Monday, May 20, 2013

Energy and Security: Natural Gas and the Example of Pakistan

By Paul Sullivan,
Georgetown University

I recently got a question the other day about Pakistan. It is having a serious electricity crisis. One of the solutions proposed to me was that a pipeline be built from a neighboring country, Iran, which has a lot of natural gas in order to fuel the power stations of this South Asian state.
Fuel is not enough.

The electricity generating stations in Pakistan need to be better maintained. Many plants are simply not running due to bad maintenance. More people need to be paying their electricity bills. The pricing of electricity needs to be more rational. Without the right amount of payments coming into an electricity company, even if it is a public sector company, the company cannot remain solvent and well run for long. Pakistan’s electricity is produced by two public sector utilities and about 20 plus independent power producers.

Part of the problem with this in some developing countries is that in the villages and even the large cities one can see thousands of “informal” wires being connected from the electrical poles to houses and businesses without any meters (or even safe connections, but that is another story). Income losses from essentially stolen electricity are gigantic.

Pakistan’s electricity demand growth of about 10-11 percent per year is overwhelming its supply of electricity.

About 55 percent of Pakistan’s people use biomass, such as cow dung, other agricultural waste, garbage and more to heat, cook, etc. These people will likely have an increasing want for electricity connections in the future. Pakistan will not develop even near to its potential if this huge proportion of its population is not connected with electricity, either on a grid or via distributed energy systems at the village and town levels.
These distributed systems could use the vast wind, solar, geothermal and other renewable energy resources available, but severely underutilized in the country. Setting up distributed power systems in villages and small towns could also prove to be a lot cheaper than extending Pakistan’s often shaky and overused grid. Pakistan is also a country facing a lot of political and social instability. In a country with those problems it is best to have distributed power. If insurgents or other folks with bad intent want to take out an electricity system it is better that it is a distributed and small system, rather than a massive centralized grid. Also, there are many remote areas in Pakistan where extending the grid really makes no economic or even engineering sense.

Pakistan’s electricity is produced by roughly equal amounts on average of hydropower and natural gas (about 30 percent) and oil (about 37 percent). Nuclear power supplies only about 3 percent of Pakistan’s electricity needs. It needs to import most of its oil needs. Pakistan has lots of coal, yet has not exploited it enough for electricity production.

I will focus on the other aspects of electricity security in a later article. For now, I want to focus on just natural gas and then loop those ideas around into the total energy security package. Pakistan is a good example of a developing country that is walking itself right into a natural gas-electricity shortage trap even well beyond what it has been facing.

Pakistan will likely need to increase its imports of natural gas quickly in order to keep up with expected increases in demand. This is driven by unnaturally low prices charged for natural gas in the country. This artificially increases the demand for natural gas over what it should be given normal prices for natural gas in its markets. This low price of natural gas has increased the use of natural gas for heating, cooking and industrial uses. It has also increased the use of natural gas for electricity generation. This low price for natural gas has stifled needed exploration, production, transmission and distribution of natural gas. The exploration and production parts could be the most important. So we have increased demand combined with decreased supply and that leads to increasing requirements for imports of natural gas.

Pakistan could build a liquefied natural gas (LNG) regasification facility at one of its major ports in the south. Karachi seems to be the most likely place according to some. However, it is a city in some degree of turmoil. Such a multi-billion dollar facility could be at significant risk. It may make more sense to build an LNG regasification facility in a place like Ghwadar, a port built by the Chinese for possibly this and other purposes. The LNG could be imported from Qatar, some facilities in Africa and even from some places in Asia, if needed. However, the most likely source would be Qatar. Qatar might even sell the LNG to Pakistan at less than the international price of LNG for political and other reasons. It has been known to do this for other countries. (For example, the same LNG Qatar sells to China and Japan for 15-18 dollars per MMBTU they sell to the United States for $3 per MMBTU – and at a loss when the liquefaction and transport costs to the U.S. are calculated.)

