Pakistan's Energy Resource Potential

Pakistan’s energy resource potential is substantial and remains largely unharnessed although not all of it is currently financially or technically exploitable.

This potential is in the form of depleting fossil fuels (oil, gas, coal) as well as renewables (hydro, solar, wind, wood fuels and agricultural residues). Among fossil fuels, in the petroleum (oil and gas) sub-sector, Pakistan has a large prospective area (or, in geological language, sedimentary basin) covering 830,000 square kilometres. Probable reserves are estimated at twenty-seven billion barrels of oil and 282 trillion cubic feet (TCF) of gas.

Of this, 936 million barrels of oil had been confirmed and 609 million barrels produced till 2007, leaving 327 million barrels of proven reserves yet to be recovered. The reserves-to-production ratio stands at 14, critically low considering the high and growing level of oil imports, and compared with the worldwide ratio of forty. For natural gas, 53 TCF have been confirmed, of which 23 TCF were produced till 2007, leaving 30 TCF of proven reserves.

The reserves-to-production ratio is twenty-one— uncomfortably low given Pakistan’s heavy dependence on natural gas as the primary commercial fuel, and in comparison with a worldwide ratio of 59.

Till early 2009, 725 exploratory wells had been drilled which resulted in over 219 oil and gas discoveries. This works out to a drilling density of 1.99 wells per 1,000 square kilometres—far lower than the world average of ten.

However, the success rate of 1:3.3 is much better than the world average of 1:10. The success rate coupled with the large sedimentary basin implies that if the exploration level is increased, there are good chances of significantly raising the level of proven reserves and, consequently, production of oil and gas.

This, however, is proving difficult since vast portions of the sedimentary basin lie in areas where security deters any significant exploration—more so as such activity is usually carried out by international oil companies with their own manpower and risk capital.

Pakistan’s indigenous coal reserves are huge, estimated at 186 billion tons, of which the Thar deposit of 175 billion tons is the fifth largest in the world. Proven reserves stand at 1,980 million tons and at the present 249production level the reserves-to-production ratio is well over 400. This signals the need to enhance production significantly. However, most of this coal is of low quality (high sulphur and ash content) and is located in remote areas. Its exploitation therefore requires expensive excavation, treatment and transport infrastructure, in areas where security is a concern.

Renewable energy sources are also significant.

Hydroelectric potential in Pakistan is an impressive 41,700 MW of which only 6,600 MW or 16% has been harnessed till today. For mini-hydro (units up to 5 MW capacity), the potential is about 1500 MW of which only 60 MW (4%) has been tapped. Pakistan’s almost entirely untapped wind energy potential, according to the USAID Renewable Energy Lab, is estimated at 41,000 MW of power generation based on areas of favourable wind regimes.

Solar energy is abundant and remains unharnessed except for a few isolated projects. If only 0.25% of the land area of the province of Balochistan were covered by solar panels of 20% efficiency, this would be enough to provide electricity to the entire country.

However, the feasibility of generating large quantities of wind and solar power (while improving with continuing research) is highly questionable. Estimates for non-commercial sources, mainly wood fuels, are less reliable. These resources are considerable and constitute 45% of the energy supply mix for the country. However, there is ample evidence that in several parts of the country, unregulated harvesting of this poorly managed resource is severely impairing its sustainability.

The current state of the energy deficit and its projected growth is even more worrisome for the future. Data from the Planning Commission, although ignoring non-commercial energy, illustrates the magnitude of the crisis ahead. It projects an annual energy demand increasing from the present level of around 60 MTOE to 198 MTOE by the year 2025.

This is based on an annual economic growth of 6.5%. While not consistent with recent trends, this could be envisioned over the longer term, with an abating global financial crisis and a cautiously optimistic view of Pakistan’s economic regeneration.

The total indigenous supply over the same period increases from around 40 MTOE to only 75 MTOE. Oil and gas supplies are assumed to increase only slightly in line with constraints on future exploration activities.

In contrast, indigenous energy from coal, hydroelectricity, nuclear and non-traditional renewable sources, are assumed to increase significantly in an attempt to offset limitations in oil and gas. The resulting deficit grows from the already disquieting level of around 20 MTOE to a staggering 122 MTOE by 2025. These figures, perhaps more than any other, underscore the fragility of the energy sector, implying a long-term dependence on external sources. This is neither a viable nor affordable scenario.

