of   58-­‐65   TCF   higher   than   the   existing   ones   have   been   reported.   These   are  
widely  spread  and  not  only  in  Balochistan.  If  the  government  is  hell  bent  on  bringing  in  expensive  LNG,  
then   I   would   propose   that   one   or   two   shale   gas   projects   be   approved   on   LNG   rates   as   well.   In   fact  
slightly   cheaper   than   LNG   rates   has   been   received   by   the   government   from   a   respectable   foreign  
company.   One   or   two   pioneer   projects   can   be   given   special   rates.   When   Ice   is   broken   and   some  
quantities   of   Shale   gas   discovered   and   developed,   competition   would   set   in,   rates   would   come   down.  
Work  on  both  conventional  and  Shale  or  tight  gas  discoveries  has  to  start.  

There  is  a  strong  case  for  revising  the  whole  sale  tariff  of  conventional  gas  as  well,  except  for  the  fields  
that  have  already  been  discovered.  The  time  for  the  classical  rate  of  4-­‐5  USD  per  MMBtu  is  gone.  Gas  
rates  are  8-­‐10  USD  per  MMBtu  in  Europe.  Comparable  rates  were  there  in  the  US  as  well,  when  there  
were  gas  supply  crunch.  Current  low  rates  are  due  to  the  new  found  Shale  gas  resources.  

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VI-­‐Development  of  indigenous  energy  resources  

 

Perhaps   the   new   energy   policy   has   been   only   partially   released   to   the   extent   of   the   issues   that   were  
relevant  to  CCI  (Council  of  Common  Interests).Not  much  has  come  out,  either  in  the  policy  or  in  other  
pronouncements,   on   the   issue   of   the   development   of   local   resources.   The   stress   seems   to   be   on  
imports;  be  it  LNG  or  imported  Coal  projects  such  as  proposed  at  Gadani  about  which  w  had  discussion  
earlier  in  this  series.  Also  up  till  now,  announcements  and  policy  have  focused  on  electricity  only  which  
have  been  handled  by  the  Minister  of  Water  and  Power.  Minister  of  Petroleum  and  Natural  Resources  
(MPNR)   has   been   rather   quiet,   except   on   LNG.   He   has   clarified   that   his   ministry   is   focusing   on   the  
development   of   LNG   terminal   and   there   is   no   discussion   on   LNG   purchases.   Without   appearing   to   be  
supportive  of  LNG,  I  would  tend  to  support  the  priority  on  LNG  terminal.  Let  us  discuss  here  the  issue  of  
local  resources  here,  which  has  escaped  the  attention  it  deserves  in  the  recent  public  discourse.  

The  next  and  new  circular  debt  that  is  expected  to  emerge  in  a  few  years  would  be  in  the  gas  sector.  
Both  LNG  and  the  Iran  Pipeline  gas  are  almost  as  expensive  as  Oil,  one  a  little  more  expensive  than  the  
other.  The  other  alternative  would  be,  as  reported  in  the  newspapers,  to  raise  the  gas  prices  to  the  level  
of   oil   which   means   quadrupling   the   gas   prices.   The   proposal   of   enhancing   electricity   tariff   from   30   to   70  
%  has  already  been  reported.  This  is  when  cheaper  local  gas  is  being  used  in  power  plants  and  not  the  
expensive  imported  gas  .I  am  fearful  of  even  calculating  the  impact.  This  Qayamat  may  not  come  fully  in  
the   reign   of   the   present   government   but   will   appear   in   full   vengeance   in   the   tenure   of   next   government  
whose  specialization  appears  to  be  limited  to  anti-­‐corruption   diatribes.   May   Almighty   save   us.   But   let   us  
apply  our  minds  too,  as  we  try  to  do  in  the  following.  

