Pakistan’s Energy Shortage: Obstacles and Opportunities

Pakistan’s Energy Shortage: Obstacles and Opportunities
By Mahad Raheel, Communications Assistant and Correspondent, American Pakistan Foundation

About two weeks ago, I had the wonderful opportunity of attending a conference at the Woodrow Wilson International Center for Scholars in Washington D.C. The conference, titled “Pakistan’s Interminable Energy Crisis: Is There Any Way Out?” brought together a number of experts from the World Bank, the government of Pakistan, and the private sector to share their views on the future of Pakistan’s energy sector. It was a remarkable experience, and one that shed light on a complex issue.

I am sad to say that there is no single cause that we can point to in order to resolve the energy crisis; there is no magic bullet solution, be it coal-fired plants, nuclear reactors, or hydroelectric dams. Quick fixes will not solve the underlying problems of poor governance and lack of long-term planning that have led to this dire situation. Still, hope yet remains. Practical initiatives, realistic goals, and a long-term strategy can dig Pakistan out of its current conundrum.

Put simply, there are three major areas of concern for the energy sector: 1) inadequate billing for energy usage, 2) lack of diverse energy sources, and 3) red tape. Secretary for the Ministry of Water and Power, Nargis Sethi, made the audience chuckle with anecdotes regarding the difficulty of revenue collection. She admitted that the kunda, a wire which illegally siphons electricity from power lines, was a particularly innovative way of dodging bill payments. Some consumers will also tamper with meters to give inaccurate readings, or better yet, none at all. As a result, the lone meter reader who is responsible for 200+ houses quickly realizes that his life would be much easier if he simply “read the meters from his office.” These remarkable innovations in electricity theft have cost electricity suppliers millions of dollars a month, making maintenance and expansion of the power grid nearly impossible. Minister of State Musadik Malik, who also presented at the conference, estimated that revenue collection covers only about 33% of the cost of the electricity that is actually distributed. Keep in mind that about a quarter of the electricity produced is lost during transmission. So not only is the system operating below capacity, but inadequate revenue collection has left the energy sector bereft of any capital to perform much needed maintenance.

According to Khalid Mansoor, CEO of Hub Power Company Limited, Pakistan imports around 44% of its energy — a completely unsustainable system. His solution? The Thar coal reserve in Sindh. Mansoor explained that it is the 7th largest reserve of coal in the world and has the potential to power Pakistan for 200 years. Strangely enough, coal power is nearly nonexistent in Pakistan’s energy portfolio. Even if the figures presented overestimate the actual supply of coal in the reserve, Pakistan should mine whatever is there in order to mitigate its reliance on foreign oil, which consists of 36% of its energy portfolio. China, India, and the United States are heavily reliant on coal power; Pakistan should follow suit.

The country will need to bring in expertise and capital from outside sources in order to get the coal industry running. It will also need to discover techniques to mine the coal without jeopardizing the local water supply. Strip mining coal requires the extensive use of water. As fate would have it, the Thar coal reserve is located in the most water stressed region of the water stressed country of Pakistan. Underground Coal Gasification (UCG) has been suggested as a water efficient mining technique, yet this technique is still in its experimental stages. Even so, what may seem like a setback may actually be an opportunity for Pakistan to test some experimental mining techniques.

Pakistan’s shortage of liquefied natural gas (LNG) may also be an opportunity in disguise. Currently, Pakistan is attempting to secure a deal with Qatar for LNG at the hefty price of $19 per mmBTU — nearly the price of furnace oil. A lower price of around $13 per mmBTU could be secured from either the U.S. or Iran; in fact, in February of this year, the Iran-Pakistan LNG pipeline was disbanded in its advanced stages due to international pressure and a $1.5 billion gift from an anonymous country (read: Saudi Arabia).

Javed Akbar, CEO of Javed Akbar and Associates, saw how the pipeline could be an opportunity for Pakistan. He recommended that Pakistan stage its LNG pipeline all the way to Gwadar port. If U.S.-Iran relations soften and sanctions are lifted, Pakistan will already have most of the pipeline constructed so that it can immediately begin imports of LNG from Iran. The LNG shortage provides an opportunity for regional peace and integration, as India has also expressed desires for a pipeline to receive Iranian gas, which could tie all three countries together. However, Pakistan’s stalling may cost them more than just LNG. If Pakistan does not complete the pipeline by December 2014, it will be obligated to pay considerable fines to Tehran. The Sharif government has asked for a year-long extension for Pakistan to complete its part of the pipeline. Only time will tell whether the Sharif Administration will follow through with the IP pipeline.

The construction of LNG import terminals in Gwadar have already begun. LNG companies in the United States need to get approval from the Department of Energy in order to export to Pakistan. Fracking, while environmentally harmful, has allowed the U.S. to increase LNG export deals with many of its free-trade partners in Europe because of the Ukraine-Russia standoff. Although Pakistan is not currently in a free-trade agreement with the United States, it should still make every effort to push for contract approval within the Department of Energy. To do this, it must prove that LNG exports to Pakistan will be in the “best interest” of the American people. In addition to LNG imports, Pakistan should look to expand renewable energy initiatives, such as wind, hydroelectric, and solar energy. Again, the situation looks dire, but this energy shortage provides private industries from around the world ample opportunity to invest in Pakistan.

Why have private industries been so reluctant to invest in Pakistan if it offers such a promising energy market? Shannon Grewer, managing director at EMI Advisors LLC, explained that poor governance has dissuaded many companies from investing. On the one hand, Pakistan is a safe place to invest in that the government guarantees returns to its investors; however, this policy discourages efficiency on the part of private industries, as they will always get some sort of return. On the other hand, Pakistan’s regulatory framework is unclear, offering unfair advantages to certain investors due to backroom dealings. Foreign companies will not invest in Pakistan until it has presented a clear, predictable, and fair regulatory environment. Additionally, ownership over energy resources falls somewhere between the jurisdiction of the federal and provincial governments; Pakistan must clarify these laws to reassure investors that there won’t be any surprises when it comes time to invest. Apparently, Pakistan has a nasty habit of introducing surprise import tariffs. Lastly, the aforementioned revenue collection problem presents the biggest deterrent to investors. Who would invest in a country where people are not obligated to pay bills? In conclusion, Grewer called for a reduction in red tape and further privatization of the energy sector to increase expertise, competition, capital, and transparency in the energy sector.

This conference was just a glimpse of Pakistan’s energy woes. Many suggestions are easier said than done. Nonetheless, I was reassured. I saw experts of diverse backgrounds make sense of an otherwise confusing situation. I saw officials from Pakistan’s government, who travelled all the way to D.C., who listened to feedback, who understood the issues, and who offered their own suggestions. I saw many in the audience who came on behalf of the United States government, or from private industries looking to get involved with Pakistan’s energy sector. I saw that many intelligent and highly motivated people were dedicated to bettering the lives of Pakistanis through an energy secure future. As long as Pakistan creates a long term plan and follows through with it, there is hope for the future. Inaction has been the bane of Pakistan’s energy sector, but dire circumstances have forced the government to consider every possibility. The problem will not be solved overnight, but with dedicated effort, intelligent policies can transform Pakistan’s energy sector over the next decade.