Future of Oil and Gas in Pakistan - Essay Example

Future of Oil and Gas in Pakistan Table of Contents I. Introduction ……………………………………………………..………. 3 II. Literature Review ………………………………………..…………....... 4 a. Importance of Oil and Gas in Pakistan’s Economy …… 4 b. Increasing Domestic and Regional Demands for Energy in Pakistan …………………………………………… 5 c. Pakistan’s Government Effort to Meet Its Increasing Domestic and Regional Demands for Energy …………… 6 c.1 Promotion of Hydro-Power Projects or Hydel …….. 7 c.2 Enhance Pakistan’s Exploration and Development of Local Gas Reserves ………………………………. 8 c.3 Building a Strong Ties with Countries that has Excessive Supply of Oil …………………………….. 9 c.4 Improving Pakistan’s Coal Production …………….. 9 c.5 Exploitation of Other Renewable Energy Resources …………………………………… 10 c.6 The Proposed Iran-Pakistan-India Gas Pipeline …. 10 d. Strategic Role of Pakistan with Regards to the Current Global Issues Related to Oil and Gas Supply … 11 e. Investors’ Benefits in Terms of Business Opportunities Related to their Investment in Oil and Gas Industry …… 12 III. Conclusion ……………………………………………………………… 12 Figure I – Pakistan’s Coal Production and Consumption, 1984 – 2004 .. 13 References …………………………………………………..…………………14 - 17 Introduction Through the state-owned Oil and Gas Development Corporation (OGDC) and Pakistan Petroleum Ltd. (PPL) aside from foreign oil companies such as the Union Texas Pakistan, British Gas, Lasmo, OMV, Gaz de France, Shell, and Unocal; the country is known for its capability to produce its own supply of oil and natural gas. (U.S. Dept. of Energy, 2008) Due to the limited supply of oil and natural gas, Pakistan remains highly dependent on the importation of crude oil from other countries. Pakistan government is very much alarmed with the necessary improvements in relation to its own oil production. As of June 6, 2008, the oil market price reached as high as US$139 per barrel. (MSNBC, 2008) In line with the constantly increasing market price of crude oil, Pakistan’s oil import bill has reached the highest record of $6.338 billion during the first quarter of 2008 as compared to $4.741 billion the previous year. (Ahmed, 2008) To enable us to understand the future of oil and gas in Pakistan, the researcher will first define the importance of oil and gas in Pakistan’s economy. Eventually, the researcher will evaluate the increasing domestic and regional demands for energy including the government of Pakistan’s effort to fulfil these requirements. After discussing the strategic role of Pakistan with regards to the current global issues related to oil and gas supply, the researcher will examine and discuss investors’ benefits in terms of business opportunities related to their investments in oil and gas industry. As part of the conclusion, the researcher will discuss the theoretical factors that contribute to the increase in gas and oil prices in the world market. Literature Review Importance of Oil and Gas in Pakistan’s Economy Sufficient supply of oil and natural gas is an important part of Pakistan’s economy since both sources of energy accounts for 80% of its commercial energy use. Among the major the sectors that consumes the most energy includes: industrial with 38.2%; transportation sector with 32.8%; residential and commercial with 25%, agriculture with 2.5%; and others with the remaining 2.2%. (Kakakhel, 2007) In the absence of sufficient supply of petroleum products, Pakistan could face a serious inefficiencies in the costs of public transportation. (Shikoh & Mansoor, 2008) Similar to the importance of petroleum products, the availability of natural gas is also considered a crucial part of Pakistan’s economic growth. A large portion of natural gas supply is mostly consumed by the energy / power as well as the fertilizer sector. Up to year 2010, Engr. Abdul Waheed Bhutto (2006) reported that the annual consumption demand growth rate (ACGR) for natural gas is expected to grow at six percent each year. The fact that Pakistan imports a significantly high level of oil and natural gas, its economy becomes highly vulnerable and dependent to the fluctuation in the world market prices of crude oil and other similar products. Basically, a significant increase in the world market price of crude oil and natural gas could negatively affect the local businesses in Pakistan one way or the other. Based on the figures that were reported by the Federal Bureau of Statistics, Pakistan’s import bill of manufactured petroleum products has increased by 43.55% since the first quarter of 2007 up to the same quarter of 2008 (from $2.379 billion up to $3.416 billion). (Ahmed, 2008) In fact, the total increase in Pakistan’s crude oil import is already more than 218 percent since the world market price of oil started to increase. (Ahmed, 2008) As a result of the high market price of oil, the prices of basic commodities such as rice, wheat and other food and non-food products has significantly increased. In line with this matter, economic analysts explain that “dollar dominated” countries are the ones that are facing the negative consequences of paying a higher price for oil and other basic commodities. (Iqbal, 2008) Increasing Domestic and Regional Demands for Energy in Pakistan Because of Pakistan’s geographic location and highly competitive human resources, the amount of American foreign direct investment in the country has increased from $238.4 million in 2004 to $326 million as of 2006. (U.S. - Pakistan Business Council, 2008) Basically, the estimated amount of global deposit receipts flows including the significant growth in foreign capital inflows in Pakistan has reached $13.5 billion during the past five years. (Akhtar, 2008) Back in 2002, the country has been capable of producing 66,000 barrels of oil each day as compared