December Issue 2009

For over five decades, Pakistan thought it had large enough natural gas reserves to fuel the economy forever. Then, sometime in the winter of 2005, people in parts of the NWFP and Punjab woke up to find their stoves and heaters not running. By end of this year, the country is expected to sign a deal to become a net importer of gas.

Domestic gas reserves have depleted to an alarmingly low level with just enough left to supplement existing demand for the next 20 years or so. A shortfall in gas supply has already started to take its toll.

The supply of gas to factories in the north has been stopped between November-February because supply is being diverted to domestic consumers fighting the cold. Power plants are using more furnace oil to run their turbines. And even CNG stations had to close for a couple of days.

An energy source once believed to be available in abundance did not become scarce overnight. Reserves depleted slowly as consumption outpaced supply over the years.

Experts say long periods of political instability, misplaced priorities, incompetence of economic managers and a nation that has little sense of conservation have all led to the current situation.

The energy crisis has been brewing for a long time. But it could not have come at a worse time, as growth is not picking up and the government does not have enough money to push-start the economy.

Natural gas makes up over 50% of total energy consumed in the country. It is also the cheapest. For years, the price of gas remained so low that it was cheaper to use than other fuels like furnace oil.

Javed Akbar, an energy consultant, says people are least bothered about changing their wasteful ways. “Look around and you will see geysers running even in summer. The geysers we use waste 80% of heat into the air. This happens because it doesn’t matter to people if they are wasting gas since it is so cheap.”

There are 25 million households in the country, out of which around 5 million have piped gas. Most of these households are in big cities like Karachi and Lahore, but they are categorised as lifeline consumers.

This lifeline reference allows the households to enjoy a rate even below the cost at which gas is bought from petroleum exploration and production (E&P) companies.

“One kilogram of gas costs households between Rs 4 and Rs 29 depending on the quantity of monthly consumption,” Akbar said, citing his own survey of different fuel prices. “Those deprived of piped gas have to rely on LPG or kerosene, which cost Rs 70 and Rs 72 per kg, respectively. Isn’t it strange that I have a gas bill of Rs 500 and my maid is spending Rs 1,500 just for cooking her meals?”

The government has made little effort to promote the efficient use of our natural gas resources. Tens of thousands of textile mills, cement and fertiliser factories and power plants have the most inefficient processes of using gas. Almost all the thermal power plants are old and so have an efficiency rate of no more than 32%, which means that 68% of the gas they get is wasted.

Notwithstanding the deficit in supply, Pakistani authorities take pride in being the world’s biggest user of gas in the auto sector. The idea of Compressed Natural Gas (CNG) as an alternate low-carbon emitting auto fuel was promoted in the late 1990s in a bid to cut down the diesel import bill, which has, instead, increased substantially.

Strong demand: Drivers face long queues for CNG daily. Photo: AFP

Thousands of CNG fuel stations have popped up around the country over the last 10 years. The business is so profitable that many dealers who used to sell petrol and diesel have converted their pumps into CNG dispensing stations.

Near the Quaid’s mausoleum, along one side of the busy M.A. Jinnah Road in Karachi, there are three CNG stations, separated by just a few feet. This, despite the fact that international standards say there should be a distance of at least one kilometre between CNG stations. Such examples can be found in other cities as well.

CNG consumes just 7% of the 4,000 million cubic feet per day (MCFD) of gas produced, but the price differential between raw stock and finished product is exorbitant. Stations buy gas at Rs 17 per kg while the retail price of CNG is Rs 48.

“It is the highest profit any industry is making in the fuel retailing business anywhere in the world,” says Akbar, who says that CNG stations make a profit of Rs 23 on every kg of gas sold.

The low price of gas also discouraged exploration of new reserves for a long time. When Burmah Oil discovered the vast Sui gas field in 1952, it was thought that another such major find would never be needed. More than 11 trillion cubic feet of gas was surely more than enough for a nascent economy.

Nevertheless, it led to the creation of one of the world’s largest gas pipeline transmission and distribution networks, which spanned all the four provinces. However, Balochistan, where Sui is located, remained deprived of piped gas until recently.

With the easy availability of gas in homes, restaurants and factories, an appetite for the fuel was created. But demand was not high enough to push the government into giving financial incentives to E&P companies.

Not much happened on the exploration side till the early 1980s, when petroleum industry officials and the government realised that reserves in Sui were being depleted. A few hydrocarbon reserves were found in subsequent years but there was no major discovery.

That was a time when the world was waking up to the oil shock. There was a general realisation that even a little turbulence in the Middle East could propel petroleum prices at pumps to unbearably high levels.

By then, gas import projects based on long-term contracts gained importance and work to find more innovative ways of transporting the gaseous fuel had started. The state-owned E&P companies — Oil and Gas Development Company and Pakistan Petroleum Limited (PPL), formerly Burmah Oil — had to increase exploration.

