ANALYSIS: Pakistan invites investment in energy —Muhammad Aftab - Monday, February 14, 2011

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The World Bank and the Manila-based Asian Development Bank are already working on some Pakistani energy projects but they will have to be persuaded to offer much more funding in the years to come

Pakistan is inviting $ 200 billion worth of investment in energy. The dividends will be high, that is for sure. The task is to tackle the grievous energy crunch, one that has made industry, business, the people and even the government its hostage.

Experts underlined the gravity of this situation at this week’s Oil and Gas Pakistan Forum 2011. However, it was realised that the government cannot cough up this huge amount domestically. Naturally, it will have to gear up foreign investors — including incentives to ensure larger inflows of foreign direct investment (FDI) and multilateral and foreign bilateral funding. Among the various crises, the energy crunch is hugely important.

The forum recommended that Pakistan, decades behind on its demand for energy, including electricity and natural gas, needs to act on a war-footing, prepare a comprehensive energy mix plan and implement it quickly and effectively.

If this strategy is properly executed over the next 12 years, it can save Pakistan at least $ 100 billion out of the amount that it will be forced to spend on the import of oil and gas.

What should the energy mix be? Raise the generation of hydel, nuclear, coal-based units, exploration and development of domestic resources of oil and natural gas and renewable energy for which the country has huge potential, the forum stressed.

Pakistan will have to largely discard oil-based thermal projects, on which the government has been illogically and fruitlessly focusing since the mid-1990s. That period had seen the installation of several controversial projects based on imported oil and described as Independent Power Producers (IPPs). They were criticised because the contracted cost per kilowatt was nearly five times compared to the cost of generation by hydel power. Hydel generation has vast potential, based on some of Pakistan’s biggest rivers.

The experts and the forum estimate that Pakistan may need close to $ 200 billion for investment in various types of projects spread over the next 10 to 12 years. This is a big amount to mobilise. Islamabad will have to provide incentives for a variety of foreign funding ranging from FDI to multilateral and bilateral credits and grants. The World Bank and the Manila-based Asian Development Bank (ADB) are already working on some Pakistani energy projects but they will have to be persuaded to offer much more funding in the years to come. Pakistan will also have to use part of its own forex resources, plus foreign funds, to finance the cash import of energy plants and machinery.

Even though the consumption of natural gas is vastly expanding, cost-effectively, electricity still is the key source of power. The country generates 10,000-11,000 MW of power, which is considerably short of the current demand of 14,500 MW. A sizeable installed thermal capacity for power generation is idle because of lack of fuel oil or natural gas on which it is based.

In case these idling units are activated, they can contribute nearly half of the present generation. The installed capacity is estimated at 19,000 MW, all of which can be activated if imported oil, natural gas and necessary cash is provided. Some of the capacity stays idle because plants are cash strapped due to the non-payment of huge bills by their consumers, or because the high-cost of import fuel has upset their tariff structure.

Poor planning and insufficient investment to build new hydel power plants in the past was not the only hindrance. Nature did damage whatever little was being done. Last summer’s devastating floods, for instance, hit several small plants that would have added 500 MW of power. Their completion has been delayed for six months to a year, besides raising the cost, according to Mr Shakeel Durrani, the Chairman of the government-owned Water and Power Development Authority (WAPDA).

The Ministry of Finance (MoF) estimated, “the cumulative effect of the energy crisis on the economy was upwards of 2.0 percent of the GDP during 2009-10 alone”. With longer outages of electricity and gas this year, and normal demand going up, the GDP is getting a bigger hit.

Pakistan will have to attract investment in all areas. Its present energy mix includes gas, oil, electricity, coal and liquefied petroleum gas. The share of gas consumption was 43.7 percent, oil 29 percent, electricity 15.3 percent, coal 10.4 percent and LPG 1.5 percent. According to recent estimates, gas consumption has been rising while its domestic resources are depleting fast. This is why the government has been tying to build two international pipelines for which plans are in a fairly advanced stage. These two projects include: $ 7.6 billion for the 1,640 km Turkmenistan-Afghanistan-Pakistan-India Pipeline (TAPI), which will supply 3.2 billion cubic feet daily (bcfd) of natural gas from Turkmenistan to Multan, in central Pakistan, and extend to Fazilka in north-western India. Of the total supply, Pakistan will consume 1.25 bcfd and India 1.25 bcfd.

The second project is the Iran-Pakistan-India Pipeline (IPI). India may or may not join, partly because Washington, in the context of its anti-nuclear sanctions against Iran, opposes the IPI.

The government is moving in several directions to overcome the energy crisis. It has just approved a tight gas reserves (TGR) policy, alongside incentives to attract FDI in its exploration. There is a creeping hope that the electricity situation will begin to improve, albeit very slowly. Two ship-mounted power plants have just started generating power near Karachi, the country’s biggest business hub. Turkey’s Karadeniz Group has supplied the plants. One must stress that Pakistan has vast potential to harness its hydel power potential, alongside exploration and development of its domestic natural gas, oil and alternate energy sources. This is where future investment, both foreign and domestic, will be provided incentives. One must also remember that foreign investors are treated like royalty in Pakistan.

The writer is an Islamabad-based journalist and former Director General of APP

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