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F U E L I N G T H E F U T U R E :

Meeting Pakistans Energy Needs in the 21st Century

Edited by:

Robert M. Hathaway

Bhumika Muchhala

Michael Kugelman


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FUELING THE FUTURE:

Meeting Pakistans Energy Needsin the 21st Century


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FUELING THE FUTURE:

Meeting Pakistans Energy Needsin the 21st Century

Essays by:

Mukhtar Ahmed

Saleem H. AliShahid Javed Burki

John R. Hammond

Dorothy Lele

Robert Looney

Sanjeev Minocha

Bikash Pandey

Sabira Qureshi

Asad UmarVladislav Vucetic and Achilles G. Adamantiades

Aram Zamgochian

Edited by:

Robert M. Hathaway

Bhumika Muchhala

Michael Kugelman

March 2007


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Available from :

Asia Program

Woodrow Wilson International Center for ScholarsOne Woodrow Wilson Plaza

1300 Pennsylvania Avenue NW

Washington, DC 20004-3027

www.wilsoncenter.org

ISBN 1-933549-17-3

Cover photos: Water Rushes Through the Warsak Dam, Pakistan, Paul

Almasy/CORBIS; Woodcutter in Hunza Valley, Robert Holmes/CORBIS


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The Woodrow Wilson International Center for Scholars,established by Congress in 1968 and headquartered in Washington, D.C.,

is a living national memorial to President Wilson. The Centers missionis to commemorate the ideals and concerns o Woodrow Wilson by pro-

viding a link between the worlds o ideas and policy, while ostering

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monthly news-letter Centerpoint. For more inormation about

the Centers activities and publications, please visit us on the web atwww.wilsoncenter.org.

Lee H. Hamilton, President and Director

Board o Trustees

Joseph B. Gildenhorn, Chair

David A. Metzner, Vice Chair

Public members: James H. Billington, Librarian o Congress; JohnW. Carlin, Archivist o the United States; Bruce Cole, Chair, National

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E. Sanchez


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3 Glossary

5 Introduction

Robert M. Hathaway

17 MeetingPakistansEnergyNeedsMukhtar Ahmed

35 TheWeightoHistory:PakistansEnergyProblem

Shahid Javed Burki

57 Energy,PovertyReductionandEquitable

DevelopmentinPakistan

Sabira Qureshi

79 SocialandGenderIssuesinPakistansEnergySector

Dorothy Lele

93 EnergyandthePakistaniEconomy:AnExploratory

Analysisto2035

Robert Looney

105 PowerSectorReorminPakistan:Issuesand

Challenges

Vladislav Vucetic and Achilles G. Adamantiades

133 PromotingPrivateSectorParticipationinOiland

GasProjectsAFinancingPerspective

Sanjeev Minocha

contents


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141 TheRoleothePrivateSectorinPakistansEnergy

SectorAsad Umar

149 TheRoleotheU.S.PrivateSectorinMeeting

PakistansEnergyRequirements

John R. Hammond

157 U.S.ChamberoCommerceEnergyOvervieworthe

IslamicRepublicoPakistan

Aram Zamgochian

167 CleanEnergyOptionsorRuralPakistan:Lessonsrom

SouthAsia

Bikash Pandey

185 ResolvingEnvironmentalConfictsinPakistansEnergyPolicy

Saleem H. Ali

201 RecentAsiaProgramPublications


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AEDB Alternative Energy Development Board

BSP Biogas Support Program (Nepal)

Btu British thermal unit

CCGT Combined cycle gas turbine

CHASNUPP Chasma Nuclear Power Plant

c-km Circuit-kilometers

CNG Compressed natural gas

CPPA Central Power Purchasing Agency

DISCOs Electricity distribution companies

E&P Exploration and production

ESMAP Energy Sector Management Assistance Project

FDI Foreign direct investment

FY Fiscal year

GDP Gross domestic product

GEF Global Environment Facility

GENCOs Thermal generation companies

GS Grameen Shakti

GW Gigawatts

GWh Gigawatt hour

HESS Pakistan Household Energy Strategy Study

Hydel hydroelectric

IMF International Monetary Fund

IPPs Independent power producers

KANUPP Karachi Nuclear Power Plant

KESC Karachi Electric Supply Corporation

Ktoe Kiloton o oil equivalent

kV Kilovolt

KWh Kilowatt-hour

glossary


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LNG Liquefed natural gas

LPG Liquefed petroleum gas

MDG Millennium Development GoalsMMc Million cubic eet

MMscd Million standard cubic eet per day

MTOE Million tons o oil equivalent

mtpa Million tons per annum

MVA Megavolt-amperes

MW Megawatt

MWe Megawatt (electrical)