It   is   only   fair   that   I   make   a   statement   about   the   prospects   of   more   competition   in   LNG   and   lowering  
down   the   prices   in   the   medium   term,   say,   five   years.   So   the   bad   days   may   ameliorate   by   then.   t   is  
therefore   important   that   in   LNG   price   formulae,   equal   weightage   be   given   to   gas   prices   as   well   as  
opposed  to  oil  price  linkage.  In  all  previous  LNG  negotiations,  there  has  been  an  oil  linkage  only.  It  is  also  
important  to  avoid  a  long  term  contract  and  rely  on  short  and  medium  term  arrangements.  

To  the  extent  that  LNG  is  imported  for  high  efficiency  use  in  Combined  Cycle  Gas  Power  Plants  (NGCC),  
there   is   some   case   for   LNG.   However,   more   imports   are   being   planned   than   is   necessary   for   the  
aforementioned  purpose.  However,  it  is  quite  possible  that  all  of  such  plans  may  not  materialize  for  a  
variety  of  reasons.  Inefficiency  has  its  positive  sides  as  well?  

We  have  covered  the  issue  of  Alternative  Energy  earlier  in  this  series  wherein  we  have  made  a  strong  
case   for   1000   MW   of   electricity   that   can   come   in   one   year.   Provide,   adequate   transmission  

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infrastructure  is  available;  this  is  the  shortest  and  cheapest  option  at  6-­‐8  cents  per  unit.  There  is  yet  a  
few  more  years  for  Solar  to  become  affordable  for  us.  What  remains  is  local  gas  potential  and  Thar  Coal.  
Some  discussion  has  already  been  done  in  the  last  piece  and  we  would  focus  on  the  remaining  issue  in  
that  respect.    

Prospects  of  local  gas  are  obviously  speculative  but  not  without  any  basis.  Various  studies  estimate  the  
potential  to  be  several  times  larger  than  the  discovered  ones.  This  is  the  irony  with  oil  and  gas  resource,  
as  it  happened  in  Saudi  Arabia  that  before  discovery,  it  was  all  speculative  and  risky.  But  the  reward  is  
great.  It  is  worth  pursuing.  Now,  Shale  gas  has  been  cited  to  be  there.  Estimates  vary  from  a  minimum  of  
51  TCF  to  584  TCF  .  Shale  gas  is  a  reality  now.  After  the  U.S.  Shale  gas  boom,  many  countries  are  actually  
prospecting   for   Shale   gas   in   their   lands.   Generally   speaking,   where   there   is   conventional   gas,   there   is  
Shale   gas   too.   In   Pakistan,   Al   of   Sindh   and   Southern   Punjab   has   been   cited   to   contain   Shale   gas.  
Production   cost   for   Shale   gas   has   been   estimated   at   6-­‐8   USD   per   MMBtu   as   against   17-­‐20   USD   per  
MMBtu  for  LNG  and  4  USD  per  MMBtu  for  conventional  gas.  A  reputed  Oil  &  Gas  company  ENI  of    Italy  
has   made   an   offer   to   develop   Shale   resource   at   a   gas   price   of   about   70   %   that   of   Oil   (14   USD   per  
MMBtu),  taking  cue  from  the  ongoing  LNG  rates  and  projects.  If  they  are  making  the  investments,  why  
can’t  we  accept  the  offer,  when  we  are  accepting  the  same  rates  or  more  for  LNG?  I  am  not  sure  whether  
the  companies  offer  is  a  serious  one(ENI  President  had  travelled  to  Pakistan  in  2012  and  met  Dr.  Asim  
Hussain,   and   spoke   of   ENI’s   for   a   readiness     10   Billion   USD   investment   for   1100   exploratory   wells).   There  
may   be   others,   who   might   come   in   at   such   a   good   rate.   Alternatively,   auctions   could   be   organized   as  
early  as  possible.  There  is  a  Shale  gas  policy  in  place  already.  Shale  gas  technology  is  in  public  domain,  as  
revealed   by   the   shale   gas   process   inventor,   George   Mitchell   who   died   recently.   Many   countries   and  
companies   have   developed   capability   in   Shale   gas   and   one   should   expect   some   competition   in   the  
auctions.   Apparently   development   time   is   not   very   long.   Indonesia   has   signed   contract   for   Shale   gas  
prospecting  and  the  targeted  commercial  production  has  been  kept  in  2018.  This  is  a  short  time  span,  if  
we  compare  it  to  LNG  which  we  are  chasing  now  for  more  than  a  decade  and  are  still  nowhere.  Indonesia  
received  75  proposals  for  Shale  gas  exploration  and  development  (  If  I  were  the  minister,  I  would  have  
opened  this  file  first  than  that  of  LNG  and  would  have  gone  to  Italy  first  than  Qatar).  

