Pakistan Shouldn't Pass the Cost to Consumers

The prolonged disruption of the Strait of Hormuz is exposing vulnerabilities across South Asia. Much of the attention has focused on India because of its heavy dependence on energy imports flowing through the strategic waterway. Rising fuel costs, inflationary pressures and risks to industrial growth are now beginning to emerge. Pakistanis should not avoid viewing this merely as a problem across the border, but take immediate corrective steps. Pakistan's challenge is even more complicated because its economic space for absorbing external shocks is considerably narrower. To read details click https://shkazmipk.com/energy-crisis-in-pakistan-19/

Lebanon plunging into constitutional chaos

Outgoing Lebanese President Michel Aoun told Reuters on Saturday his nation could be sliding into constitutional chaos, with an unprecedented situation of having no one in line to succeed him and a cabinet that is operating in a caretaker capacity.

Aoun is set to leave the presidential palace on Sunday, a day before his six-year term ends, but four sessions in the nation's fractured parliament have failed to reach consensus on a candidate to succeed him.

Aoun said in an interview an 11th-hour political move to address the constitutional crisis might be possible, but added there is no final decision on what that could involve.

Aoun's presidency is inextricably linked in the minds of many Lebanese to their country's worst days since the 1975-1990 civil war, with the financial crisis that began in 2019 and the deadly Beirut port blast of 2020.

In the days after the blast, Aoun said he had received a report about the roughly 2,700 tons of ammonium nitrate stored at the port of Beirut weeks before they detonated and killed some 220 people.

Aoun's son-in-law Gebran Bassil, who was put on a sanctions list by the United States in 2020 for alleged corruption, has presidential ambitions, according to political sources.

Bassil has denied the allegations of corruption, and Aoun said on Saturday the sanctions would not stop Bassil from eventually being a presidential candidate.

Once he's elected president, the sanctions will go away, Aoun said, without elaborating.

In his final week as President, Aoun signed a US-brokered deal delineating Lebanon's southern maritime border with Israel - a modest diplomatic breakthrough that would allow both countries to extract natural gas from maritime deposits.

He said powerful Iran-backed armed group Hezbollah, which sent unarmed drones over Israel and threatened to attack its offshore rigs multiple times, had served as a deterrent that had helped keep the negotiations going in Lebanon's favour.

"It wasn't coordinated (with the government). It was an initiative taken by Hezbollah and it was useful," Aoun said, adding that the Lebanese army "had no role" in this regard.

He said the deal paved the way for gas discoveries that could be Lebanon's last chance at recovering from a three-year financial meltdown that has cost the currency 95% of its value and pushed 80% of the population into poverty.

Lebanon has otherwise made slow progress on a checklist of reforms required to gain access to US$3 billion in financing from the International Monetary Fund.

Aoun said he would stay involved in politics in Lebanon even after he leaves office, particularly to fight Central Bank governor Riad Salameh, one of the president's main political adversaries.

Salameh is being investigated in Lebanon and at least five countries abroad on charges of corruption and embezzlement of public funds, charges he denies.

 

 

 

 

Cunningly US has dragged EU into Ukraine war

With no end in sight to the fighting in Ukraine, the European Union has become financially exhausted with the drawn-out conflict on its doorstep. As against this, United States, sitting across the pond, is watching on as well as making huge profits. As the war drags on, the costs for Europe are mounting.

One thing is for sure. It is certainly not the first time Washington has tricked the international community into a war. One can still recall the US sending fake intelligence, to the UN Security Council to make the case for the Iraq war.

At the time, France and Germany formed a coalition, making strong arguments and objections to prevent the Iraq war. 

This time, critics argue EU members caved in too quickly and are acting as US proxies without even being aware of it.

Before the conflict broke out on Europe’s doorstep in February, Russia regularly accused the US of deliberately creating a scenario that was designed to lure Moscow into war while ignoring Russia's security concerns over Ukraine.

