February Issue 2011

It couldn’t have happened at a worse time. The attack on the employees of MOL, the Hungarian petroleum company, coincided with the worst gas shortage in Pakistan’s history. In a swift and deadly operation, militants descended from the mountains on January 20, 2011, in Khyber Pakhtunkhwa’s Kohat region, killed six people and took four others hostage.

Spread over the districts of Kohat, Karak, Hangu, Bannu and parts of Orakzai and North Waziristan tribal agencies, the Tal Block has contributed most of the gas supply to this energy-starved country in the last 10 years.

After the attack, MOL suspended its operations in the block’s Maramzai field for an indefinite period, cutting the supply of gas to the country by 40 million cubic feet a day (MMCFD). One block has multiple fields, separated by a substantial distance. Soon after the incident, MOL Managing Director Janos Feher made a strong plea to the government to enhance the security cover for workers in order for the exploration and production work to continue.

The deployment of more troops, however, seems unlikely at the moment. The army is already stretched to the limit as it battles the militants, and providing security to all parts of the volatile province appears impossible. Among those killed were also four personnel of the Frontier Constabulary. Militants freed two of the hostages after negotiations with their families.

Hundreds of kilometres away, in volatile Balochistan, another insurgency is regularly targeting oil and gas installations. Nationalist insurgents blow up gas pipelines and fire rocket-propelled grenades at the Sui field every other day.

The deteriorating law-and-order situation has derailed exploration in most parts of the country. High risk associated with the business has started to delay projects for long durations, jacking up costs. Petroleum exploration and production (E&P) companies are spending increasing amounts of money on providing security to their employees, but to no avail.

Pakistan Petroleum Limited (PPL), the operator of the Sui field, sets aside Rs 200 million annually for security-related expenditures. Yet on January 9, simultaneous explosions damaged five gas-producing wells of its largest field.

PPL’s Managing Director Khalid Rahman says that protection of the entire field, which covers 570 square kilometres, remains virtually impossible. “We have a three-tier security cordon. There is the Frontier Constabulary, the Defence Security Guards and a cantonment, and yet these incidents happen. What can one do?”

In a similar attack last year, a gas well at Sui was blown up, and PPL had to bear an additional expense of Rs 1 billion to put out the fire.

The discontent among the Baloch brews even as PPL spends between Rs 300 and Rs 400 million every year in community development, running medical dispensaries and schools. “We do everything that is possible under the CSR (Corporate Social Responsibility) programme, for the benefit of the locals,” says Rahman.

Militants have successfully mounted attacks on high security installations and effectively blocked exploration activities in the entire Dera Bugti and its neighbouring Marri tribal area for some years now.

The other state-run outfit, the Oil and Gas Development Company Limited (OGDCL) has also suffered an account of security-related issues. After waiting for more than six years, the company finally decided to carry out surveys in Zin Block, located in Dera Bugti. But it has run into problems.

“Something untoward happens in the area almost every day,” says a senior OGDCL official. “How can one focus on the work when rockets fall near the camp on a regular basis?”

Despite security problems, Pakistan’s overall production of gas has increased. The total output stands at over 4,200 MMCFD against the 2009 figure of 4,000 MMCFD. This increase came particularly from MOL-operated Tal Block. But most of the large fields including Qadirpur, Mari, and Zamzama in Sindh and Sui in Balochistan which were discovered in the mid-90s and before, are depleting fast. However, other E&P companies have kept up production from these fast-depleting fields to meet the mammoth jump in demand.

Incidentally, no authentic study containing the country’s future supply and demand projections is available. However, some government officials insist that the gas needs touched 5,000 MMCFD in 2010, creating a shortfall of 1,000 MMCFD that forced a record number of factories in the Punjab to shut down this winter.

The roots of the current crisis that spilt out onto the streets, with people protesting against the low gas pressure that was creating problems in running geysers and heaters in homes can be traced back to the short-sightedness of successive governments.

“Over the years, thousands of kilometres of pipelines were laid in the country’s rural areas without considering its economic feasibility,” says an official of the ministry of petroleum. “New connections were doled out on political considerations. It didn’t matter that people could not pay their bills.”

As new villages, mostly in the Punjab and Sindh, were given connections, more gas started being used for generating electricity. Far cheaper than furnace oil, it remains feasible to produce power using gas. However, this left textile, chemical and other factories without gas in winters.