Three characteristics of Pakistan’s energy sector take on special significance. First, the indigenous resource potential is substantial, not- withstanding some critical exploitation issues. Two, the energy deficit is prohibitively large and expanding. Three, nearly half the population, mainly the rural poor, is not connected to the commercial grids and relies on non-commercial energy. This combination often tempts policymakers to promote the harnessing of all forms of energy available. This is a common trap, particularly in a severely cash-strapped environment such as Pakistan. In this approach, for example, undue priority is given to renewable forms such as solar and wind, since they are considered free and able to reach poor, remote localities. Such forms of energy are indeed ‘free’ since they are constantly renewable, but they are not necessarily cheap. Moreover, they do little to close large deficits. Even compared with nuclear power generation, itself an expensive option, wind power is around 60 percent more expensive and solar about 30%. Nevertheless, to support poverty alleviation objectives under severe budgetary constraints, all options should be on the table but a mechanism needs to be in place to strike an affordable balance. The degree of departure from the optimum can make the difference between success and failure of energy policy.

How did we get here? How this dire state of affairs came about is analysed in a noteworthy work, which traces the history of the downward spiral and milestones along the way. The path is characterised by ‘stop-go’ reforms, policy reversals, bureaucratic delays and missed opportunities and, over the last decade or so, a growing security crisis. Through all this, there were some sound and well-intentioned policy initiatives and concerted efforts towards implementation. However, these efforts could not yield the desired results in a policy environment, which lacked the necessary fundamentals.

251A few examples illustrate the dilemma. In the early 1980s, there were four international oil companies, which had been granted concessions for exploration in Pakistan. Such companies commonly deploy their own capital for exploration, relying on satisfactory profit sharing or production-sharing agreements with the government to recoup their expenditures once commercial production begins. Drilling conditions were difficult and expensive with deep wells in high-pressure areas but discovery prospects were good. However, a major oil company, on the verge of a significant discovery, decided to suspend drilling operations and leave the country. The net effect was to discourage further exploration at a time when at least ten companies were considering the possibility of exploring in Pakistan with their own capital for the first time—a possibility that could have turned around the country’s energy future.

A combination of factors led to the oil company’s departure. Among them was the inflexibility of the bureaucracy to address glaring anomalies in the tax structure, which severely eroded the cash flow of the company especially in areas with high exploration costs.

The second, more significant reason was that, under the prevailing policy regime, oil and gas prices could only be negotiated after commercial discovery. This was a major disincentive for a company deploying its own capital in expensive operations. Rising expenditures in an uncertain post-discovery regime was enough to warrant a pull-out even on the verge of discovery, to the detriment of Pakistan’s economy.

Pakistan’s policymakers failed to understand that the country was competing with others across the world in attracting scarce exploration risk capital. For this, it needed to make its pricing regime as attractive as possible.

If there had been a mechanism to rapidly assess the economic penalty of the policy, which traded immense long-term benefits for short-lived financial gains, the story would have been different. It is a credit to subsequent policy-makers that these retrogressive policies were amended. This is now reflected in the government’s exploration promotion and investment promotion documents. However by the time this was done conditions had changed. The security situation became a key deterrent to exploration. This underscores a lost opportunity, one of many policy actions offering too little, too late.

At around the same time, another petroleum company involved in a joint venture with the government had decided to sell to the government its shares in a natural gas field development operation, which provided valuable nitrogen-rich gas feedstock to the fertilizer industry. It took over a year to negotiate the sale price and government inter­locutors were able to reduce the 252purchase price by a significant amount. This could be considered a major gain but for one serious repercussion. Through the protracted negotiations, the field expansion program was put on hold, resulting in immense losses in revenue to the joint venture itself, as well as to the fertilizer industry, and in terms of lost agricultural productivity due to lack of fertilizer. Again, a mechanism to assess the penalty could well have prompted speedier negotiations with less immediate financial gains but with vastly greater financial and economic benefits in the longer term.

Perhaps the most significant example of lost opportunities relates to Central Asia in the early to mid-90s when all six of the newly independent republics, under immense internal economic pressures, were actively seeking avenues to export their surplus energy. Strong consideration was given to the southern corridor through Pakistan to tap the large energy- starved South Asian market as well as gain access to ports on the Arabian Sea for further extending export. This was well before the security situation in Afghanistan had begun to deteriorate. As expected, there were competitors promoting alternative routes. The Great Game was on again, being played with higher stakes and at electronic speed.

Central Asian authorities and international consortia made several attempts to pursue discussions with Pakistani authorities but progress was elusive. One thing was evident. The level of interest and effort of the competitors drowned out the lukewarm response of the Pakistani government and private sector. The rest is history.

One can only surmise how the trade corridors, had they been established, would have transformed the regional scenario. Revenue from trade and from transporting energy across the region would have brought immense benefits to Afghanistan and Pakistan. Both countries, as well as India, would have also benefited from greatly enhanced energy supplies. The resulting prosperity and trade links would certainly have strengthened interdependence among the three countries and helped mitigate the conflict which currently engulfs the region.