The Pentagon led the mobilization of NATO troops and weapons on Russian borders and Europe quietly followed suit. The security concerns expressed by the Kremlin were ignored by Washington despite many experts describing them as legitimate.

Moscow wanted the West to respect an agreement signed in 1999 that no country can threaten its security at the expense of others. The Kremlin said this was at the heart of the crisis before the conflict broke out.  

The question must be asked, why not sending peace delegations to Russia and Ukraine instead of arms packages? The answer is the American economy crashed in the aftermath of the covid-19 pandemic and now it is growing again as a result of the war. America has a long history of making money out of waging or triggering wars across the planet.

Those paying the price on this occasion are European states with the continent slipping into a recession and ordinary households failing to make ends meet.

Reportedly, the EU has set aside fund to reimburse member states with the money they spend on sending weapons to Ukraine. However, the EU has been flooded with requests that the bloc simply cannot cover. Brussels has reportedly not even sent out the first payment.

The news outlet cites diplomats as saying the EU had estimated it could cover some 85% of the costs but so many requests were sent to the bloc’s headquarters that it revised that number down to 46%.

That is said to have angered Poland, which is one of the EU’s largest arms exporters to Ukraine and a leading seeker for reimbursements. The diminishing payback scheme and struggling attempts to reimburse risks damaging the EU’s reputation.

The argument coming out of Brussels is that at times like these, unlike the Iraq war, the Western allies must stick together with the United States.

What allies is Brussels exactly referring to? Europeans are struggling to heat their homes this winter because of the Ukraine war. France and Germany’s request for US gas supplies to alleviate the crisis in “ally” states were met with “astronomical” prices by Washington.

There is no doubt the US is making astronomical gas sale profits from the Ukraine war. The US oil giant Chevron, also a large global natural gas producer, is expected to make record exports to Europe.

"We have seen a big uptick in demand from European customers so we are adjusting to that," said Colin Parfitt, who oversees the company's shipping, pipeline, supply and trading operations. Europe will not "go back to the same flows from Russia as it did before," he said.

The US achieved its long term desire to replace Russian gas flows to Europe with its own stocks of liquefied natural gas (LNG). For years Washington has been demanding Europe to wean itself off Russian gas and the Ukraine war has met that demand, even slapping sanctions on Russia’s Nord Stream 2 gas pipeline to Germany. At the time, Berlin strongly censured the move.

American energy companies are now reaping in the profits. "What's growing in the United States is demand for exports," Parfitt said.

According to the Energy Information Administration, the US became the top LNG exporter in the first half of 2022, because of increased supplies to Europe amid the Ukraine crisis. Exports rose to average 11.2 billion cubic feet per day compared with the second half of 2021.

The fact is Europe has no choice but to purchase American energy as Washington has imposed sanctions on certain other major gas-producing countries. But why is the US selling at “astronomical” prices to its “allies”. The answer is American politicians, energy giants and arms manufacturers don’t really care about Europe.

Senior officials in France and Germany have even accused the US of overcharging for its LNG and using the war in Ukraine and the energy crisis to make profit and make Europe dependent on US gas.

French Finance Minister Bruno Le Mair recently noted the US should not be allowed to dominate the global energy market as its allies in Europe are suffering from the consequences of the Ukraine conflict.

He also said it is unacceptable for the US to sell LNG at prices four times higher than those paid by companies in America. The French Minister also called for the establishment of a more balanced relationship between the US and Europe.

The German Economy Minister Robert Habeck decried American LNG companies of charging too much for gas at a time when Europe’s biggest economy is struggling to balance its energy mix without Russian supplies.

He also recalled how the US has turned to the EU before when crude oil costs were skyrocketing, and that Europe’s national reserves were used at the time to push the prices back down.
At a time that the EU is in crisis, with friends like the US who needs enemies? Of course, American arms manufacturers are also making gigantic profits. They are shipping weapons to the warzone in Eastern Europe.

In the lead up to the war, President Putin said Russia needs to defend itself from an aggressive and hostile America. Washington is not primarily concerned with Ukraine's security, but with containing Russia, Putin said.

