Most recently Gilani set up and managed the Prime Minister's Performance Delivery Unit (PMDU) to oversee all energy and infrastructure initiatives for the government. He leads Pakistan LNG, the entity responsible to manage the entire supply chain for LNG to solve Pakistan's energy crisis.
BR Research recently had a discussion with Gilani on burning matters surrounding all things LNG. The discussion revolved around the need, projections, prices, contracts, and the myths about LNG. Below are edited excerpts of the discussion.
BR Research: You have been pretty vocal of late in advocating the importance of LNG to Pakistan and the role that Pakistan LNG Limited is playing. Tell us more about it.
Adnan Gilani: I was asked to set this company up as a world class Goldman Sachs level firm. This initiative encompasses two companies with a combined strength of about 30-40 people, envisioned to warehouse the entire LNG supply chain. This would be akin to managing $8-10 billion of flows annually and hopefully save $2-3 billion of precious foreign exchange for the country.
Pakistan LNG Limited is a wholly owned subsidiary of Government Holdings Private Limited, operating under the Ministry of Energy. Given the persistent gas shortage in Pakistan, the company is mandated to manage the supply chain of LNG to overcome the gas shortfall, in the most world-class professional manner.
We are known for our transparent operations. So much so, that some say that we disclose too much information. You will find every single detail of our contracts and transactions in our website.
We currently have a constrained demand supply gap of 6000 MW, which goes up to 12000 MW unconstrained. Before the gas crisis actually happened, per capital electricity consumption in Pakistan was equal to India's. India today sits at over 1200KwH per capita, whereas Pakistan has remained at 440 kwH per capita. It was as if our economy and energy sector hit a wall.
BRR: Looking at the aggressive plans of more and more imported gas in the system, what is your assessment of the current gas shortfall in Pakistan?
AG: The gas shortfall in Pakistan currently is between 2-4 bcfd. We are running out of local gas and for economic growth to continue and accelerate, this needs to be supplanted with imports.
BRR: Isn't 4 bcfd as gas shortfall on the higher side? Most estimates put the number between 1.5-2 bcfd. What is the basis of your assumption?
AG: When I say a shortfall of 4 bcfd, I am referring to unconstrained demand. We never had enough electricity to actually check the unconstrained demand.
The world is producing just 1 percent of electricity from furnace oil. We produce 35 percent of our electricity burning furnace oil. This is equal to literally burning billions of dollars in an inefficient and expensive fuel. Pakistan could have saved $8 billion in four years between FY13 and FY16, had the new power plants on LNG been in place instead of furnace oil.
Then we have gas powered electricity generation capacity, which remains unutilized to the tune of 3000-4000 MW, due to gas supply shortage.
Not very long ago, Pakistan was importing fertilizers worth of $1.5 billion per annum, owing to acute gas shortage. With more gas in the system for industries, Pakistan is now actually producing exportable surplus of fertilizers. Recall the troubles the textile sector and the CNG industry were facing, before LNG came in. So the benefits are plenty and are already visible and quantifiable.
The cost of not having enough gas has been very dear. It has shaved off 2-3 percentage points off the GDP growth rate, with a potential loss of 1-2 million jobs every year.
BRR: So how do you plan to go about implementing your mandate?
AG: We aim at solving the gas crisis, which will lead to solving the energy crisis. The idea is to take the share of imported gas in the system from current 15 percent to over 60 percent in the next three to five years, and increase the gas based generation above 40 percent, and all of it will be based on LNG.
BRR: With a much improved fuel mix, isn't Pakistan already producing 40 percent of electricity from gas?
AG: We need to do it on a continuous and more sustainable basis. And for that, you need adequate handling and transmission infrastructure, efficient generating plants and an efficient regulator. We already have one of the most extensive gas infrastructures in the world. We have the power plants. It is now time to take advantage of LNG and we plan to bring Pakistan's energy cost down by over 50 percent compared to the alternate liquid fuels, furnace oil and diesel.
We are looking at inclusive growth going forward, primarily stemming from the SME sector. Eighty percent of jobs in Pakistan are created in the SME sector, and a reliable energy supply to the SMEs will ensure higher employment and growth.
BRR: Clearly, there is a strong case of encouraging more LNG in the system. What is the level of readiness on Pakistan's part in terms of infrastructure and investment?
AG: The good thing is that Pakistan fortunately has an extensive gas pipeline infrastructure and would require much lower lead time to pump LNG in the system than most other countries. The current gas infrastructure caters to delivery from local gas sources to population centers. Pakistan has never been able to transport gas from south to north, which is something we aim to achieve, as three-quarters of our industrial base, as well as population, is situated in the north.
BRR: What is the progress and timelines on the journey to move from south to north?
AG: The first pipeline with a capacity of 1.2 bcfd has been constructed at a cost of $1.5 billion. The second pipeline carrying a similar capacity should commence operations in 2019/2020, and the third one would be international, with a capacity of around 1.2-1.5 bcfd.
On the terminals front, Pakistan has progressed rapidly. The first terminal was built in a record time in 2015, and the second one with a handling capacity of 600-700 mmcfd is also operational. We took the risk of starting the terminals, pipeline and power plants simultaneously, which reduced a seven-year process to a two-year process. That is a massive $6-8 billion combined investment that has been made in Pakistan through LNG terminals, pipelines and power plants.
The demand is already there and it is only going to grow. Pakistan can absorb 30 million tons per annum of LNG by 2022, to make up for the massive shortfall of 4 bcfd, of which 3bcfd has already been earmarked for supply to power, industries, fertilizer, and CNG..
