Energy challenges – Opinion – Business Recorder

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 escalated in 2021, had significant economic impacts, driving commodity prices to record highs, in particular fuel. This impact was particularly severe in Pakistan, where the financial crisis led to almost 80% devaluation of PKR, over 30% inflation and a doubling of energy prices.

Political instability, increased smuggling from Iran and security problems in Afghanistan have further worsened the situation for consumers.

Pakistan’s heavy dependence on imported energy has highlighted many challenges, including limited domestic resources and an expensive fuel mix for power generation. Furthermore, energy generation and distribution have not kept pace with economic growth, leading to significant energy shortages.

This shortage and high energy costs limit economic growth and job opportunities.

The crisis has been further deepened by rapidly growing circular debt and dependence on fossil fuels, especially oil and natural gas, which produce 80% of energy. The single buyer model through the Central Power Purchasing Authority (CPPA-G) hinders competition and strategic planning, leading to inefficiencies. As a result, Pakistan’s electricity tariffs are much higher than in other countries, weakening the region’s competitiveness and export potential. The critical condition of the sector threatens the entire economy and requires urgent reforms to ensure sustainable and effective energy management. The discussion around 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 considerations.

The recently concluded Pakistan Energy Symposium in Islamabad, organized by the Overseas Investors Chamber of Commerce and Industry (OICCI) and Shell Pakistan Limited, provided just this opportunity by not only bringing together stakeholders and leading thinkers to discuss the causes and solutions to Pakistan’s energy crisis, but also delving into strategies to reduce Pakistan’s import dependence and develop alternative resources, with the aim of paving a sustainable path forward.

Pakistan’s domestic oil market is divided into upstream (exploration and production), midstream (transportation of oil from production sites to refineries), and downstream (refineries and oil marketing companies). Dr. Nazir Abbas Zaidi, Secretary General of the Petroleum Companies Advisory Council, in his keynote address highlighted six key aspects of the upstream, refining and downstream sectors of the petroleum industry, with particular emphasis on trends in oil production, which has peaked at 94,000 barrels per year. per day in 2012–2014, but decreased to 73,000 in 2022–2023, and a similar decline in gas production from 4.3 BCF per day in 2012 to 3 BCF in 2021–2022. He attributed this to depleting deposits and insufficient new exploration.

To address the financial crises faced by foreign investors in the mining sector, timely payment of gas sales invoices is crucial, with current arrears exceeding USD 600 million. The experts’ recommendations included raising gas prices for consumers to cover income shortfalls, providing subsidies or subsidies to clear outstanding invoices, and prioritizing the allocation of foreign exchange to ensure timely payments. These actions are aimed at restoring investor confidence and ensuring the continuity of mining and exploration activities.

To ensure stable gas supplies and attract foreign investments, the construction of new private LNG terminals and the expansion of existing ones should be accelerated. This approach avoids government guarantees of consumption and solves 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 the approval process and harmonize gas licensing rules, and the deregulation of the LNG value chain. This will encourage competitive gas prices and improved services, making it easier for private players to enter the market. It is suggested to establish an onshore LNG terminal to ensure long-term security of gas supply.

LPG is playing an increasingly important role as an alternative fuel due to the depletion of natural gas. However, its potential is limited by regulatory conflicts and inadequate infrastructure, with significant imports and minimal storage capacity. To increase the role of LPG in the energy landscape, it is necessary to strengthen regulatory coordination and infrastructure.

Comprehensive policy and management reforms are needed to improve downstream operations. A robust regulatory framework is also needed to curb illicit product flows impacting revenues and supply in existing and new projects. An updated ‘Pakistan Petroleum Refining Policy 2023 for new greenfield refineries’ has been approved which is in line with the current growth of the sector and by encouraging investment will potentially bring in investments of USD 10-15 billion in a new petrochemical/refining complex on a global scale .

Another positive step in this direction was the approval of the Oil Refining Policy on the “modernization” of degraded refineries. This policy has created an excellent opportunity to make huge investments and ensure a significant increase in production while meeting the latest environmentally friendly specifications. Three refineries namely 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 once their issues are resolved, bringing the refinery’s total investment to $5-6 billion. The GOP/OGRA position and their need to accelerate the signing of agreements with refineries that agreed to permanently block the development were mutually agreed.

The other side of the downstream oil industry needs to be strengthened. The main issues need to be urgently addressed, in particular regarding compliance with policies independent of political changes and strict control of illegal inflow/outflow of petroleum products and, of course, gradual deregulation with identified key milestones.

Implementation of the refining policy (green and brown – both) will only affect 30% of the production after 3-5 years, but controlling illegal inflows/outflows will bring immediate benefits/revenue to the national exchequer.

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

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

While the symposium highlighted the importance of supporting public-private partnerships to leverage collective expertise for large-scale sustainable projects, encouraging private sector investment in renewable energy, and diversifying the energy supply by prioritizing renewable sources such as solar, wind, hydro and biomass – the dominant belief was the 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 imperative given the urgent need for a complete restructuring and overhaul of both the transmission and distribution sectors, moving away from the ad hoc and makeshift arrangements that have persisted for over three decades. This transformation should include not only structural reforms and a change in thinking at the top, but also adapting to the best and most relevant practices from Third World countries. Additionally, it is important to take into account global changes initiated in the post-COVID era, such as digitalization and artificial intelligence, and apply them locally. This can only be achieved by integrating young, innovative and fresh perspectives across the energy value chain, in both the public and private sectors.