For   conventional   gas,   let   us   open   Balochistan,   as   government   is   already   doing   and   seeking   a   political  
settlement.  It  may  be  worth  considering  the  share  of  the  local  tribes  (call  it  Local  Government)  in  the  gas  
royalty.  Currently,  the  royalty  goes  to  the  government  of  Balochistan,  which  reportedly  squanders  it  all.  
Government   is   abstract   and   passive   and   the   tribes   are   real   and   offer   resistance.   It   would   not   be   unique.  
In   the   U.S.   law,   Oil   belongs   to   the   owner   of   the   land.   Even   otherwise,   let   us   try   to   be   creative   and  
recognize  the  realities  of  that  province.  It  is  difficult  to  break  the  local  system  there.  Many  have  lst  hope  
and  would  mentally  be  ready  to  a  creative  formula?  However,  one  has  to  take  care  that  the  new  found  
money  does  not  go  into  buying  arms  ?  

Now   that   the   last   tranche   of   gas   is   to   end   in   a   decade   or   so,   it   is   the   right   time   to   announce   that   the   era  
of   cheap   gas   is   over.   We   will   have   to   enhance   the   well-­‐head   prices   for   new   discoveries   as   a   general  
policy.   The   new   price   should   be   around   8-­‐10   USD   per   MMBtu.   This   is   the   whole   sale   price   of   gas   in  
Europe   where   gas   is   imported   and   as   well   as   locally   produced.   For   the   knowledge   of   the   readers,   let   me  
clarify  that  it  is  the  Asian  LNG  price  that  is  high  to  the  extent  of  80-­‐905  OF  THAT  OF  Oil,  in  Europe  and  

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elsewhere,   it   is   much   lower   and   around   8-­‐10   USD   per   MMBtu.   That   is   why   the   wane   expectation   in  
Pakistan  was  that  at  least  Iran  would  recognize  this  discrimination  and  would  offer  a  better  deal  in  the  
international   political   circumstances   in   which   Iran   suffers   from   embargoes   and   blockades.   It   has   not  
happened  despite  persuasion.  I  do  sincerely  hope  that  finally  sense  would  prevail  in  Iran  and  they  would  
revise  their  policies  eventually.  Market  may  eventually  correct  itself  with  the  advent  of  American  Shale  
gas   into   the   system.   It   is   therefore   important   to   include   a   price   revision   clause   in   all   import   agreements.  
Iran   gas   agreement   includes   such   a   clause.   Reportedly,   as   per   news   paper   account,   Qatar   demanded  
constant  price  without  revision  clause.  