"In this sense, Ukraine itself is just an instrument to achieve this goal, this can be done in different ways, by drawing us into some kind of armed conflict and, with the help of their allies in Europe, forcing the introduction against us of those harsh sanctions they are talking about now in the US" he said at the time.

The consequences of the conflict have been felt by Europeans who have been staging mass protests, strikes and voting governments out of power across the continent. While the war has triggered soaring costs that the European public simply cannot afford, it has also frustrated hopes of any normalization in Europe following the covid-19 pandemic as well as European unity.

Studies show there is growing polarization in Europe as to whether supporting the US into triggering the Ukraine crisis was worth it after all?

Pakistan: Perfect example of putting cart before the horse

It may not be possible for me to recap the history of ‘energy crises’ in Pakistan spread over 75 years in a few hundred words. Since the country is dependent on funds extended by the multilateral lenders, the country has remained a ‘Guinea Pig’. 

The donors have done all sorts of experimentation. I am refraining from talking about other policies imposed on Pakistan and confine my narrative to just one issue ‘Energy Stigma’.

It is known to all and sundry that Pakistan is capable of producing 50,000MW hydel energy. However, during the last 75 years the aggregate installed dependable capacity has remained below 10,000MW. It may be recalled that at one stage multilateral lenders refused to provide funds to WAPDA for the construction of dams/hydel power plants.

Pakistan’s energy dynamics were completely ruined in nineties when multilateral lenders started playing ‘deregulation, liberalization and privatization’ mantra. Under this theme the first Independent Power Plant (IPP) was initiated under the banner of The Hub Power Company based on furnace oil in the private sector. 

Then the floodgates were opened and all sorts of plants were established using a variety of fuels, including natural gas.

The managers of energy sector in the government as well as lenders knew very well the factors responsible for the technical bankruptcy of WAPDA: rampant theft of electricity and poor recovery. However, distribution of electricity remained the sole prerogative of state owned distribution companies. At that time I had termed the policy of creations of power plants in the private sector “Putting cart before the horse”.

It is on record that dozens of power plants have been established in Pakistan but all the distribution companies are still operating in the public sector. Track record of these entities is pathetic because of electricity theft and non-recovery of outstanding dues. These entities have also failed in revamping their infrastructure which is highly depleted and incapable of handling additional load.

It is also known to all that thermal power plants are not cost effective and cost of generation was bound to increase with the hike in crude oil prices, mainly due to geopolitics. However, no credible efforts were made to increase indigenous production of oil and gas as well as refining capacity.

Then the ruling junta started playing imported LNG mantra. Nobody objected on this ‘make shift arrangement’. However, groups having ‘vested interest’ made this a prime source of energy. After the imposition of economic sanction on Russia, LNG prices rose to historic level. Since Pakistan has no ‘long term’ agreements with suppliers now it is buying gas at the most expensive cost in the spot market.

To cover up its inefficiency to procure LNG, the government has resorted to load shedding of electricity. Some analysts go to the extent of saying that the Government of Pakistan (GoP) does not have foreign exchange for the import of energy. To save the face it is talking about high price and non-availability.

I can bet that local refineries have the surplus capacity to produce furnace oil and almost all the thermal power plants operating in the country are dual-fired (capable of use furnace oil as well as gas). That means if LNG is not available plants can be run on furnace oil.

What is Hezbollah’s role in mounting tension in Lebanon

Tension has spiked in Lebanon as Justice Tarek Bitar, who is leading the investigation into the 2020 Beirut Port blast, issues charges and warrants against a number of high-ranking officials, including Hezbollah allies. It is necessary to understand what the Israeli and western media is saying 

Bitar is the second judge to run the judicial investigation into the explosion, in which more than 200 people were killed and thousands wounded after a large amount of ammonium nitrate improperly stored at the port caught fire and detonated in one of the largest nonnuclear explosions in human history.