to its total consumption of 359,000 barrels. (People Daily Online, 2002) Considering Pakistan’s constantly growing population as well as the economic growth of Pakistan, demand for energy consumption throughout the country is expected to increase over the years. The total number of electricity consumers had increased up to 15.9 million in 2006 and 16.7 million in 2007. (Kakakhel, 2007) In relation to the increasing population and economic growth, BMI forecasts revealed in its latest Pakistan Oil & Gas Report that Pakistan’s share in the projected Asia Pacific regional oil demand by 2011 of 29.04mn barrels per day (b/d) will be at 7.89% as compared to an estimated 7.50% back in 2006. (Business Monitor International, 2008) Likewide, the report of Bhutto (2006) reveals that the expected total demand for gas in Pakistan will increase from the current level of 2,061 mm cfpd up to 4,452 mm cfpd by 2015. It remains a challenge for Pakistani government to meet the increasing domestic and regional demand for petroleum products and natural gas. Based on the World Bank report dated back on February 2008, there is a strong possibility that Pakistan may experience “a severe power shortage of roughly 6,000 megawatts by 2010” in case the government fails to balance the needed supply and demand for oil and natural gas. (Shikoh & Mansoor, 2008) This is possible due to the limited available supply of oil coming from Pakistan’s local producers of crude oil (Daily Times, 2007) and the excessively high market price of crude oil (Ahmed, 2008; MSNBC, 2008). Pakistan’s Government Effort to Meet Its Increasing Domestic and Regional Demands for Energy Pakistan’s government have been exerting effort to meet the increasing domestic and regional demands for energy. As of March 2008, Dr. Shamshad Akhtar – the governor of the State Bank of Pakistan publicly announced the plan of Pakistan to: (1) optimize the energy mix between hydel: thermal generation from its current level of 28:72 up to 29:61; (2) enhance the exploration and development of local gas reserves; (3) improve the coal production up to 3,300 million tons; and (4) exploit other potential renewable energy resources. (Akhtar, 2008) Promotion of Hydro-Power Projects or Hydel The government’s plan to promote the use of hydro-power projects – also known as ‘hydel’ is expected to minimize poverty throughout the country since more people will have the opportunity to operate their small- to large-scale businesses using a relatively lower cost of electricity as compared to the use of kerosene oil, diesel, and/or natural gas. (Abbasi, 2006) Back in April 2004, the first hydroelectric power station located along the downstream of Mangla Dam called the Upper Jhehlum Canal/New Bong Escape project with the capacity of 1,000 MW started its operation as the first Independent Power Producer (IPP) of hydro-electricity in Pakistan. (BAITHAK, 2008; Siddiqui & Mufti, 2004) Aiming to improve the hydro-electric power in the country, Pakistan Power Infrastructure Board (PPIB) showed its interest to Amzo Corporation in U.S. to construct 740 MW Munda multi-purpose dam project (MMDP) on Swat River which will be constructed under ‘build, own, operate transfer basis’ for a tenure of 25 years. (Power Engineering International, 2004) Basically, MMDP is an on-going project that is expected to be completed by year 2011. Another hydel project is the Kurram Tangi Dam multipurpose project which is located across Kurram River in North Waziristan Agency. The purpose of Kurram Tangi Dam is to house three units to generate 58 MW of hydel energy to provide irrigation facilities to thousands acres of land (Daily Times, 2002) Aside from Mangla, other notable hydropower projects that is operational in Pakistan as of 2008 includes: (1) Tarbela – 3,478 MW; (2) Warsak – 240 MW; (3) Chashma – 187 MW; and (4) Ghazi Barotha – 1,450 MW. (BAITHAK, 2008) Enhance Pakistan’s Exploration and Development of Local Gas Reserves Since 2002, Pakistan has been inviting domestic and multi-national companies to explore its untapped oil and gas resources with an estimated volume at 200 trillion cubic feet (tcf) of gas and 40 billion barrels of oil. (People Daily Online, 2002) Enhancing the country’s exploration and development of local gas reserves will also increase the needed oil and gas supply. (Akhtar, 2008) In line with this matter, the government implemented an open gas-pricing policy as a result of cutting the income tax rates on oil as well as removing the mandatory participation of the government in forming joint-ventures between domestic and foreign oil and gas companies. (People Daily Online, 2002) As of 2006, Dewan Petroleum and its partners such as Rally Energy Corporation – a Canadian oil and gas company will be exploring all hidden areas with sufficient gas reserves. (IFC, 2006) To meet the increasing domestic demand for oil-related products, Pakistan together with the International Finance Corporation (IFC) has been supporting the local oil and gas companies in terms of strengthening the natural gas production in the country. IFC together with Dewan Mushtaq Group in Pakistan – a new Islamabad-based oil and gas company provides and implement comprehensive guidelines and training programs to ensure a good environmental and social management will be present in all projects. (IFC, 2006) Building a Strong Ties with Countries that has Excessive Supply of Oil As part of Pakistan’s active role in search for more supply of oil and gas, Pakistan has been maintaining a strong business relationship with United Arab Emirates (UAE) – a surplus producer of oil. (Khaleej Times, 2008) By establishing a good business relationship with UAE, Pakistan can build a long-term relationship with its business partner with regards to the allocation of the country’s