Poor Policy Choices Bring Pakistan To The Brink In Gas Price Surge

For Pakistan, the inexorable rise in global LNG spot prices is turning into a never ending nightmare. Thanks to a high dependence on spot gas purchases, the South Asian country of almost 220 million people is headed for a cold winter with possibly some of the poorest preparations in a decade.

Even as the government there has struggled to ensure gas shortages do not lead to a full blown crisis, critical sectors of industry have already been under the pump for months now, having been asked to cut working hours or stop altogether, to allow diversions to the residential consumer sectors. The forex starved economy has tried to keep export focused sectors going, at the cost of other ‘non-essential’ sectors. The case for Solar continues to grow, especially when one considers the promise of Prime Minister Imran Khan of 60% of its electricity from renewable sources by 2030. This would require Pakistan to add around 24,000 megawatts of solar and wind power capacity by 2030, from just over 1,500 megawatts now, where it contributes to barely 2% of total power generation.

The countries gas troubles are not new, and can be traced back to its heavy dependence on the fuel, which accounts for 43% of its energy needs. Large domestic gas finds in the last century had led to the creation of massive infrastructure designed for gas use, especially for industry.

Currently, the Pakistani domestic gas output is around four billion cubic feet per day (bcfd) of indigenous natural gas distributed through an extensive gas network of over 12,971km transmission, 139,827km distribution and 37,058km services gas pipelines  for the 9 million plus consumers across the country.

With gas being used across power, fertiliser, captive power and regular industry besides residential use, the demand supply gap has grown much faster than planned, as domestic production has dropped. From 1.44bcfd, it is expected to grow 3 times by 2030, a gap that the country has increasingly been filling with LNG imports. All this, even as the country has lagged behind on pricing reforms

With just over 50% of supplies coming from long term contracts, (India by contrast, has over 80% supplies tied in through long term contracts) the country’s spot purchases have been under the scanner in recent months for ordering very late  with small lead times leading to higher quotes. In fact, orders placed for August and September deliveries were actually cancelled fearing criticism for high quotes. Now the country faces the unenviable future of accepting prices that will be way higher than those rejected, to tide through the cold winter months of Dec- January especially. Even as the government was justifying prices of  $15.5 per million British thermal unit (MMBTU) paid for cargoes in July-August, new deals were struck at over $20 per unit. And now, with international spot rates ruling over $28, the government faces some really tough choices.

The federal government is already pushing consumers towards electricity where possible by a combination of subsidies and persuasion.

The country was also counting on multiple coal fired power plants to be built by China for its power needs, something that might be at risk considering the Chinese pledge to stop funding coal plants now. Hydropower, the next big hope has become erratic, as it has everywhere, thanks to the impact of climate change on rainfall patterns. Also, Chinese influence here too is massive.

Surprisingly, despite the high Chinese influence, the country has lagged behind on adding solar power and wind energy, mainly due to the nature of contracts entered into with thermal power generators. One hopes the new Chinese shift will lead to a significant shift in the renewable energy mix for the country too.