NEPRA National Electric Power Regulatory Authority

NGO Nongovernmental organization

NTDC National Transmission and Dispatch Company

NWFP Northwest Frontier Province

PAEC Pakistan Atomic Energy Commission

PEPCO Pakistan Electric Power Company

PPA Power purchase agreement

PPIB Private Power and Inrastructure Board

PPP Purchasing power parity

PV Photo voltaic

RE Renewable energy

REDCO Regional electricity distribution company

RERED Renewable Energy or Rural Economic

Development (Sri Lanka)

RETs Renewable energy technologies

Rs. Rupees

TOE Tons o oil equivalent

WAPDA Water and Power Development Authority

WPPO WAPDA Power Privatization Organization


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RobeRt M. HatHaway

Pakistans development vision or an expanded economy, increased industrializa-

tion, and elevated standards o living will demand enormous amounts o energy;

and the links between sustainable development and energy will require major

eorts or long term energy security.

Pakistan Planning Commission1

Pakistans economy is growing, and with this growth comes

higher energy consumption and greater pressure on the countrys

energy resources. At present, demand or energy exceeds sup-

ply, and power outages and planned power cuts (euphemistically termed

load-shedding) are common. In addition to the economic costs, en-

ergy shortages can oster political instability. June 2006 saw angry public

protests in Karachi and riots in Liaquatabad over repeated power ailures.

A widespread power outage across much o the country three months

later triggered panicky rumors o a coup. This unrest may be only a ore-

taste o things to come. Absent drastic action, Pakistans energy situation

is expected to get worse in the years ahead.

Today, oil and natural gas supply the bulk (roughly 79 percent) o

Pakistans energy needs. However, the consumption o those energy

sources vastly exceeds the indigenous supply. For instance, Pakistan

currently produces only 19.9 percent o the oil it consumes, ostering a

dependency on imports that places considerable strain on the countrys

fnancial position. While the present situation with respect to natural gas

production is not nearly as serious, Pakistans projected natural gas needs

are expected almost to double (rom 2004 levels) by 2010.

On the other hand, hydropower and coal are perhaps underutilized

today, as Pakistan has ample potential supplies o both, at a time when

IntroductIon

Robert M. Hathaway is director o the Asia Program at the Woodrow Wilson

International Center or Scholars.


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Introduction

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Program, to look at Pakistans energy needs over the next 25-30 years,

and to oster inormed discussion on how Pakistan might succeed in

meeting its energy requirements in the decades ahead. Conerence par-ticipants were invited to consider what stepsby the Pakistani govern-

ment, Pakistans private sector, oreign investors, and the international

fnancial institutionsmight be taken today so that Pakistan will be

prepared to meet its energy needs tomorrow. Many o the essays printed

here were frst written or that conerence. Others were solicited ater

the conerence or inclusion in this collection.

In the volumes opening essay, Mukhtar Ahmed, energy adviser

to the Pakistani prime minister, explores the energy challenges ac-ing Pakistan and lays out the energy policies o the current Pakistani

government. Observing that 40 percent o Pakistani households are

not even connected to the electrical grid, Ahmed warns that over the

next 20 years, the countrys overall demand or energy will increase by

350 percent. During this period, the percentage o Pakistans total en-

ergy needs met rom domestic sources will all rom 72 to 38 percent.

Ahmed writes o the need to develop an integrated energy development

plan combining energy imports, the development o indigenous en-ergy resources, a more diversifed energy mix, and programs emphasiz-

ing greater energy efciency and better management. In the near term,

gas imports via pipeline can deliver energy at competitive prices. The

government gives a high priority to tapping the energy resources o

Pakistans neighbors, Ahmed asserts; several projects or the import o

natural gas rom the Middle East and Central Asia and o power rom

Tajikistan and Kyrgyzstan are under consideration. Moving rom the

near to the medium term, Pakistan will need to develop the rich coal de-posits o the Thar desert, as well as nuclear power. The cornerstone o

the governments long-range policy, Ahmed states, involves a shit rom

a predominantly state-controlled industry to an arrangement where the

private sector plays a leading role in the development and management

o the countrys energy program.

ShahidJavedBurki, or many years a senior World Bank ofcial

who also served briey as fnance minister o Pakistan, provides a histor-

ical context in which to place Pakistans current challenges. For nearlysix decades, he writes, no Pakistani government made a serious eort

to prepare or the countrys energy requirements. As a consequence,


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Robert M. Hathaway

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Pakistan has been saddled with weak institutions, inappropriate pricing

policies and insufcient public sector investment. The net result, Burki

observes, citing the governments own fgures, is that by 2030, energydemand in Pakistan will be almost 64 percent greater than projected

supply. Unless Pakistan moves to address this shortall, he warns, the

country will inevitably pay a large cost not only in an economic sense,

but also in terms o a rise in Islamic extremism and slower progress to-

ward political democracy.