needed supply of oil and natural gas. Improving Pakistan’s Coal Production The government also suggests the need to improve the efficiency of Pakistan’s coal production. (Akhtar, 2008) Back in 2004, Pakistan produced only 2.5 Mmst and import additional 1.7 Mmst of coal. (Energy Information Administration, 2008) Basically, increasing the supply of locally produced coal will significantly lower down the Pakistan’s import bill of manufactured petroleum products such as crude oil and natural gas. (See Figure I – Pakistan’s Coal Production and Consumption, 1984 – 2004 on page ) The Thar coal project is believed to have a potential capacity to produce 175 billion tonnes of coal. (Pak Tribune, 2006) As part of the agreement with the Pakistan government, companies who are interested in participating with the project will be asked to extract the coal followed by generating electricity within the area. Right after exploring the coal in Thar region, the government will negotiate the electricity tariff with interested companies who will agree to install the power plants within the region. Exploitation of Other Renewable Energy Resources The government strongly suggest the need to exploit other potential renewable energy resources such as solar, wind, bio-fuels, hydrogen, and other alternative fuels. (Akhtar, 2008) Aside from improving the hydel power generation up to 40,000 mega watt power (Kakakhel, 2007), Pakistan should also explore is the use of biofuels. Considering that Pakistan is an agricultural-based country, the production of biodiesel through the use of its natural resources is considered to be a feasible project. (Ahmad, Zafar, Khan, & Sultana, 2007) However, there has been a very few studies made on the utilization of the bio-diesel technology caused by lack of education and insufficient institutional research studies. According to Kakakhel (2007), Pakistan government have been seeking the exploration of alternative energy sources such as the use of wind technology which could be set up along the villages of Sindh and Balochistan in order to produce as much as 9,700 MW wind power by the end of 2030. The Proposed Iran-Pakistan-India Gas Pipeline In line with the increasing demand for natural gas, Pakistani policymakers have been dealing with energy-producing countries like Iran and Russia in order to enable them to secure their own self-interests. As a result, the idea of increasing Pakistani’s supply of oil by building a 1,724 miles or 2,775 kilometers of pipeline that will connect from Iran’s oil reserve to the Indian markets and across the Pakistan’s geographical territory took place. (Cohen, Curtis, & Graham, 2008; Bhutto, 2006) According to Cohen, Curtis, & Graham (2008), building the Iran-Pakistan-India (IPI) gas pipeline could eventually increase Iran’s capability and power to influence the entire South Asia. In the process of gaining excessive control over the South Asian countries, there is a higher possibility for Iran to defy any forms of agreement or regulations set by the international community against developing nuclear weapons or even support terrorism. Strategic Role of Pakistan with Regards to the Current Global Issues Related to Oil and Gas Supply With regards to the current global issues related to the excessively high market prices of oil and natural gas, Pakistan has implemented a strategic plan on how the country could maximize all the available resources they have ranging from the need to establish a strong business relationship with energy-producing countries; increasing the domestic supply of oil and natural gas; including the need to strengthen its renewable sources of energy to keep down its current and future domestic demand for oil and gas. With regards to the strategic plan that is currently being implemented by the Pakistani government, the country serves as a good example to other Asian countries that is currently facing a serious economic problem caused by the high prices of crude oil in the global market. Investors’ Benefits in Terms of Business Opportunities Related to their Investment in Oil and Gas Industry Within the next 20 – 50 years, there will always be a demand for oil and gas as long as people have not yet found several good alternative sources of energy that could efficiently run our vehicles and machineries. In line with this matter, investors who are placed their investment in oil and gas industry could still benefit from it. Given that the current global prices for crude oil and natural gas is high, people all over the world will be encouraged to search for alternative sources of energy particularly on renewable energy sources. Considering the constantly increasing domestic demand for energy, the use of alternative sources of energy within Pakistan could slightly decrease the overall expected demand for oil and natural gas but not totally removing the high demand for oil and gas. Conclusion Because of the high dependent on oil and natural gas, Pakistan is importing 80% of its petroleum products for many years. Considering the constantly increasing population and economic growth in Pakistan, the total annual energy requirements is expected to increase over the years. Failure to find other sources of energy other than oil and natural gas could significantly damage the country’s overall economic growth. In order to prevent the possibility of insufficient energy supply within Pakistan, the government strongly encourages the development of other alternative and renewable sources of energy to keep the demand for oil products as low as possible. *** End *** Figure I – Pakistan’s Coal Production and Consumption, 1984 – 2004 Source: EIA – International Energy Annual, 2004 References: Abbasi, A. H. (2006, December 4). Alternative Energy. 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