In the 1990s, the search for new reserves picked up, says Moin Raza Khan, general manager exploration at PPL. Discovery of fields like Qadirpur, Sawan, Bhit and Zamzama in Sindh together added 6 TCF to national gas reserves, he said.

“We became overly optimistic after all these new finds,” he said, explaining a long lull in exploration activities. “It was thought that enough gas is available to meet our needs for the coming years.”

As a result, the reserve replacement ratio (RRR), an indicator of how much consumed gas is being replaced with new discoveries dropped. “E&P companies were able to replace about 95% of produced reserves during the last 10 years but in the last five years the country’s RRR was reduced to 49%.”

Abdullah Yousuf, former federal secretary of the petroleum ministry, said the depletion of reserves was the result of a substantial increase in production to meet the needs of a booming economy.

“When I took the post in 1999-2000, gas production was 2.1 BCF [billion cubic feet] per day. And by the time I left in 2004, it increased to 4.2 BCF a day.”

While production doubled, he said, new discoveries were not coming up because of various reasons. “There were issues with gas pricing. E&P companies were demanding a higher price and most prospective places in Balochistan had become difficult to operate in.”

Petroleum exploration requires an investment of millions of dollars and without a business-friendly environment that will not come, he said. In the last few years most new gas reserves have been found in Sindh, which has become Pakistan’s biggest producer.

PPL’s Raza Khan said new fields are staggered in Sindh and Jhelum, Chakwal and Mianwali in Punjab. “All these places come under the category of mature basins, which have been explored. But prospective fields in Balochistan and NWFP are yet to be explored. That is where most of the potential lies.”

Exploration in Balochistan has become very difficult and expensive in the wake of continuous attacks on the gas pipeline infrastructure by nationalists who are demanding greater rights over the province’s natural resources.

The ongoing war against extremist militants in the NWFP has made E&P companies reluctant to carry out exploration in the province. But there are other issues which have bogged down exploration in the country.

The multinational E&P companies have never taken much interest in Pakistan. Some of them are here as a result of mergers and acquisitions. The Hungarian company, MOL, is the only company which has expanded operations in recent years. Overall there has been little transfer of technology.

It has always been hard to find good geologists who are acquainted with modern technology and the latest exploration techniques. Teachers at the universities where subjects related to petroleum engineering are taught do not have relevant industry experience to prepare their pupils.

Syed Wamiq Bokhari, chairman of the Pakistan Association of Petroleum Geoscientists, sees a serious shortage of qualified workers now that exploration is most needed. “In terms of technology, we are decades behind the rest of the world and we have now created a human resource crisis.”

Petroleum engineers in Pakistan are paid more than their counterparts in the Middle East, he said. “So when I want to hire two engineers, I will hire one and it is also not economical to induct fresh graduates and train them.”

Uncertainty looms over every drilling project, says Khalid Rehman, CEO of PPL. “We were really hopeful about finding something in Dadhar,” he said, referring to a block in Balochistan, which was abandoned earlier this year. “We were expecting a seal of 150 meters, which traps gas. It was only 10 meters.”

Notwithstanding the estimates, he said no one can say for sure if exploration will bring new discoveries. Extensive research, including seismic surveys and test drilling, is required to ascertain that, he says.

“No one can tell by looking at the land how much gas there is in there,” he said. “The World Bank once said there was 230 TCF in Pakistan. Where is it? I want to know. They said there are many billions of barrels of oil. Where is that? I want to know.”

As petroleum reserves are depleted around the world, he said, conventional ways of production have given way to advanced technology which can extract gas from the deep corners of a well.

PPL aggressively went after licenses in the latest round of bidding for exploration licenses held in October. It came out with 14 exploration licenses, the highest number for a single company. Unfortunately, despite hectic efforts to attract investors, no new foreign company participated.

But Rehman said the days when oil and gas was easily found are gone. “Conventional gas is not going to come now and we have to look for unconventional reserves. PPL will work on tight gas reserves from Sirani to Naushero Feroz [in Sindh].”

Tight gas is trapped in rocks which are not permeable. Equipment is used to create an artificial conduit to bring the gas to the surface. Since heavy investment is required in recovering tight gas, the E&P companies demand a higher price for it. The search for such reserves has already started in the country on a limited scale.

Wamiq Bokhari, who is the CEO of New Horizon Exploration and Production, estimates tight gas reserves of 30 to 50 TCF in the country. “It is far more than what we have found in Sui. But getting that out is not economical.”

He underlined the importance of a separate petroleum policy for tight gas reserves, something which the industry has been demanding for quite a while. “Drilling for tight gas reserves requires adoption of technology at a higher cost. There has to be some incentive like higher gas prices.”