Burki criticizes the Pervez Musharra government or resorting to

ad hoc measures to deal with Pakistans energy needs and or ailing to

address deep-rooted structural problems in the energy sector. The gov-ernments so-called strategy or placing the country on a sustainable path

o development is, in act, no more than a long wish-list o projects and

intentions. Pakistan must develop a comprehensive strategy or meet-

ing its energy needs over the next quarter century. Such a strategy would

oer realistic approaches or addressing the widening energy supply-de-

mand gap and, among many other things, would require greater political

will than the government has displayed to date to overcome resistance

to the construction o the dams that will enable the country to exploitits enormous hydroelectric potential. Burki also places considerable em-

phasis on the development and exploitation o new technologies, such

as those that could turn cellulose into energy, as a means or Pakistan to

meet its coming energy requirements.

Several o the contributors to this volume emphasize that a lack o ac-

cess to modern energy services is inextricably linked to poverty and to

a countrys ailure to meet the basic needs o its people, including ood,

shelter, health care, and education. SabiraQureshi looks at the linksbetween energy policy and poverty reduction eorts, and asks how en-

ergy policy and energy programs can be better leveraged to address the

challenge o reducing Pakistans high poverty rates. Study ater study,

Qureshi writes, has demonstrated that a lack o access to modern en-

ergy supplies inhibits the ability o the poor, particularly the rural poor,

to escape rom poverty. Yet in Pakistan, as elsewhere in the develop-

ing world, energy policy is disproportionately oriented towards the

elite rather than the poor. Those responsible or ormulating Pakistansenergy policy, Qureshi laments, continue to concentrate on meeting

the countrys rapidly growing energy needs in the ormal sector, while


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Introduction

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ailing to respond to poverty reduction needs, particularly as they relate

to rural household consumption. And because the majority o Pakistans

poor are emale, government energy policies must explicitly recognizethe need to mainstream gender in all energy initiatives.

DorothyLeleinsists that social and human development should be

the ultimate objective o Pakistans energy policies, not just a ortunate

by-product. The poor, she writes, usually pay a higher percentage o their

income on energy, and much more per unit o useul energy service

than the rich. (Qureshi cites a study that ound that low-income rural

households spend 21 percent o total household expenditures on uel.)

Modern energy services, Lele maintains, can transorm the lives o thepoor by increasing the productivity o their labor, providing new em-

ployment opportunities, reducing the time spent in arduous tasks, and

eliminating the damaging health eects o traditional cooking stoves.

Lele and Qureshi both stress the signifcance o biomass (primarily

frewood, dung, and crop residues), noting that these materials comprise

a substantial proportion o total energy consumption in Pakistan and

are the primary household uel in rural areas, irrespective o household

income, and in low-income urban households. Most biomass energy isused by women or cooking. Given its importance or the majority o

the population, Lele writes, and given the act that biomass will play an

essential role in energy use in Pakistan or many years to come, the ex-

clusion o this orm o energy rom energy sector planning and programs

and the lack o attention given to improved biomass use constitute seri-

ous shortcomings in Pakistans current approach to energy. Lele readily

concedes that the government needs to develop modern uels, but asserts

that this ocus neglects the barriers involved in their adoption by largesegments o the population, and the urgent need or improving current

damaging uel-use practices.

Both Lele and Qureshi highlight the manner in which a lack o ac-

cess to modern uels reinorces Pakistans gender divides. Energy pov-

erty, Qureshi writes, urther marginalizes rural women and girls who

spend a disproportionate amount o their time collecting uel-wood and

water, which leaves them with little opportunity to engage in more

economically productive activities. When womens labor is not val-ued, Lele adds, the time and eort they spend on uel collection and

ood preparation are not seen as important. Consequently, they fnd it


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Robert M. Hathaway

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difcult to draw attention to their plight. Lele asks whether the neglect

o biomass in commercial energy planning is not linked to the predomi-

nance o women in biomass energy use.Qureshi also highlights the situation in Baluchistan, the largest and

least developed o Pakistans our provinces, where an insurgency that

has simmered or decades has recently become a more serious challenge

to Islamabad. Baluchistan has vast reserves o natural gas, petroleum, and

minerals, Qureshi notes, yet or all its wealth, 45 percent o the popula-

tion lives below the poverty line. While its natural gas generates huge

revenues or the central government, most o the province, except or a

ew cities, remains without access to natural gas, and Islamabad returnsto the province only a tiny percentage o the revenues it receives rom

Baluchistans natural gas. Baluchistans grievances with Islamabad go ar

beyond energy issues, but the ailure by a succession o central govern-

ments to ensure that the province receives benefts commensurate to its

energy wealth has helped create a serious security problem or Pakistan.

