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Economic pressure mounts as policies start failing in long term

KARACHI: Thanks to adhocism in policy and decision making, Pakistan has been exposed to repeated energy supply crises. Knee jerk reactions to address emergency situations have only compounded the problem.

As the government put all its energy into adding power generation capacity, and appeared to be delivering on the promise, it has been unable to demonstrate a clear road forward and continues to remain unpredictable. In the process, it kept getting rid of all those minds within the system that raised warning signs.

No wonder then, it has recently dawned on the government, despite repeated warnings earlier, that it was entering ‘capacity trap region’ or surplus power. Suddenly, power plants running on furnace oil were shut down without realising the ensuing closure of refineries and congestion at ports.

As storage tanks topped with furnace oil, all refineries were forced to run at sub-optimal capacity and the largest was compelled to a complete shut down and remain so for almost two weeks. Ports on the other hand struggled to handle normal cargo traffic as oil vessels queued up.

Belated corrective moves eased the supply chain as some furnace oil based plants were allowed to revive partial operations after two weeks, the impact continues to haunt the government with majority of airports running short of fuels for aviation and defence operations.

As a short term measure, imports of at least six furnace oil ships of almost 300,000 tonnes have been delayed, deferred or cancelled. The product from six to seven ships has been pumped into the empty storages of power plants to clear the port and Karachi roads of almost 8000 tankers and may earn a few bucks in inventory gains. It has also been decided that furnace oil produced by local refineries would be allowed for use at the power plants for the time being.

Little did the government realise that amid expanding the energy market, it urgently needs a smart fuel management mechanism with short and medium term rolling plans to avoid multiple crisis.

At least a three year strategic fuel plan should be put in place at the earliest to allow transformation of local refineries for phasing out furnace oil production and move to better fuel generation, with value addition like diesel, petrol and jet fuels currently being imported at the rising cost of foreign exchange loss.

At the same time perhaps the government also needs to reconsider its fuel pricing priorities in view of 33 per cent growth in oil product imports and 25 per cent growth in consumption coming from motor gasoline or petrol. International prices may not always remain favourable.

The strategic fuel rolling plan that is smart enough to take care of changing dynamics and availability of various fuel sources — hydro, coal, RLNG, local gas, furnace oil, nuclear, diesel and so on — at a given period in time is important because most of the furnace oil based power plants would be completing their contractual 25-30 year life over the next 3-5 years and the generation portfolio is going beyond 25-27,000megawatt.

The traditional 9-9.5 million tonnes of furnace oil consumption would be declining to 6-7 million tonnes during the current fiscal year (2017-18). It would further drop to 3.5 to 4 million tonnes during 2018-19 and 2019-20.

Little did the government realise that amid expanding the energy market, it urgently needs a smart fuel management mechanism with short and medium term rolling plans to avoid multiple crisis

These numbers would be critical, particularly for the profitable operations of the country’s largest firm by revenue, the state run Pakistan State Oil that is expected to cross Rs1.3 trillion turnovers this year. Almost enjoying a monopoly over the furnace oil market, PSO could be hit significantly in revenue loss unless it looks for other options.

Even in the short term, PSO’s managing director has reportedly been demanding a three-month rolling plan for his fuel supplies to make operations and relationship with suppliers and purchasers predictable, but in vain. In case of need, it requires at least two months to arrange an import vessel.

Sheikh Imran ul Haque, the PSO chief, is already reported to have started working on non-traditional-non-oil based revenue generating options like ‘other businesses’.

As part of diversification to cope with furnace oil challenge, PSO would soon be entering the consumer business — selling expanded portfolio of retail goods at its 3500 outlets — and starting ATM business for transfer of readily available cash at its outlets.

This may be partly helpful in view of ever rising receivables. This stems from unreasonable projections in the budget for power sector tariff subsidy and unresolved efficiency challenges at the power companies that end up adding to the circular debt, now at Rs850 billion, and creating problems for the entire supply chain — low payments to power producers and down the road.

A longstanding call for integrated planning to deal with challenges in oil, gas and electricity industry remains unattended despite creation of a Ministry of Energy, led directly by the Prime Minister of Pakistan. The ministry was created for better coordination under one leadership to resolve issues relating to oil, gas, and electricity.

As it turns out, the two ministries under two secretaries — water and power and petroleum — stand further divided into three divisions under three different secretaries and three federal ministers for power division, water division and petroleum division and a super minister on top of all — Shahid Khaqan Abbasi the Federal Minister for Energy who also happens to be the prime minister. And interestingly, all these secretaries and ministers seldom meet under one roof.

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