At present Pakistan is suffering from two contentious
problems: 1) precarious balance of payment position and 2) acute shortage of
electricity and gas. The recent agreement with the International Monetary Fund (IMF)
for US$6.6 billion has not brought any respite. Despite receiving the first
tranche of US$544 million the Government of Pakistan (GoP) has to borrow
another US$625 million for one year at LIBOR plus 5.3% from the local and
international banks, lending were demanding LIBOR plus 7.77% initially.
Disbarment of US$1.00 billion (to clear circular debt) among
the companies belonging to energy chain was likely to add about 1,700MW
electricity as against prevailing shortfall of about 4,000MW. The most disturbing
fact is that circular debt amounting to US$20 million has again piled up within
a very short span of time.
The harsh reality is that the country has total installed
capacity of around 24,000MW but actual generation hovers less than 16,000MW,
mainly because of inability of power generation companies to buy fuel.
Persistent increase in electricity tariff is becoming punitive because of
running of power plants on furnace oil.
One of the recent announcements is that in Punjab, where 65%
of Pakistan’s total population lives, all the CNG stations will remain closed
for three months, starting 1st November 2013. Along with this, fertilizer
plants getting gas from SSGC and SNGPL networks will face 60-days mandatory
closure. Even those fertilizer plants getting gas from Mari gas field will face
20% curtailment in gas supply.
With rising crude oil prices, hovering around US$110/barrel,
oil import bill is becoming unsustainable for Pakistan. Even the IMF package
will not be enough to pay for additional oil import bill in winter. In the prevailing scenario Pakistan has two
options: 1) switchover thermal power plants to coal from furnace oil and 2)
make earliest arrangement for the import of gas from Iran.
One of the problems is that multilateral financial institutions
are not willing to finance Iran-Pakistan gas pipeline project due to pressure
from the United States. In the prevailing scenario Pakistan will have to
mobilize US$2 billion to complete the portion of gas pipeline in its own area, Iran has already completed its
portion and has also offered Pakistan assistance up to US$250 million.
The GoP has remained reluctant in going ahead with the
project. Pakistan is being warned by the United States that if it goes ahead
with the pipeline project the country could also face economic sanctions,
similar to those imposed on Iran. This hype has been created by those who don’t
wish Iran could sell its gas to any country.
The fact is that India is not only one of the biggest buyers
of Iranian oil but also constructing Chabahar port in Iran and also connecting
roads and railways up to Central Asia, passing through Afghanistan. Besides
India, China, Japan and some of the member countries of European Union are also
buying Iranian oil, because they have been granted exemption by the United
States. Therefore, Pakistan should also seek exemption from the United States
for buying gas from Iran.
Mobilizing US$2 billion from the global market should not
pose any problem. The GoP should float Sovereign Ijarah Sukuk and offer the
pipeline as underlined asset. It must be remembered that Pakistan has to
complete its portion of pipeline by end 2014 or will have to pay the penalties.
The advantage of getting gas from Iran via pipeline is that
local gas transmission and distribution system is capable of handling this
additional load.
One of the apprehensions is that Iran is asking higher price,
but it can be renegotiated.
On top of all Pakistan will be buying maximum 500mmcfd gas
from Iran as against more than 4,000mmcfd gas produced indigenously. Therefore,
the average cost will still be very low as compared to furnace oil.
Let another point be also kept in mind that Pakistan can add
another 1,500mmcfd gas by commencing work on a few mega gas fields over the
next few years.
To further ease payment pressure Pakistan can enter into a
barter agreement with Iran for the payment of gas price, against supply of
wheat, rice and edible oil.
At present Pakistani oil refineries are operating far below
optimum capacity utilization. Pakistan can refine Iranian oil on ‘job cost
basis’ and export white oil products to Iran or any other international buyer,
including India and Afghanistan.
The prevailing situation offers opportunity for the
international financial institutions, particularly those offering Shariah
compliant products and services to explore flotation/management of Sovereign
Ijarah Sukuk on behalf of the Government of Pakistan.
