Pakistan Strives to Switch to Natural Gas

Courtesy of STRATFOR (subscription required), a report on Pakistan’s desire to switch to natural gas for its main energy fuel:

  • Pakistan will continue to shift its economy from oil to natural gas, a cleaner and less expensive option.
  • The government’s wide-ranging campaign against graft, and other problems like debt and energy bottlenecks, will likely complicate future Pakistani LNG terminal projects.
  • Nevertheless, its energy transition will drive demand for increased LNG imports, creating investment opportunities.

As it looks to quench its economy’s growing thirst for energy, Pakistan has turned to several multinational companies for an ambitious expansion of its liquefied natural gas terminals on the Arabian Sea. On Sept. 20, Petroleum Minister Omar Ayub Khan said Pakistan had chosen ExxonMobil, Trafigura, Royal Dutch Shell, Gunvor Group and Tabeer Energy to build five LNG facilities. Ayub’s announcement touches upon a broader plan to boost the country’s LNG processing capacity while shifting its economic reliance away from oil. With a shortfall in domestic production expected to persist even as power demand climbs, Pakistan’s appetite for natural gas for electricity generation will drive ever-more LNG imports over the next few years. And though some might hesitate to invest in Pakistani LNG lest local partners run afoul of a far-reaching (and allegedly politically motivated) anti-corruption campaign, the growth of the country’s LNG demand creates major opportunities for international energy companies looking to capitalize on one of Asia’s fastest-growing markets. 

The Big Picture

As Pakistan emerges from a balance of payments crisis, its government is driving forward the economy’s gradual transition away from oil toward natural gas, a cheaper fuel source. This will whet the public appetite for more liquified natural gas, though Islamabad will have to address several issues in the energy sector before it can begin to watch the economy grow.

 Natural Gas: A Vital Fuel Source

Natural gas is Pakistan’s most important source of energy. The country’s energy consumption last year met the equivalent of 85 million metric tons of oil in total; natural gas accounted for the biggest share at 44 percent, outpacing oil and coal combined. Natural gas is a critical input in Pakistan’s economy for numerous industries, including the power generation, commercial, fertilizer and transport sectors, among others. For Prime Minister Imran Khan’s government, using more natural gas serves a broader purpose as well: lessening the country’s reliance on furnace oil, a more expensive energy source per unit that inflates the import bill, especially when dollar-denominated oil prices rise (of course, LNG is also denominated in dollars, but its price per unit is generally cheaper). And given the country’s slow climb out from its latest balance of payments crisis — which exacerbated the rising energy bill, forcing Islamabad to seek a $6 billion loan from the International Monetary Fund (IMF) in July — the government has a strong incentive to ease its dependence on oil. 

Despite the clearly growing importance of natural gas to Pakistan’s economy, supply is failing to keep pace. Through the fiscal year ending in June 2020, the country’s petroleum regulator has forecast a shortfall of 104.7 million cubic meters (mmcm), or 3.7 billion cubic feet, per day — more double last year’s deficit. The addition of 700,000 consumers to the overall consumer base of 9.6 million over the past year partly accounts for an uptick in demand, which increases during winter. But the shortfall — estimated at an equivalent 2,000 megawatts of electricity — sheds light on fundamental problems in the energy sector involving distribution, transmission and circular debt. A reliance on burning more expensive furnace oil to drive generators forces the government to offer subsidies to power companies. However, the failure of the cash-strapped government to actually pay these subsidies creates a cascading effect throughout the power supply chain as each customer is unable to pay its suppliers, leading to load-shedding, which greatly limits business activity.

 LNG: Importing the Solution

To bridge the shortfall while hastening the economy’s gradual transition away from oil, Islamabad has turned to imports. In 2015, then-Prime Minister Nawaz Sharif’s administration inaugurated the country’s first LNG facility in Karachi’s Port Qasim on the Arabian Sea. Engro Elengy Terminal Finance Limited completed the $125 million project — financed in part by the Asian Development Bank and the International Finance Corporation — in 11 months. The speedy construction (by Pakistani standards) illustrated the urgency of the country’s energy crisis. In 2016, the Pakistan State Oil Co. and Qatargas 2 signed a 15-year agreement for 3.75 million metric tons of oil equivalent of LNG per year. Today, the facility, which includes a floating regasification and storage unit, processes 16.9 mmcm of gas per day, which it sells to the state-owned Sui Southern Gas Co.

On the heels of that project, Islamabad launched its second LNG facility in Port Qasim, attracting a wider range of international companies eager to grab a stake in the fast-growing South Asian market. Financed for $500 million under a consortium featuring Norway’s BW Group, Pakistan’s Fauji Foundation, the Pakistan GasPort Consortium Ltd., as well as Trafigura — the Singapore-based global leader in the LNG trade — the Pakistan Gasport LNG facility and Floating Storage and Regasification Unit began operations in 2017. Processing 16.9 mmcm per day, the facility sells gas to Pakistan LNG Terminals Limited and aims to provide 3,600 MW of electricity by fueling three gas-fired power plants in Punjab, the country’s most populous province

 Risks Ahead

The completion of Pakistan’s first two LNG terminals is a positive step as the country seeks to boost growth amid energy bottlenecks stemming from transmission and distribution shortfalls, circular debt, inadequate investment and electricity theft. The politically explosive issue of corruption, however, gives cause for concern due to its potential to hobble future LNG projects. In July, the National Accountability Bureau (NAB), the government’s anti-corruption agency, arrested Shahid Khaqan Abbasi, a former petroleum minister who became temporary prime minister after Sharif was ousted in a graft probe, and former Finance Minister Miftah Ismail on charges of overseeing a non-transparent bidding process involving the second LNG project.

Abbasi, who remains in custody, claims the charges are politically motivated — a frequent lament of the two main opposition parties. Anti-corruption was a key plank of Imran Khan’s campaign ahead of his 2018 election. Since he took office, the NAB has pursued cases against some of the country’s top political figures, including the incumbent prime minister’s three predecessors, Abbasi, Sharif and Asif Ali Zardari of the Pakistan People’s Party. To calm the business community’s concerns, the NAB has announced it won’t pursue tax-related cases as the government seeks to generate $37 billion in revenue as part of the IMF program. But fears that local partners could become caught in the NAB’s dragnet will likely complicate progress on future LNG projects as investors consider the disruptions that could stem from the graft probe.

Natural gas will play a critical role in Pakistan’s future. The petroleum minister’s plans to build five additional LNG terminals are ambitious — perhaps overly so — and will doubtlessly encounter delays in a country where the energy sector faces numerous problems. And if future LNG projects come under the umbrella of the China-Pakistan Economic Corridor (CPEC), especially in Balochistan province, they could come under attack from separatists. But Pakistan’s demand for natural gas will only grow, creating a need to source more imports and build more infrastructure as the world’s sixth most populous nation looks to the future.

This entry was posted on Thursday, October 3rd, 2019 at 5:50 am and is filed under Pakistan.  You can follow any responses to this entry through the RSS 2.0 feed.  You can leave a response, or trackback from your own site. 

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Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.