The first judge, Fadi Sawan, was removed from the case on charges of “legitimate suspicion” over his neutrality, due to the fact his home was damaged in the blast. Sawan was removed after a request from two of the officials he charged, MP Ali Hassan Khalil and MP Ghazi Zaiter, both Hezbollah allies.

Bitar followed in Sawan’s footsteps and issued charges against a number of officials, including Khalil, Zaiter, former public works minister Youssef Fenianos, and former prime minister Hassan Diab, among others. Most have refused to show up for questioning.

The case has already been suspended three times under Bitar due to allegations of bias filed by the charged officials, with the latest suspension coming on Tuesday.

In order to understand why Hezbollah may be hesitant for an investigation to progress, it’s important to understand the background of the explosion itself.

The ammonium nitrate in question was carried by the Rhosus, whose declared destination was Mozambique. Investigative journalist Feras Hatoum found the ship was owned by a shell company linked to Syrian-Russian businessmen sanctioned by the US for acting on behalf of the Syrian government. At least until shortly before it arrived in Beirut, the ship was owned by an individual linked to a bank accused of dealing with Hezbollah and the Syrian government.

When the ship arrived, it was deemed at risk of sinking, and the chemicals were removed and stored at the port in an unsafe way.

Human Rights Watch (HRW) found that multiple Lebanese officials were, at minimum, criminally negligent in their handling of the weapons-grade ammonium nitrate. The report found some officials foresaw the deadly risks and accepted them. Officials also repeatedly failed to accurately disclose the dangers posed by the chemicals.

The HRW report listed officials who were aware of the dangers, including President Michel Aoun, Diab and Khalil. The report additionally mentioned that at least four people who had knowledge about the chemicals or the explosion have died in suspicious circumstances.

An FBI probe found the amount of ammonium nitrate that exploded at the port was only a fifth of the amount that arrived on the Rhosus, raising questions of where the rest had gone.

The links of the possible owners of the Rhosus to Hezbollah and the fact the chemicals were weapons grade and had largely been siphoned away from the port by the time of the explosion, among other factors, caused HRW and many others in Lebanon and around the world to question whether the chemicals were actually meant for Mozambique, or had been meant to arrive in Lebanon all along.

Hezbollah also has a strong hold over Lebanon’s ports, with many relevant officials coming from either Hezbollah or its allies. Even if the movement did not purposefully import the ammonium nitrate, it or its allies may still be found responsible for the explosion due to negligence.

These details may be behind the decision to charge the Hezbollah-affiliated officials, although at least one Hezbollah opponent has been charged as well.

Hezbollah has expressed outrage at the charges and is demanding Bitar be removed. Recently, rhetoric against Bitar has escalated, with Hezbollah members and allies threatening to leave the government and even use force to get Bitar off the case.

Hezbollah Secretary-General Hassan Nasrallah attacked Bitar on Monday, saying the judge is using the case for political goals and does not want to reach the truth about the explosion. Nasrallah also questioned why Bitar questioned only certain ministers and not others.

Hezbollah security official Wafiq Safa reportedly threatened Bitar in September, saying the movement would remove Bitar by force if the judge displeases them.

“We have had enough of you. We will go to the end of the legal path, and if that does not work, we will remove you by force,” said Safa to Bitar, according to Edmond Sassine, a journalist with Lebanon’s LBCI news.

Safa was sanctioned by the US Treasury in 2019 for exploiting Lebanon’s ports and borders to smuggle illegal drugs and weapons into Beirut and facilitate travel on behalf of Hezbollah.

Khalil told the Hezbollah-affiliated Al-Mayadeen TV on Tuesday that Bitar’s investigation “is unlawful and surpasses many of the protocols that must be followed.” The MP additionally claimed that the judge had met with a foreign delegation minutes after issuing the arrest warrant for Khalil, implying influence by foreign powers.

The MP warned there would be a “political escalation, and perhaps [an escalation] of another kind,” adding that “all possibilities are open,” including taking to the streets.

