Fuel import addiction undermines energy security, financial stability

KARACHI: Pakistan’s addiction towards imported fossil fuels, which now has shifted towards liquefied natural gas (LNG) as a replacement fuel, undermines the country’s energy security and financial stability, IEEFA’s latest report suggests.

“LNG sourced from global markets now costs 5 to 10 times more expensive than domestically produced gas in Pakistan,” Haneea Isaad, the co-author of the report said.

LNG has also been unreliable as LNG suppliers under long-term contracts with Pakistan have defaulted on at least 11 cargoes since January 2021, contributing to fuel and power shortages.

Extreme LNG price volatility continues to stymie energy sector planning and expose the government to massive subsidy burdens.

Institute for Energy Economics and Financial Analysis (IEEFA) estimated that Pakistan’s LNG imports could rise to more than $32 billion by fiscal year 2030, up from nearly $2.6 billion in fiscal year 2021, according to the co-authors of the report and energy finance analysts Haneea Isaad and Samuel Reynolds.

“Pakistan’s vulnerability to commodity market shocks has only been increasing in the wake of the Ukraine crisis,” Reynolds said.

“Coupled with the global economic recovery from the Covid-19 pandemic, price-sensitive countries such as Pakistan may be unable to compete with wealthier buyers in Europe and Northeast Asia.”

Pakistan imported 7.4 million tonnes of LNG in 2020, and the government expects the LNG demand to grow rapidly over the next decade. There are currently at least four major LNG import terminal projects at various stages of development.

However, the high cost of LNG has shed new light on many of the pre-existing issues with the country’s gas system, including final tariffs that are not reflective of gas costs, inefficient cross-subsidisation of gas tariffs, and high volumes of unaccounted for gas (UFG) that are lost in transportation through the network.

“As more LNG is injected to this faulty network, financial issues in Pakistan’s gas sector are likely to worsen significantly,” Reynolds said. “Circular debt, chronic cash flow shortages that have historically plagued Pakistan’s power sector, is now rampant in the gas sector.”

A greater reliance on imported LNG would only reinforce credit risks for investors in the country’s LNG-to-power value chain. The planned pipeline projects and terminals may also take time to materialise as geopolitical conflicts and unviable economics exacerbate stranded asset risks for LNG infrastructure.

Natural gas is used widely throughout key sectors of Pakistan’s economy, as a result LNG price spikes and supply insecurity can have major negative macroeconomic spillover effects.

In the power sector, LNG fuel shortages have forced 3,500MW of power capacity offline since December 2021 and have contributed to nationwide load shedding of 10 to 18 hours per day in recent weeks.

In January, fuel shortages caused textile mills in Punjab to close for over two weeks. As a result, exports worth $250 million, or 20 per cent of the entire sector’s annual revenue were lost.

“In Pakistan’s textile sector, power generation costs can amount to roughly 30 to 40 per cent of the production costs. Since the textile industry depends on gas-based power generation, rising LNG prices can grossly reduce profit margins,” Isaad said.

The fertiliser sector also has an entrenched dependence on natural gas as a fuel and feedstock, but the sector pays among the lowest gas prices despite high costs.

The sector accounts for 16 per cent of national gas consumption, but only 3 per cent of revenues of state-owned gas transmission companies.

“The focus should be on the demand side of the equation, and less so on expanding supply,” Reynolds said. “The promotion of energy efficiency equipment and more cost-reflective tariff structures can incentivise more efficient use of gas to reduce import needs.”

“More coherent strategies for LNG procurement and tenders, along with maximising the utilisation of existing LNG terminals can also help improve energy security without major new infrastructure additions,” Isaad added.

Meanwhile, the acceleration of new utility-scale and behind-the-meter renewable energy and battery storage projects can help limit demand for LNG in the power sector, the country’s largest gas consumer.

Although there are plans to hold renewable energy auctions, these have been repeatedly delayed, and no new wind or solar projects have been brought online since 2020.

In the long-term, Pakistan can harness its potential as an agricultural economy by complementing its natural gas usage with biogas for power generation and domestic usage.

“Alternative energy technologies, particularly those in non-power sectors, may take time to research and develop, but it is critical to lay the groundwork now for a favourable investment environment and sustainable growth in the future,” Isaad concluded.