Pakistan has been in negotiations with Iran to import some of its natural gas. One of the pipelines being considered would go from Iran to Pakistan and then on to India. India-Pakistan relations may bring complexities into this pipeline system in the future. The problems in Baluchistan in both Iran and Pakistan may also bring in instability directed at this pipeline. The United States and others are not happy with the idea of Pakistan importing Iranian natural gas. This would give income to a country that the U.S. and others think of as a threat to the region and beyond. Some also think that Iran may use this natural gas income to fund its nuclear program. Indeed, there are some political complications as well as engineering complications. And these are just the tip of a very complex iceberg.

Pakistan might also think of importing Afghan gas or Turkmen gas via Afghanistan. This idea has been tossed around for some time. Most Afghan gas that is known is found in the north of that country. The Turkmen gas would have to travel through Afghanistan over some treacherous geographical and topological terrain as well as treacherous political terrain. It is unlikely that Afghanistan will be stable enough and peaceful enough in the near future to make such a pipeline system make sense economically and even strategically.
Another option might be for China to export some of its future shale gas production to Pakistan. However, China is only slowly developing its shale gas reserves for various problems it has in pricing its gas, gas infrastructure, legal and mining rights issues and more.

Given the expected huge increases in Chinese natural gas demands it is likely that further demands will be placed on Turkmen natural gas by China. They are also expecting to increase their imports of natural gas from Uzbekistan. The costs of these pipelines to China are massive.

It is unlikely that Pakistan would be able to afford any significant pipeline system from Central Asia or even Iran without outside help. The most likely source of that outside help is China. It could be that sometime in the future China will help fund pipeline spurs from their own import pipelines from Turkmenistan and Uzbekistan into Pakistan over the mountains. However, this Chinese investment would hardly be out of charitable intent. They would want something in return. That return would likely be an even stronger relationship between China and Pakistan on many issues. This, of course, would tend to weaken Pakistan’s relations with the U.S. and increase tensions between Pakistan and India.

As you can see natural gas, simple molecules of methane, takes on a grand strategic significance in this region.

Whichever way the natural gas gets into Pakistan the pipelines, and the required pumping, processing, and distribution stations need to be built within Pakistan. Pakistan would need to spend tens of billions on this system within the coming years to keep up with demand for natural gas. It would also likely need to attract tens of billions in outside investment in the exploration and production of natural gas within Pakistan. Given that much of Pakistan’s known and possible gas reserves are in very dicey places, such as Baluchistan, getting this investment may require either increased stability, which is unlikely, or a very high guaranteed investment return, which would be politically very hot in Pakistan.

Another option for Pakistan is to bring its natural gas prices up. However, this could drive inflation in the country and lead to some energy riots in the streets. The increased natural gas prices would also lead to increased costs of production of electricity given that this natural gas is a major fuel for electricity production. This would normally lead to increased losses for the generating companies, unless they can increase their electricity prices to at least a significant part of their customer base.

A better option for Pakistan seems to be to import natural gas from a country that will sell it at below international prices. Qatar seems like the best option. There may be some help from China. The U.S. seems like it may be out of this loop for some time given its own budgetary issues. However, U.S. businesses could do a lot for public diplomacy and building relations in the region by working on this situation with Pakistan.
Another option that could be considered in the longer run, if Pakistan actually has a longer run politically as a functioning state, is in the development of its methane hydrate resources offshore. Pakistan also has significant shale gas reserves in the southeastern part of the country and possibly in other areas. However, both of these options would face the difficulties presented in developing any significant investments in Pakistan. It is a failing, unstable state, with a weak government and lots of insurgent and terror groups. It is poor country that is cursed with poor leadership and corruption. It is a country on the edge.

It is also one of the most water stressed countries on earth. Huge amounts of water are needed for shale gas extraction and even conventional natural gas production and processing. Huge amounts of water are needed for thermal power production with natural gas.

Energy and security related to natural gas can be complex indeed.

Poor Pakistan, but this is not the only country that faces such energy and security threats and opportunities.

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