Khalil claimed the investigation may be part of a regional and internal plan to try to “change balances,” and that he had information that indicates that the investigation has a goal for a certain political group “at the behest of external parties.” On Wednesday, Hassan Fadlallah, a Hezbollah-affiliated MP, outright accused the US of interfering in the investigation.

The secretary-general of the Lebanese Parliament announced on Wednesday that all the measures taken by Bitar against presidents, ministers and deputies were considered an infringement of powers.

Sources from Hezbollah and the Marada movement told the Lebanese Al-Jadeed TV news that Bitar was preparing to accuse Hezbollah directly of responsibility for the explosion. The sources added that if Bitar is not removed, they will leave the government.

Hezbollah’s fight against Bitar may impact its relationship with Aoun as well, with Al-Jadeed reporting Aoun stormed out of a meeting on Tuesday, expressing anger at Hezbollah’s threats of force. Aoun reportedly has insisted on a separation of powers and refused to interfere in the judiciary.

The head of Lebanon’s Kataeb Party, Sami Gemayel, on Wednesday asked the government of Lebanon not to “bow to Hezbollah’s intimidation.”

Samir Gaegea, a Christian opponent of Hezbollah, called on the “free people of Lebanon” to prepare for a peaceful general strike if Bitar’s opponents attempt to impose their will by force. While Gaegea stressed his statement was not a threat, he added he would never accept a “certain reality” being imposed by force.

The families of the blast victims warned against replacing or intimidating Bitar, “no matter how high the threat level,” telling officials to “keep their hands off the judiciary.”

Former MP Mustapha Allouch warned on Wednesday, in an interview with Voice of Lebanon that an international investigation is needed, and that the current situation is repeating the situation of the assassination of former prime minister Rafik Hariri, as Hezbollah feels the threads of the investigation pointing at it.

All of these factors are leading to concerns that Lebanon’s newly formed government may already be on the brink of collapse, which would leave the country leaderless yet again as it deals with an ongoing economic crisis.

Concerns are rising that the tensions could explode into violence, especially if Hezbollah continues to obstruct the investigation or tries to use force to remove Bitar.

Lebanon is set to hold elections in the spring, although there are concerns they could be delayed. The elections will pose yet another test for the country in crisis, as it will face the opportunity to elect new leaders.

Lebanon will also be faced with the challenge of keeping the elections safe and unaffected by corruption amid an increasingly charged environment that will likely only get tenser as elections near.

Hassan Nasrallah Messiah for Lebanese

In the recent past Lebanon has faced multiple domestic crises. At present one of the biggest challenges facing the country is the unprecedented energy crisis that is literally suffocating a nation struggling to keep the light on. 

This crisis got worse, on the verge of reaching a point where hospitals, shops, bakeries, etc. cannot function because of a lack of fuel. Lebanon was heading towards the unknown. 

Hezbollah devised a plan to alleviate the crisis, while preventing any foreign interference or trouble for Lebanon. 

After careful consideration, Secretary General of Hezbollah, Hassan Nasrallah and other high ranking officials in the movement decided to purchase oil from the Islamic Republic of Iran and bring the oil tankers to Lebanon itself. 

Hezbollah chief said, after being told of possible sanctions or other measures by the United States that could hurt the government if the tankers docked in Lebanon; it decided to dock the first vessel in neighboring Syria and take the cargo by land across Lebanese-Syrian border crossing. 

Nasrallah extended his gratitude to the Syrian government for helping coordinate the logistics of importing this vital commodity. He thanked the Syrian government for understanding the situation of Lebanon and the dangers of Lebanese and Syrian enemies in trying to harm Damascus for the assistance it provided.

The vessel was expected to dock at Syrian seaport by Sunday and the process of unloading and dispatching fuel to Lebanon was has to be completed by Thursday. Hezbollah said, this is the first of many ships to bring oil from Iran to Lebanon.

According to Nasrallah, the negative statements were the following and he noted how they ended up in dustbin of history. 

One: The announcement of importing oil from Iran was just a stunt. However, the oil has arrived.

Two: Those who said the operation will fail because Iran itself has problems exporting gasoline and diesel. 