BRR: That is the supply side of things taken care of. What about the other side of the equation, i.e. pricing? How competitive are we? LNG pricing gets a lot of flack in the media for being on the higher side.
AG: We have compared the prices, and Pakistan has the lowest prices in the contractual imports all over the world. We are surely doing something right, as even the likes of Japan and South Korea are using our models for LNG contracts. We are the first company in this business, that publicizes every single document, as we believe in transparency and we are the first company to float long term open international tenders for supply.
BRR: We wonder when everything is so smooth, and the prices are the lowest in the world, what is that going on in the Senate regarding the LNG issues?
AG: The lobbying system in Pakistan is very robust, and there are vested interests attached at every level. We have absolutely nothing to hide, in fact everything to show for, as the whole LNG chain is saving Pakistan precious billions of dollars.
The fuel cost component in the LNG tariff for the new plants is almost half of that of furnace oil based power generation, which is between Rs 13-15 per unit and almost a third of that for high speed diesel.
BRR: In the last ten to twelve months, the average fuel cost component of LNG has been around Rs 10 per unit, as reported by Nepra. This is surely not half the furnace oil cost, as you just claimed.
AG: That is not correct. The NTDC issues a merit order every month, and our numbers are based on that. The fuel cost component for three RNLG power plants for last month was around Rs 7.3 per unit, whereas that for furnace oil plants was around Rs 11-13 per unit, thus over 50 percent more expensive.
BRR: Yes, but these three plants you mentioned are not the only RLNG plants in the system right now. For some the costs are even higher than Rs 11 per unit.
AG: The merit order works in accordance with capacity available in the system, and the cheaper fuel source gets the priority. The weighted average fuel cost component for RLNG is slated to come down, as the three new RLNG plants which sit high on the merit order and are the most efficient in the world, will start contributing more power in the system, and that is how the weighted average cost of generation will come down.
Right now, the fuel cost component for LNG is higher as there are many older plants that run on gas and the new LNG plants are not running at full steam. Once that happens, you will see the actual cost coming down closer to the reference cost of Rs 7.3 per unit, which is based on optimal utilization. Once more furnace oil based power plants start retiring, and the LNG plants are ready, you will see the weighted average fuel cost component coming down significantly, from current levels. Currently, the average older gas plants are at Rs 8-9/kwh, with the average furnace oil tariff at Rs 12-15/kwh, and so there is still substantial savings.
We already have six to seven hydro power plants coming up. The energy mix would be wonderful once that happens, but that can take eight to ten years. The whole issue is can we shut down the entire country waiting for these hydro projects to come online? The immediate term solution is RLNG.
BRR: You earlier mentioned that Pakistan's LNG demand of 20 million tons in 2018, while it was less than 5 million tons last year. Do you not think this is exaggerated?
AG: We expected it that way, but it could take another 18 months to achieve that level. By 2020, we will have two more terminals in the system, and that would be sufficient to cater for 20 million tons of LNG.
Ogra puts the gas supply gap at 3.4 bcfd and that does not even include unconstrained demand. So the LNG demand projections based on this number are certainly not exaggerated. The private sector is coming in as well as there is so much interest now in the LNG sector.
BRR: Talking of power generation mix, we have been time and again told that the long term generation mix would be built heavily around indigenous fuel. On the other hand, we are talking of building this LNG scenario for 10-15 years and long term contracts with every supplier. Are we going towards becoming solely a fuel importing country? How does that fit in with the broader plan?
AG: I am the biggest supporter of indigenous fuel, in the long run. We will need around 50,000 MW, ten years from now. It is not a lofty projection, if you keep in mind the per capita power consumption, where we lag India by some distance.
BRR: What kind of a scenario analysis does our long term energy policy have? If the demand is un-met, and the state keeps paying for capacity payments, what kind of policy do we have in place to counter such a situation?
AG: We need to move beyond the fixation with capacity. My point is that we have never had enough electricity in the system to have ever tested our full potential. Imagine the kind of energy demand that a different growth tangent of 7-8 percent can create.
Everyone is in favour of hydro based projects, but it is for the long term. And especially in our case, it can take even decades to build a dam. So we cannot just sit back and watch the demand supply gap widen, in the hope of adding indigenous fuel based generation. That is important, but we have to have power till that time as well. Not having energy over the last decade and a half has resulted in our economy not creating 15-20 million jobs. That is the real travesty.
In the last three years, there has been more exploration than in the last 25 years. But we have not even been able to maintain the same demand/supply gap, and our local gas is fast depleting and will not last forever. People are trying harder to find large finds in Pakistan. It is not for the lack of trying, it is just that they are fewer left out there now. So even if you ignore the demand for argument's sake, there will definitely be this relentless pressure from the supply side.
BRR: Do you think having that comfort of having imported gas in the system can instill some sort of complacency in terms of looking for more indigenous fuel based generation?
AG: I have an exact opposite viewpoint. We did just that. We had discoveries, and pushed local production, but nothing happened, and here we are with such a large gap. The complacency part was actually on the other side, when we did not do our best to explore more avenues such as the LNG.
In the interim period between now and forming a solid base on hydro and renewable sources, we must find ways to energize our country. All the LNG contracts are five to ten years, at a low cost. LNG is an amazing opportunity, and we must take advantage of it.
BRR: Would you always prefer contract over spot prices?
AG: It is about managing the flexibility of demand. We have to have gas at all times, and long-term contracts give us that flexibility.