CNG   today   is   being   sold   at   50%   of   gasoline   and   Diesel   price   that   is   why   there   are   long   queues.A  
reasonable  price  differences  would  be  75%,  which  means  that  its  retail  has  to  be  around  Rs  100  per  kg.  
Natural  gas  is  being  supplied  to  CNG  pumps  at  Rs  636  per  MMBtu  (Rs.  30per  kg).This  rate  has  to  go  up  to  
14  USD  per  MMBtu,  the  current  price  of  LNG,  so  that  CNG  can  be  sustainably  sold  to  the  sector  or  CNG  
sector   can   procure   its   own   LNG.   Alternatively,   CNG   sector   can   be   removed   from   regulated   prices.   That   is  
to  say  CNG  sector  buys  in  free  market  (LNG)  prices  and  sells  at  free  prices.  An  upper  limit  would  be  USD  
26  per  MMBtu  for  CNG  retail  which  in  common  kg  parlance  would  be  Rs  123  per  kg  which  is  the  current  
gasoline/diesel  price.  Thus  CNG  retail  price  fluctuates  between  a  minimum  of  Rs  100  to  a  maximum  of  Rs  
123  per  kg,  while  CNG  pumps  get  it  at  a  price  of  about  Rs  75  per  kg.  One  may  have  to  fine  tune  these  
figures,  while  implementing  it.  This  may  sound  anti-­‐CNG,  but  in  the  final  analysis  ,it  would  indicate  that  
this   is   the   only   sustainable   solution   for   CNG.   It   increases   their   fuel   supply   spectrum   to   LNG   and   LPG.  
Industrial  Gas  tariff  would  have  to  be  doubled  to  around  USD  10  per  MMBtu  from  the  present  5.6  USD  
per  MMBtu  and  so  should  be  the  commercial  rates.  Accordingly,  Domestic  tariff  is  doubled  to  the  current  
industrial  tariff  of  5-­‐6  USD  from  the  present  domestic  tariff  of  2.5  USD.  Fertilizer  gas  input  price  is  to  be  
pegged  at  one  of  the  European  Hubs(NBP  or  others)  .  Fertilizer  prices  should  be  stabilized  by  the  direct  
subsidy  to  the  farmer.  The  increased  revenue  from  higher  gas  prices  to  Fertilizer  plants  goes  to  the  direct  
subsidy   pool.   In   this   pricing   framework,   it   may   be   possible   to   maintain   well-­‐head   prices   equal   to   the  
European   gas   prices   and   local   gas   exploration   and   production   can   be   encouraged.   This   would   also  
discourage   wasteful   use   of   the   gas.   Low   prices   have   tended   to   encourage   waste.   GoP   would   not   need   to  
cajole  Fertilizer  industry  to  let  their  energy  audit  done.  They  would  do  it  themselves.  LNG  can  be  inducted  
eventually,   if   and   when   LNG   prices   stabilize   around   USD   10   per   MMBtu   in   future.   There   is   a   strong  
likelihood  that  it  would  be  so  with  new  LNG  entrants  in  the  market.  This  also  argues  against  long  term  
contracts  based  on  seller’s  market  of  today.  The  adjoining  table  summarizes  the  price  recommendations.  

Comparative  and  suggested  fuel  Prices  and  tariff  

USD/MMBtu    
  August  2013    
prices   Suggested  
 LPG   20.4   20.4  
Gasoline   27.4   27.4  
Diesel   25.7   27.4  
CNG(retail)   13.1(Rs.75/kg)   20.4(Rs.100/kg)  

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 NG(ind)   5.6   10  
NG(comm)   6.36   10  
NG(domestic)   2.5   5  
NG(CNG  
pumps)   6.56(Rs  37/kg)   15(Rs70/kg)  
NG(fertilizer)   3   10  
LNG   14-­‐15  
Source:Author    
     

The  proposed  gas  tariff  may  be  implemented  in  a   suitable  time  frame-­‐work  in  stages  as  its  purchase  cost  
increases  due  to  increases  in  local  wellhead  prices  and  with  the  induction  of  LNG.  However,  CNG  pricing  
is  to  be  implemented  on  proposed  lines  as  early  as  feasible.  This  is  just  a  reversion  to  the  previous  formal  
and  practice.  MPNR  fought  for  it  and  collapsed  in  the  wake  of  Supreme  Court’s  fiasco.    Former  Minister  
Asim  Hussain  gave  a  tough  fight  on  the  issue  but  surrendered  rather  inconceivably.  Current  CNG  pricing  
is  highly  injurious  to  resource  husbanding  and  is  in  fact  rather  irresponsible.  Immediately  speaking,  there  
is  a  strong  case  for  banning  the  use  of  CNG  for  cars  bigger  than  1000  cc.  The  decision  had  been  taken  by  
the  interim  government  but  was  reversed.  The  gas  thus  saved  should  go  to  the  power  sector.  Ultimately  
consumers  would  benefit  from  increased  electricity  supply  at  cheaper  gas  rates.  