Three: Those who stated Israel will prevent the tanker from reaching Lebanon or Syria, especially because Hezbollah announced the move publicly on the day of Ashura. It wasn’t a secret operation.

Nasrallah believes it's unfortunate that some had hoped Israel would prevent the ship from reaching Lebanon. 

He highlighted that the 2006 war which created a security equation with Israel is what prevented the regime from stopping the fuel from arriving. This is despite the fact that Tel Aviv is very well aware the arrival of the fuel would increase Hezbollah’s popularity even more, something Israel has, for decades, tried to prevent.

Four: Those who said America will prevent this operation. Nasrallah noted the US knew any action would lead to a reaction “from a certain party”.

The Hezbollah chief said, the US only knows sanctions, tried to pressure Lebanese officials and when that did not work, the US embassy in Beirut presented an alternative plan.

The US plan had already been widely ridiculed among Lebanese commentators and analysts. 

Those who said the import of oil would cause problems for the new government and this never happened.

Five: Finally, those who said this was a sectarian move and the energy would only be distributed to Hezbollah strongholds in Southern Lebanon. Nasrallah said, oil would be sent to every region of Lebanon.

In the upcoming days, the second ship will dock in Syria and will also contain diesel.

A third ship has been loaded with gasoline and the paperwork has been completed for it to sail. The fourth tanker will contain diesel.

The fourth ship will contain diesel because it will arrive at a time when some areas of Lebanon get cold and more diesel is needed than gasoline. 

The Hezbollah chief reiterated the movement is not after trade and profit or competing with energy companies. The initiative is simply adding to a product short in supply. 

Nasrallah studied the distribution process from a humanitarian point of view and came up with the following.

A months’ worth of supply will be offered, free of charge, to government-run hospitals, centers that care for the elderly and vulnerable, every facility that cares for orphans, water facilities in poorer provinces, fire stations, the Lebanese Red Cross. 

The reality of this humanitarian mission cannot be emphasized enough when Hezbollah says it is offering the diesel to the above free of charge. 

The second list will be sold, but also in terms of priority, to those that need the energy most and at a reasonable price whereby other energy supplier’s businesses are not affected. 

Private hospitals, pharmaceutical manufacturers, mills, bakeries selling bread, companies purchasing, storing and selling vital food products, food manufacturers, and agricultural companies remain top priority. Among those also considered high-priority, that will be offered the diesel, are electricity companies who provide generators to help people with power outages. 

According to the Hezbollah Chief, the oil will not be sold to individuals, but he did leave this door open when the suffering among the priority lists is gone. 

A Lebanese company has been chosen to assist and Hezbollah says this company has been chosen because it is suffering under US sanctions. 

Nasrallah added this commodity is for all Lebanese, regardless of faith or political allegiance. It will be sent to every province in the country. 

Every effort will be done to prevent the oil from entering the black market “because the black market has already profited significantly”.

Hezbollah says this operation will hopefully break the black market, which is selling oil at unreasonable prices and hurting ordinary Lebanese waiting in line for hours. 

Hezbollah said, it will not consider the import costs of the oil tankers when it sells the oil. The movement says it will bear responsibility for these costs and says it doesn’t want to make a profit.

The Hezbollah Chief said, the movement wants this initiative to be considered as a gift to Lebanese people from the Islamic Republic of Iran and from Hezbollah. 

Nasrallah said, Hezbollah won’t use the dollar to sell any of the oil imports. Any fuel sold will be done using the Lebanese Lira. 

Hezbollah could have imported a flotilla of oil tankers and not begin with one ship. He pointed out this would have led to extensive media speculation about the whereabouts of the ships and when they will arrive; something that would have boosted Hezbollah’s popularity. 

The Hezbollah chief said, “We could have done that with the first tanker”. However, the moment chose to keep a low profile because it didn’t want to frighten the Lebanese people, especially when there are officials and enemies scaremongering the public. 

Hezbollah’s goal is easing the suffering of the people, serving the Lebanese nothing more, nothing less.

