Easwaran Kanason

Co - founder of NrgEdge
Last Updated: August 30, 2017
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Business Trends
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Pakistan’s new Prime Minister loves skydiving and he is bringing that adrenaline-seeking attitude in a bid to reshape a country that has long languished from crippled energy infrastructure. Fuel demand is soaring – gasoline volumes alone has tripled between 2010 and 2016 – but aging domestic refineries means much of this has to be imported. Rolling blackouts across the country are common, product of a power grid that is old and underfed.

One of Prime Minister Shahid Khaqan Abbasi’s first moves as Prime Minster, after Nawaz Sharif was barred from public office by the Supreme Court over Panamagate corruption charges, was to merge the country’s petroleum and power ministries. The new Ministry of Energy, headed by Abbasi himself, acknowledges the intrinsic link between all aspects of the country’s energy industry in an attempt to prevent the in-fighting and cross-purposes that the old bureaucratic structure promoted.

The solution, according to Abbasi, is to champion the use of LNG and promote foreign investment in the oil sector to move the onus away from beleaguered state companies. The LNG slant is nothing new; Abbasi served in the Pakistan cabinet under the PML-N party and promoted LNG as a solution to Pakistan’s ailing electricity network. To that end, his position as Prime Minister merely hastens a transition that was originally in the works. His vision is to depend on import LNG and domestic coal in a two-pronged approach to boost power generation and reduce dependence on imported gasoil/fuel oil, with an ambitious deadline to end blackouts by November 2017, giving his party a boost ahead of elections due in 2018.

To that end, Pakistan needs to be to import and re-gas LNG. Pakistan has signed two LNG supply contracts so far this year – a five-year deal with Gunvor and a 15-year deal with Italy’s Eni that will bring 3.6 million tons and 11 million tons (across 60 and 180 cargoes) to Pakistan. Competition for the tender was stiff, with all major traders including Glencore, Trafigura, Shell and Petronas taking part. This adds to Pakistan’s existing contracts with Gunvor and Qatargas, which began when LNG imports first started in 2015. On the receiving end, Pakistan is n a multi-billion spending spree that includes the construction of a second and third LNG import terminal and pipelines linking coastal Karachi with inland Lahore, the country’s industrial heartland. Up to five more terminals are being considered – in Karachi and in Gwadar – which could conceivably make Pakistan one of the world’s top five LNG importers by 2022.

The massive influx of LNG would help in providing power to a fast-growing population – especially when combined with domestic coal power expansion – but the other side of the equation is oil. The 120 kb/d Balochistan refinery – the largest in Pakistan – has been out of commission since 2015 due to fire damage. Aging refineries elsewhere have curbed the ability to provide domestic sources of fuel. This is a gap that foreign traders have exploited. Vitol bought a stake in local retailer Hascol Petroleum in 2015, recently increasing its share from 15% to 25%, followed by Trafigura (via subsidiary Puma Energy) this month through the purchase of a stake in the Admore Gas fuel retail network – capitalising on a gap in the market that requires imported supply to fill.

The longer term solution will be to beef up refining capabilities. Byco Petroleum has restarted operations at the Balochistan refinery after two years of repairs, supplying its own retail network as well as others owned by Pakistan State Oil, Shell, Hascol and Admore. Beyond that, Pakistan is looking to the usual suspect – China – for more capacity. The WAK Group and Guangdong Electrical Design Institute are building a US$3.58 billion 100 kb/d refinery for private player Falcon Oil, expected to be ready by 2020.

Almost all of the crude required to run these refineries will have to be imported. Domestic crude supplies are drying up, with Pakistan’s state-owned firms focusing on new exploration activities. Oil & Gas Development Co and Pakistan Petroleum have both doubled well drilling and seismic activity in the last two years, capitalising on cheaper costs, though this is bringing them to areas of the country rife with insurgent activity. And once again, it is China to the rescue. Chinese firms Poly-GCL and Sino-PEC have agreed to invest in Pakistan’s upstream sector, tempted by oil and shale gas reserves in Sindh and Balochistan. If successful, increased domestic production could reduce Pakistan’s dependence on imports. But that’s in the long run. 

For now, Abbasi has set an achievable path to energy optimisation for Pakistan. All that’s left is to implement it successfully. Which is always the harder part of that equation.

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A brief recap. Like most of Asia, Indonesia has been grappling with food price inflation as consequence of Covid-19. Like most of Asia, Indonesia has been attempting to control this through a combination of shielding its most vulnerable citizens through continued subsidies while attempting to optimise supply chains. Like most of Asia, Indonesia hasn’t been to control the market at all, because uncoordinated attempts across a wide spectrum of countries to achieve a similar level of individual protectionism is self-defeating.

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Joko Widodo has said that the ban will be indefinite until domestic cooking oil prices ‘moderate’. With the global situation as it is, ‘moderate’ is unlikely to be achieved until the end of 2022 at least, if ‘moderate’ is taken to be the previous level of palm oil prices – roughly half of current pricing. Logistically, Indonesia cannot hold out on the ban for more than two months. Only a third of Indonesia’s monthly palm oil production is consumed domestically; the rest is exported. An indefinite ban means that not only fill storage tanks up beyond capacity and estates forced to let fruit rot, but Indonesia will be missing out on crucial revenue from its crude palm oil export tax. Which is used to fund its biodiesel subsidies.

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Market Outlook:

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