Energy is the biggest mess this government has inherited. Two years are gone with only talks of the reforms. The third year of PTI has dawned with some real movement in the power generation sector. Everyone is following its updates. Reforms are to be initiated in the petroleum sector for bringing efficiencies in the overall energy sector.
Government is working on reform programme for five petroleum sub-sectors. The process is in approval stage and is being discussed with the IMF. These are oil and gas exploration, natural gas distribution, oil – refining and marketing, RLNG import and LPG.
In the upstream oil and gas exploration and production (E&P) sector, Pakistan’s potential is primarily in gas. The salable gas today is around 3.2 billion cubic feet – within this, 1.9bcf is of pipeline quality and rest is for fertilizer and other usage. The reserves, on average, are declining at a rate of 9.5 percent annually. The demand is growing, and the country must rely on imported RLNG. Without doing anything, the country’s reserves will deplete in a few years.
E&P sector thus needs major reforms. First and foremost is that policy and regulation must be separated. Ministry cannot be a regulator and policymaker at the same time. The other issue is of security, and to counter that, premium must be paid to E&P companies for producing oil and gas. The third issue is of lack of continuity of polices – existing are forced to join in the new policy.
All these are in process of change. Ministry should only be in policymaking. Auction of new blocks are expected to take place soon. In the past 24 months, there were 24 small discoveries in the existing blocks – 240mmcfd gas is being added; but higher amount is being depleted. Government is confident that 20 new blocks will be auctioned in September and another 20 will be done in January 2021. In these new areas, there are some prospective discoveries that could lower the reliance on imports.
The second reform is required in the gas distribution sector. The two gas companies’ (SSGC and SNGP) incentives are misaligned. They make money on pipelines (17.5% regulated return on assets) and lose money on distribution. Why would these companies demand higher distribution? Recent RLNG shortage is a manifestation.
The pipeline business (transmission) should be separated from distribution. These gas companies should only be doing transmission – earn on renting pipelines to distributors; just like road makers earn on the toll from transporters. The distribution network must be broken down into numerous companies. World Bank is providing technical assistance on it. The idea is that transmission with open access should be managed by the government. The distribution must be in private hands.
The third area is downstream oil – refineries and oil marketing companies. The memories of petrol saga of June-20 are still fresh. It happened due to fundamental issue in regulation. The price of petrol and diesel are pegged to the previous month actual import price of PSO. The other marketing companies have to track PSO imports to make their decisions. In rising market, everyone is making inventory gains. But the losses hurt in falling market. Companies reduce the strategic requirement of 21 days’ storage in falling prices – not to mention OGRA (regulator) has no mechanism to ensure reserves on day to day basis. Now the prices are to be set on Platts average for September.
The other issue in the sector is of conversion from Euro2 to Euro5. Initially there were talks of Euro4, but the cabinet decided on the Euro5. PSO buys HSD from Kuwait Petroleum and reason for solely relying on one company is 90 days’ credit. The refinery is upgrading its facility to move to Euro5. By Jan-20, all imported cargo will be on Euro5 – till then it will be a mix of Euro4 and Euro5. Euro2 has 500 part per million (PPM) of Sulphur. For Euro5, this would reduce to 10 PPM.
Thus, all imports of petroleum (70% of consumption) will be Euro5 while the local refined products would be at Euro2. The average Sulphur content would be at 40-50 PPM. The vehicles on Euro2 can easily run on Euro5 and there will be less emission of Sulphur. However, the Research Octane Number (RON) will be at 92 of Euor5 to be imported. This will be similar to what we produce at home. Domestic refineries produce at 87-88 RON and magnesium additives increase the RON value to 91. RON determines anti-knock quality. The cars of higher RON cannot be run at lower – Honda Civic Turbo knocking problem was due to low RON and is nothing to do with Euro standards.
To reduce Sulphur PPM of local refineries, government wants refineries to submit workable plan to upgrade by Dec-20. If they fail, their fuel will not be acceptable in Pakistan. Effectively, the non-committal refineries will be left to die.
The plan is to use to Euro5 imported fuel in central plains (Lahore and surroundings) where lesser emission will help reduce the smog in winters. In South, the sea breeze is a natural killer. The government is working on completing the dualized oil pipeline. This will be moving petrol and HSD in batches to reduce fuel moving vehicles on roads significantly. The plan is of extending the dual pipeline to Peshawar. The GIDC money can be used to construct this pipeline. This work can be completed in two years. Once done, all white oil products will be done through pipelines to reduce the truck traffic on roads.
Fourth area is RLNG import. It is allowed to use existing terminals for private import, in case of excess, through third party tendering. The legal issues of Terminal 2 are almost dealt with. This can be used by fertilizer and the CNG sectors. The plan is to have new terminals to be operated by the private sector.
In case of LPG, the focus should be supply in remote areas by passing some cost in country wide averages. Pipeline gas should be discouraged in far flung areas. There were some rifts in LPG sector among the four stakeholders in the sector: local producers, importers, local marketers, and imported marketers. The government is working on reducing frictions. The vision is to have maximum local production by keeping imported prices little higher than the local by using fiscal measures.
This is the government’s reform plan for the petroleum sector. In addition, the subsidy mechanism in the sector is to be completely reformed. The subsidy should be direct to deserving consumers through Ehsaas Program. The blanket subsidy on monthly consumption must be finished as there are distortions in it. It’s a good plan; but such plans are in talks for two years now. It’s time to walk the talk.