HUBCO More than just an Independent Power Producer

The Hub Power Company Limited (HUBCO) is Pakistan's largest multi-project power producer (1200MW RFO powered base plant, 214MW RFO powered Narowal, 84MW hydel based Laraib) and a stalwart of the IPP space in Pakistan.  Continuing with its pedigree of developing diverse capacity additions, expansion into coal fired power through its 46% stake in China Power Hub Generation Company Limited (CPHGCL) is now likely. Inclusion of the 2x660MW project in the priority list for CPEC projects confirms the market’s bullish expectations and allows us (AKD Securities) a firm basis to include dividend income from the project in our valuation set. We await the financial close of Thar Electric Power, to incorporate upside. Furthermore, the COD of SECMC (expected Dec'18) may also be achieved offering additional upsides. Moreover the company has also approached relevant authorities for developing a mine mouth power project of, 330MW in Thar. Having had a strong bull run (FY14-16 return of 102%), on the back heightened investor expectations of value addition post expansion plans, the stock trades at attractive price.

Going forward, earnings are expected to be driven by: 1) movement past the trough of the U-shaped tariff for the base plant, 2) improved efficiency in the base plant from continuing overhauls (boiler overhaul completed) and 3) termination of O&M contract with O&M services at the base plant (and planned coal expansion) to be managed internally, reducing consolidated O&M costs (halving of annual O&M expense). The separation of O&M services subsidiary Hub Power Services Limited as an in-house O&M provider in a technical agreement with GE and its stake in SECMC are value accretive. The absence of these companies in the consensus valuation method (DDM using income paid through tariffs post indexation), may be undervaluing the company and missing value additions from these segments of HUBC's business.

CPHGCL (2X660MW) coal fired plant with accompanying jetty adjacent to its base plant site, with an expected cost of US$2.4 billion (in an 80/20 debt to equity) through a JV with China Power International  Holdings, and HUBC holding minority stake in the project (recently notified at 46%). To recall, coal based power plants have a lucrative upfront 27.2% ROE (imported coal) during the four year construction period, with a guaranteed 17% US$ indexed IRR. Thus, the planned project, with expected COD by FY19-20 (staggered COD is planned, with each 660MW unit brought online in a span of 2-3 quarters of each other), is expected to be a major contributor to payouts from FY20 (Rs5.73/share in annual dividend income from CPHGCL).

HUBCO’s base plant with 1,200MW net generation capacity forms the foundation of the current valuations as it makes up for 80% of units generated by the company. These factors allow the base plant to add Rs63.2/share to DDM based valuation in the form of dividend income (at 100% ownership). Having a U-Shaped tariff (unique in the Power Sector) the plant's tariff peaks towards the end of its tariff period, expiring in FY27. Additionally, the recent completion of boiler overhauls and incorporation of a wholly owned subsidiary to carry out plant O&M significantly reduces O&M costs for the consolidated entity.

A number of catalysts continue to fuel investor expectations including: 1) demerger of Narowal into a separate IPP, with potential listing to raise additional funds for sizeable CPHGCL equity drawdown, 2) Pak Rupee depreciation and increase in US CPI provide upside to indexations built into the tariff and adjusted quarterly, and 3) additional income from the acquisition of 6% stake for US$20 million in Sindh Engro Coal Mining Company (SECMC) tasked with mining for coal in Thar Block II (COD expected Dec'18). Lastly, headway on additional projects, including 330MW Thar Electric (TEL) could be value accretive (26.5% ROE on local coal vs. 24.5% on imported coal).

Under the scheme of arrangement for asset desegregation approved in the EOGM on Feb'15, the newly formed Narowal Company Ltd will have 392.2 million shares. Post demerger, 100% ownership of Narowal Company Ltd will remain with HUBCO; the company may put up a minority stake for listing through Offer for Sale.