Robert Looney, an economist and proessor o national security

aairs at the Naval Postgraduate School in Monterey, Caliornia, sets

out seven energy uturesalternative scenarios o growth and energyneeds, based on a macroenergy orecasting model that simulates dier-

ent patterns and rates o investment and energy availabilities between

now and 2035. The models attempt to predict how di erent investment/

energy supply mixes will aect the overall economy. Looneys model-

ing suggests that an economic environment characterized by high rates

o sustained investment and a major expansion o Pakistans hydroelec-

tric generation capacity is most likely to produce sustained economic

growth, especially i supported by substantial loans rom internationalagencies. The author is suitably modest in the predictive capabilities o

his models. What takes place outside the energy sector, he cautions, may

have consequences that are just as important or the countrys energy

uture as policies directly targeted at the energy sector. True enough, yet

it appears indisputable that choices in the energy sector made today will

have a major impact on whether Pakistan succeeds in generating high

GDP growth rates a generation hence.

The essay by VladislavVucetic and AchillesG.Adamantiades,both o the World Bank, ocuses specifcally on Pakistans power sector,

with particular emphasis on the status o the reorms initiated in the


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Introduction

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1990s and on the remaining challenges acing the sector. Historically,

the authors note, Pakistans power sector was organized into two state-

owned, vertically integrated utilities, KESC (which served Karachi andadjoining areas) and WAPDA (which served the rest o the country). In

2005, 73 percent o KESC was sold to private investors. In addition, the

country has 16 independent power producers today. Yet, because o a

lack o managerial and fnancial autonomy, the power sector continues to

unction largely as a centrally controlled, vertically integrated monopoly.

The authors provide a troubling assessment o the state o Pakistans elec-

tricity sectordemand is approaching maximum production capacity,

while institutional capacity or policy development and implementationremains low. Failing to resolve these problems may cause investment

delays and hamper Pakistans economic growth.

The Vucetic/Adamantiades essay is one o several contributions in this

volume that discuss privatization and argue that Pakistan is unlikely to

address its energy challenges successully without the active participation

o the private sector, both domestic and oreign. SanjeevMinocha o

the International Finance Corporation, a major source o private sector

fnancing, describes the benefts, rom a fnancing standpoint, o privatesector involvement in oil and gas projects. From the perspective o the

state, Minocha notes, enlisting the private sector to assume much o the

risk associated with oil and gas exploration and development can gener-

ate immense revenues with little or no provision o government capital.

Private investors are also useul partners in raising the large amounts o

capital required or transmission, distribution, and storage inrastructure.

In addition, partnership with the private sector brings new technologies

and operational efciencies and helps expand local skills.Several o the essays presented here eature perspectives rom the

Pakistani and American business communities. Pakistani businessman

AsadUmar notes that until the early 1990s, the private sectors par-

ticipation in the energy sector was limited largely to exploration and

production. Over the past decade, however, a number o new com-

panies, including prominent international corporations, have become

major players in Pakistan. Privatization o ormerly public sector entities

has dramatically changed the energy landscape in recent years. Umaremphasizes our roadblocks keeping private enterprise rom playing an

even larger role in the energy sector: the unstable political situation and


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Robert M. Hathaway

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attendant law and order problems in Baluchistan; delay in the priva-

tization o public sector energy companies; the political controversy

and provincial disagreements associated with storage-based hydroelec-tric power generation projects; and overlapping responsibilities o the

Private Power and Inrastructure Board and the National Electric Power

Regulatory Authority. Umar remains optimistic, however, predicting

that the role o the private sector will expand in the years ahead, as the

government continues its policies o privatization and deregulation.

JohnR.Hammond o the U.S. Energy Association observes that

U.S. investment in Pakistan has traditionally been substantial, but notes

a signifcant drop since 2004. Whereas in 1995 approximately 18 U.S.energy companies were involved in Pakistan, today this number has

shrunk to only fve or six. This diminished interest in Pakistan is due

only partially to developments within Pakistan, Hammond explains;

increased U.S. demand has created new opportunities or American

companies at home, while a restructuring o the U.S. energy indus-

try has also reduced the industrys appetite or overseas investments.

