Pakistan’s Path to Energy Independence

We no longer have the luxury of existing in an isolated ecosystem where we can predetermine the impact of international events on our policies and strategies. Instead, it has become a living biosphere where regional cooperation and active war zones have significant potential to influence and change global dynamics.

The conflict between Russia and Ukraine, which intensified in 2021, has had significant economic consequences, driving up record prices for commodities, particularly fuel. The impact has been particularly acute in Pakistan, where the financial crisis has led to a nearly 80 percent devaluation of the Pakistani rupee, inflation of over 30 percent, and a doubling of energy prices.

Political instability, increased smuggling from Iran, and security concerns in Afghanistan have further worsened the situation for consumers. Pakistan’s heavy dependence on imported energy has highlighted a number of challenges, including limited domestic resources and a costly fuel mix for power generation. Furthermore, energy generation and distribution have failed to keep pace with economic growth, leading to significant energy shortages. This shortage and high energy costs are limiting economic growth and job opportunities.

The crisis has been further deepened by skyrocketing circular debt and dependence on fossil fuels, especially oil and natural gas, which provide 80 percent of energy. The single buyer model through the Central Power Purchasing Authority Guarantee Limited (CPPA-G) hinders competition and strategic planning, leading to inefficiencies.

As a result, Pakistan’s energy tariffs are much higher than those of its competitors, undermining regional competitiveness and export potential. The critical state of the sector threatens the entire economy, requiring urgent reforms to ensure sustainable and efficient energy management. The debate on the challenges of the energy sector has gained momentum in the face of inflation and the widening gap between production and supply, creating a huge space for decisive deliberations.

The recently concluded Pakistan Energy Symposium in Islamabad, organized by Overseas Chamber of Commerce and Industry (OICCI) and Shell Pakistan Limited, provided just such an opportunity. It not only brought together stakeholders and thought leaders to discuss the causes and solutions to Pakistan’s energy crisis, but also delved into strategies to reduce Pakistan’s dependence on imports and develop alternative energy sources to chart a sustainable path forward.

The domestic oil market in Pakistan is divided into upstream (exploration and production), midstream (transportation of oil from production sites to refineries) and downstream (refineries and oil marketing companies) sectors. Dr. Nazir Abbas Zaidi, Secretary General, Advisory Board of Oil Companies, while delivering his keynote address, highlighted six key aspects of the upstream, refining and downstream sectors of the oil industry, with special emphasis on trends in oil production, which peaked at 94,000 barrels per day in 2012-14 but declined to 73,000 in 2022-23 and a similar decline in gas production from 4.3 BCF per day in 2012 to 3 BCF in 2021-22. He attributed this to depleting reserves and insufficient new exploration. Zaidi noted that 90 percent of oil production is accounted for by four large companies and stressed the need to increase exploration, especially in underexplored regions. He also highlighted the potential of tight gas, estimated at 70 to 100 trillion cubic feet, as key to future demand.

To address the financial crises faced by foreign investors in the upstream sector, timely payment of gas sales invoices is crucial, with current arrears exceeding $600 million. Expert recommendations included raising gas prices for consumers to cover revenue shortfalls, providing grants or subsidies to settle outstanding invoices, and prioritizing foreign exchange allocation for prompt payments. These measures are intended to restore investor confidence and ensure the continuity of production and exploration activities.

To ensure stable gas supplies and attract foreign investments, the construction of new private LNG terminals should be accelerated, as well as the expansion of existing ones. This approach allows you to avoid government offtake guarantees and solve the problem of winter gas shortages. The recommendations included the activation of third-party access (TPA), the creation of an LNG task force to streamline approvals and harmonize gas licensing rules, and the deregulation of the LNG value chain. This will encourage competitive gas prices and improved services, facilitating the entry of private players. An onshore LNG terminal is suggested to ensure long-term security of gas supply.

LPG is becoming an increasingly important alternative fuel due to the depletion of natural gas. However, its potential is limited by regulatory conflicts and insufficient infrastructure, with significant imports and minimal storage capacity. Improving regulatory coordination and infrastructure is necessary to leverage LPG’s role in the energy landscape.

Comprehensive policy and governance reforms are needed to improve downstream operations. A strong regulatory framework is also needed to curb illicit product flows that impact revenues and supply to existing and new projects. An updated “Pakistan Petroleum Refining Policy 2023 for New Greenfield Refineries” has been approved, which is aligned with the current growth of the sector and will potentially leverage $10-15 billion in new world-scale petrochemical/refinery complex by encouraging investment.

Another positive step in this direction was the approval of the Petroleum Refining Policy for “modernization” of brownfield refineries. This policy has provided an excellent opportunity to inject huge investments and ensure significant increase in production while meeting latest environmentally friendly specifications. Three refineries – Attock Refinery Ltd, National Refinery Ltd and Pakistan Refinery Ltd – have already agreed to sign modernization agreements with Ogra under the revised Policy. Parco and Cnergyico are also likely to join after resolving their issues, taking the total investment by the refineries to $5-6 billion. The GOP/Ogra position and their need to expedite the signing of agreements with the refineries that have agreed to permanently block the expansion was mutually agreed upon.

Strengthening is needed on the other side of the downstream oil industry. The main problems we face need to be urgently resolved, in particular in terms of compliance with policies independent of political changes and strict controls on illegal inflows/outflows of petroleum products and, of course, phased deregulation with specific milestones.

Implementation of refining policies (green and brown) will affect only 30 per cent of production in three to five years but control of illegal inflows/outflows will bring immediate benefits/revenues to the national exchequer.

Despite recent momentum, renewable energy development in Pakistan has been hampered by low private sector participation, delayed tendering processes, inadequate transmission infrastructure, and the intermittent nature of renewable energy sources. Recommendations to address these challenges include promoting hybrid wind-solar farms, identifying arid regions for developing solar parks, streamlining the tendering process, accessing global funds to reduce costs, and encouraging local manufacturing of renewable energy equipment.

Given the challenges of the sector, such as circular debt and outdated infrastructure, the need for comprehensive modernization measures and efforts, with a clear and coherent policy framework, was highlighted. In addition, solid regulatory support to facilitate the development of sustainable, modern infrastructure will be required with significant financial commitments ($340 billion by 2030) and incentives.

The symposium highlighted the importance of supporting public-private partnerships to leverage collective expertise to deliver large-scale sustainable projects, encouraging private sector investment in renewable energy sources, and diversifying energy supplies by prioritizing renewable energy sources such as solar, wind, hydropower, and biomass. However, the overarching message was the critical need to reduce dependence on fossil fuels.

Guided by this transition, it becomes clear that there is a need to focus on four key areas: first, robust demand planning strategies must be implemented to ensure efficient use of energy; secondly, diversifying the fuel mix to include renewable resources is essential for long-term sustainability; third, market deregulation can promote competition and innovation in the energy sector, increasing efficiency and affordability; fourthly, the role of distribution companies (DISCOs) turns out to be crucial and requires reforms to increase their efficiency and effectiveness in energy distribution.

The recognition of all stakeholders is necessary because of the urgent need for a complete restructuring and overhaul of both the transmission and distribution sectors, moving away from the ad hoc and makeshift solutions that have been in place for over three decades. This transformation should include not only structural reforms and a change of mindset at the top, but also adaptation to the best and most appropriate practices of developing countries.

Additionally, it is crucial to embrace global transformations initiated in the post-Covid era, such as digitalization and AI, and apply them locally. This can only be achieved by integrating young, innovative and fresh perspectives across the entire energy value chain, in both the public and private sectors.

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The author is a teacher and writer.