Valuation & Investment Perspective: Having had a strong run (FY14-16 return of 102%), on the back heightened investor expectations of value addition post expansion plans, the stock trades at a premium. The financial close of TEL also offers additional upside. Between now and the commencement of operations in the 1320MW coal fired extension project, the COD of SECMC (expected Dec'18) may also be achieved offering additional upsides. That said, both projects will be a drain on liquidity, which the company may balance by offloading Narowal post demerger. Despite this, management has recently stated its aim to implement quarterly payout regime.

Regulatory impediments with pending approvals on 1,320MW coal fired power plants having the potential to delay the project in a material manner. In the backdrop of additional burden of upcoming projects and investments, liquidity crunch may ensue if circular debt resurges. Any surge in debt build up may impede FO supply, particularly at the base plant, where PSO (with whom a Fuel Supply Agreement governs payments) is exposed to a liquidity crunch and may face problems opening LC's/ facilitating shipments.

HUBCO, Pakistan, energy crisis, circular debt

OGDC achieves record crude oil production per day

It is not a secret that Pakistan is highly deficient in indigenous energy products. Import of crude oil and POL products eats up billions of dollars every year. On top of that extensive gas and electricity load shedding keeps capacity utilization of industrial units below optimum capacity utilization. The prevailing situation demands accelerating activities of exploration and production (E&P) companies. Pakistan meets around 12 percent of its oil requirement from indigenous resources.

The state owned largest E&P, Oil & Gas Development Company (OGDC) claims it is making extra efforts and one tends to agree with the statement partially. Its latest announcement says that the Company has achieved a record production of 50,172 barrels per day (bpd) of crude oil. By international standard the number may look dismal but for Pakistan it looks enormous, 57 percent of the country’s total crude oil production estimated around 88,000 bpd.

The information disseminated indicates that the Company is all set to inject about 4,000 barrels of additional oil per day, 100 million cubic feet per day (mmcfd) of gas and 400 tons of liquefied petroleum gas, starting with fewer quantities in the first week of December and then gradually going up. This addition would come from Kunar Pasakhi Deep field in Sindh which had been held up due to disputes and court cases.

IMF Review of Pakistan economy: Privatization remains a hurdle

The International Monetary Fund (IMF) has completed a review of performance of Pakistan’s economy. This has paved way for release of another tranche of US$500 million subject to the approval by the Fund's Board.

It is encouraging to note that the Government of Pakistan (GoP) has managed to meet all five covenants for the period ended 31^st December 2015 as recent foreign inflows amounting to US$2.4 billion helped in achieving US$9.3 billion NIR target, while retirement of budgetary borrowing from SBP kept NDA below its prescribed ceiling of Rs2.58 trillion.

Revenue collection was slightly below the required target reflecting impact of recently imposed duties. This helped the GoP to achieve targets for limiting budget deficit to Rs625 billion, which remained a major concern in the last review.

However, GoP was unable to meet structural benchmarks relating to PIA's privatization, where news flows indicate further delay. While clarity in this regard should emerge from the review report (likely to be released next month), low probability of privatization being completed this year does not bode well and likely to constrain fiscal space further, as Rs50 billion have been budgeted in FY16 under privatization proceeds.

IMF has maintained its positive tone on the country's economic outlook with optimism driven from investments under CPEC, higher construction activity and lower oil prices. However, weak agricultural output this year with low cotton production (down 33%) is a key risk where the Fund has reiterated its GDP growth projection at 4.5%. Inflation level is projected at 3.7% for FY16.

The news flows indicate a possible delay in privatizations of both PIA and power entities by GoP but the Fund has remained silent on the future course for privatizations - contrary to the last review where the IMF emphasized on it. The clarity on Fund's stance on privatization is likely to emerge from the review report to be released late next month.

There is strong perception that Pakistan will get the money irrespective of meeting or not meeting the agreed targets due to the support of its western allies, and neighbors Afghanistan and India. Analysts openly express fears that an economic meltdown could further destabilize the atomic power having a population of over 200 million, suffering from looking power shortages, wide spread corruption and ever growing militancy.

Fragile economy, energy crisis, corruption, militancy