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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Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2019
EIA’s January Short-Term Energy Outlook forecasts that world benchmark Brent crude oil will average $61 per barrel (b) in 2019 and $65/b in 2020, an increase from the end of 2018, but overall it will remain lower than the 2018 average of $71/b. U.S. benchmark West Texas Intermediate (WTI) crude oil prices were $8/b lower than Brent prices in December 2018, and EIA expects this difference to narrow to $4/b in the fourth quarter of 2019 and throughout 2020.
EIA expects U.S. regular retail gasoline prices to follow changes to the cost of crude oil, dipping from an average of $2.73/gallon in 2018 to $2.47/gallon in 2019, before rising to $2.62/gallon in 2020. Because each barrel of crude oil holds 42 gallons, a $1-per-barrel change in the price of crude oil generally translates to about a 2.4-cent-per-gallon change in the price of petroleum products such as gasoline, all else being equal.
EIA estimates that global petroleum and other liquid fuels inventories grew by an average rate of 0.4 million barrels per day (b/d) in 2018 and by an estimated 1.0 million b/d in the fourth quarter of 2018. EIA expects growth in liquid fuels production in the United States and in other countries not part of the Organization of the Petroleum Exporting Countries (OPEC) will contribute to global oil inventory growth rates of 0.2 million b/d in 2019 and 0.4 million b/d in 2020.
Although EIA forecasts that oil prices will remain lower than during most of 2018, the forecast includes some increase in prices from December 2018 levels in early 2019 in order to keep up with demand growth and support the increased need for global oil inventories to maintain five-year average levels of demand cover. EIA expects crude oil prices to continue to increase in late 2019 and early 2020 because of an increase in refinery demand for light-sweet crude oil, which is the result of regulations from the International Maritime Organization that will limit the sulfur content in marine fuels used by ocean-going vessels.
Source: U.S. Energy Information Administration, Short-Term Energy Outlook, January 2019
EIA expects global oil production growth in 2019 to be led by countries that are not part of OPEC, particularly the United States. EIA expects non-OPEC producers will increase oil supply by 2.4 million b/d in 2019 which will offset forecast supply declines from OPEC members, resulting in an average of 1.4 million b/d in total global supply growth in 2019.
In 2020, EIA expects oil production to increase by 1.7 million b/d because of production growth in the United States, Canada, Brazil, and Russia, while overall OPEC crude oil production is expected to remain flat. EIA forecasts global oil demand to grow by 1.5 million b/d in 2019 and in 2020. In both 2019 and 2020, China is the leading contributor to global oil demand growth.
Headline crude prices for the week beginning 7 January 2019 – Brent: US$57/b; WTI: US$49/b
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