The consumption of gas in Pakistan as compared to other fuels is much higher than several other countries of the world. Almost 48% of its economy is run on gas whereas in India, China and the US its share is 3%, 2.5% and 23.8%, respectively.

One reason for this preference for using gas is its relatively low price for domestic consumers and for some industrial usage such as the production of fertilisers. The wellhead gas price that E&P companies get — $3 per MMBTU — is below the world average, which presently stands at $4.5, but went as high as $9 in recent months.

Even when the global gas price shot up during the past four years, geysers in Pakistani homes were being used continuously in the summers.

Preoccupied with terrorism, political and judicial issues, the last government did not see the double-digit increase in the energy demand. When the GDP rose at an average of 6.3% between 2002 and 2007, so did the consumption of gas, but the supply side was left unattended. For instance, no one looked into the prospect of importing gas. For years, experts had been stressing that the import of gas would become inevitable. But despite the passage of 15 years, little progress has been made on the Iran-Pakistan (IP) gas pipeline.

Another initiative, which included import of liquefied natural gas (LNG), has not materialised either. While the transnational IP pipeline remains on the drawing board, five years of efforts on the LNG terminal were recently scrapped by the cabinet. The Mashal LNG project would have allowed for import of 500 MMCFD by the end of 2012. However, the Economic Coordination Committee (ECC) has recently sought retendering of the project which was initiated in 2005, which means the entire process will have to be restarted from scratch.

Munawar Baseer, the former managing director of Sui Southern Gas Company (SSGC), who initiated the LNG project, maintains that it remains the quickest way of importing gas. “We need gas on an immediate basis. In its absence, the situation will turn really bad next year.”

The mighty OGDCL, owned by the government, continues to be exploited blatantly by vested interests. And corruption appears to be the name of the game.

Pakistan ’s largest petroleum producer confirmed the discovery of 300 MMCFD of gas along with 10,000 barrels per day of oil and 500 tons of LPG in Tando Allah Yar Kunnar Pasakhi Deep and Sinjhoro fields of Sindh. But work on the production facilities, which should have been completed in November 2009, has yet to start.

Consumer gas prices have been somewhat rationalised in Pakistan in recent years, but the gap between what households and industries pay remains large, the Asian Development Bank (ADB) stated in a recent study. This effectively results in domestic consumers not being able to understand the value of gas. Increase in gas prices for households is important since import of gas from the international market and new fields within the country would prove to be expensive in the long run.

Besides the inefficient use of gas, the two distribution companies, SSGC and Sui Northern Gas Pipelines Limited (SNGPL), also face pipeline loss.

ADB says that there is a leakage of 500 MMCFD. “Our effort to contain this loss depends on the government’s support. It should be obvious that theft and leakages increase as the pipeline network is stretched for new consumers,” says an SNGPL official.

Interestingly, Pakistan’s gas pipeline transmission and distribution infrastructure is far better than a lot of developing countries including India, where even in the urban centres people use liquefied petroleum gas (LPG) cannisters to cook food. But this cannot be used as a barometer of development in Pakistan, for almost 80% of the population has no access to piped gas!

In the face of such a high impending demand, petroleum industry officials maintain that the government must come up with investor-friendly policies. This would mean facilitation of exploration, more rational gas prices and less official interference in matters of OGDCL and PPL.

Companies around the world are employing new technologies to dig deeper and crush the hardest underground rocks for pumping out gas. Development of shale and tight gas reserves made it possible for the US to boost its overall production in the last few years. But the Pakistan government has yet to realise its importance. A draft,Tight Gas Policy, has been awaiting the government’s approval for several months now. “It needs to be implemented immediately and marketed abroad,” says an industry executive.

Only 16 offshore wells have been drilled in Pakistani waters since 1963. The large coastline of 1,990km, running from Sindh’s Indus delta to Balochistan’s Makran coast, also remains largely unexplored. The Indus Delta has many similarities with other oil and gas-producing deltas like Mahakam (Indonesia), Niger (Nigeria) and the Nile (Egypt) in terms of its age, sediment thickness, tectonic formation and rock properties.

The government has generally resorted to stop-gap measures to resolve the major issues facing the country. However, the gas crisis needs the immediate attention of the government as this demand rises, and factories shut down and domestic consumers demonstrate as they freeze in the winter cold, with no gas to run their heaters.