 For  immediate  and  emergency  purposes,  imported  Lignite  and  Biomass  Briquettes  may  be  encouraged  
and  introduced  in  the  market  to  be  replaced  by  local  ones  as  the  local  facilities  emerge.  Home  Heating,  
Industrial   furnaces   and   commercial   enterprises   like   restaurant   and   Tannoors   can   utilize   it   beneficially.  
There  is  no  use  to  chase  gas  when  it  is  not  available  and  is  expensive.  This  recommendation  ought  to  be  
taken   seriously.   Solutions   are   not   always   centralized   and   on   massive   scale.   More   effective   and   wide  
spread   changes   can   occur   in   decentralized   and   user   based   systems.   There   is   still   some   use   of   Coal  
briquettes  in  Central  Europe.  Greece  is  using  it  extensively  in  industries.  In  India  coal  is  used  extensively  in  
industries.  India  dose  not  have  gas  in  quantities  required  by  India.  

While  local  gas  may  be  speculative,  Thar  Coal  is  firmly  located  in  the  ground  and  known  fairly  well.  All  
kind  of  investigations  have  been  done.  Both  gas  and  electricity  can  be  produced  from  it.  It  can  be  burnt  
directly   in   industrial   furnaces   and   boilers.   Fertilizer   can   be   produced   including   the   existing   Fertilizer  
plant’s   conversion   to   it.   Existing   oil   fired   power   plants   can   be   converted   to   it.   Sindh   Government   has  
been   given   a   long   leash   of   five   years   to   develop   Thar   coal.   It   has   not   happened.   A   new   formulae   and  
arrangement   is   due   under   a   new   initiative.   The   new   government   should   demonstrate   leadership,  
initiative  and  creativity  in  this  respect  rather  than  exploring  other  options.  It  is  in  every  body’s  interest.  
Sense  would  prevail  even  in  Sindh.  

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http://www.windpowermonthly.com/article/1161584/ming-­‐yang-­‐reliance-­‐complete-­‐25gw-­‐india-­‐deal  

http://panchabuta.com/2013/02/01/ming-­‐yang-­‐wind-­‐working-­‐with-­‐reliance-­‐power-­‐to-­‐install-­‐2-­‐5-­‐gw-­‐
over-­‐3-­‐years-­‐with-­‐financing-­‐support-­‐from-­‐china-­‐development-­‐bank/  

China Ming Yang Wind Power Group Limited (NYSE: MY), a leading wind turbine manufacturer in China, reiterated
recent statements by its Chairman and Chief Executive Officer, Chuanwei Zhang, that market prices of 1.5 megawatt
(“MW”) and 2.0MW domestic wind turbine generators (“WTG”) are expected to increase up to as much as RMB4,000
per kilowatt (“KW”) this year, and that Ming Yang currently expects to deliver 2.5 gigawatts (“GW”) of WTGs in
2013, including domestic and overseas markets.

About China Ming Yang Wind Power Group Limited

China Ming Yang Wind Power Group Limited MY 0.00% is a leading and fast-growing wind turbine
manufacturer in China, focusing on designing, manufacturing, selling and servicing megawatt-class wind
turbines. Ming Yang produces advanced, highly adaptable wind turbines with high energy output and
provides customers with comprehensive post-sales services. Ming Yang cooperates with aerodyne
Energiesysteme, one of the world's leading wind turbine design firms based in Germany, to co-develop
wind turbines. In terms of newly installed capacity, Ming Yang was a top 10 wind turbine manufacturer
worldwide and the largest non-state owned wind turbine manufacturer in China in 2011.
 

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