Nonetheless, Hammond also underscores a perception in the U.S.

energy industry o heightened political and security risks in develop-ing countries, including Pakistan. Unless oreign investors eel sae in

Pakistan, Hammond seems to be saying, they are unlikely to be enthu-

siastic about doing business there.

Observing that the country will require immense new supplies o

electricity by 2030, Hammond argues that Pakistan oers inviting op-

portunities or oreign investors. But, he adds, signifcant barriers inhibit

U.S. investment in Pakistans energy sector today, including a lack o

knowledge on the part o American businesses about Pakistans marketand regulatory structure; a U.S. preerence or sales o goods and ser-

vices instead o investments; and fnancing difculties due to political

and fnancial risks. Pakistan needs to demonstrate to the investing world

a show me elementsuccessul, unaltered private power investment

projects that operate without government intererence in contractual

agreements. While not minimizing the remaining barriers to increased

U.S. investment in Pakistans energy sector, Hammond, like Umar,

credits the Pakistan government with taking meaningul steps to over-come these obstacles, and predicts an improvement in the medium-term

investment climate or U.S. (and other oreign) companies.


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The U.S. Chamber o Commerces AramZamgochian lists seven

criteria oreign investors look or beore deciding to do business in

Pakistans power sector. Like several o the other authors in this volume,Zamgochian gives the Pakistan government credit or opening its en-

ergy and power sectors, and instituting many o the policies necessary to

attract oreign investors. Privatization and deregulation in the oil sector

are progressing steadily, he asserts. Eorts in building a strong inra-

structure, on the other hand, have been lacking, and Pakistans poor in-

rastructure results in an estimated 30 percent loss in transmission. Power

thet also remains a major problem, he reports. Zamgochian warns that

environmental degradation is another issue that potential oreign inves-tors in the energy sector consider when making investment decisions.

The essay by Bikash Pandey, director o the South Asia Clean

Energy program at the U.S. nonproft Winrock International, ocuses

more directly on clean energy and renewable energy options or Pakistan.

Pakistans renewable energy potentialhydro, wind, and solaris sub-

stantial, Pandey asserts, although presently this potential remains largely

untapped. Escalating petroleum prices in recent years have given Pakistan

an additional incentive to invest in renewable energy technologies. In2003, the government ambitiously declared that by 2015, 10 percent o

the countrys total energy supply would come rom renewable energy

sources, and established the Alternative Energy Development Board to

coordinate renewable energy promotion. Modest steps in the direction

o greater reliance on renewable energy, such as pilot projects and mar-

ket-based fscal incentives, have already been taken.

Nonetheless, renewable energy labors under severe handicaps in com-

peting with conventional energyhidden subsidies that allow or lowerconventional energy generation costs, or example, or policies that per-

mit conventional energy to disregard the costs o the pollution it creates

when pricing power. Unless renewable energy is given a level playing

feld, Pandey warns, a major expansion o renewable energy generation

is unlikely, and the governments goal o 10 percent by 2015 will not be

met. Pandey draws rom his extensive experience in South Asia to pro-

vide specifc examples o successul clean and renewable energy initia-

tives in rural areas across India, Bangladesh, Sri Lanka, and Nepal. Thesetechnologies, he writes, can be rapidly adopted in Pakistan by replicating

the basic business models available in neighboring countries.


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Robert M. Hathaway

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The University o Vermonts SaleemH.Ali also looks to other de-

veloping countries or examples o environmentally riendly energy poli-

cies. While Pakistanis oten talk about emulating Chinas developmentpath, Ali writes, they might look instead to Taiwan or lessons on how

to promote relatively green growth even in a country with large deense

expenditures. Or to take a dierent example, Morocco has a lower per

capita energy consumption rate than Pakistan, yet perorms better than

Pakistan on human development indexes and industrialization indicators.

He also points to Malaysia and Costa Rica as developing countries with

environmentally progressive policies rom whom Pakistan might learn.

Alis essay highlights some o the ways in which Pakistani decisionmakers ormulating energy policy should incorporate ecological plan-

ning criteria. Instituting appropriate accounting systems or energy de-

mand and supply must be a frst step, he writes, ollowed by national

eorts to tackle inefciencies in energy generation and distribution.

Large hydroelectric projects, he cautions, should be viewed only as a last

resort ater low-cost conservation measures have been ully utilized. The

governments current supply-side approach to energy has stied envi-

ronmental consciousness and eorts toward energy conservation whileleading to massive investments in energy generation at the expense o

ecological considerations. Above all, Pakistani authorities should re-

consider what constitutes a successul energy policy. Ali challenges the

perception, or instance, that reaching the countrys energy extraction

potential is necessarily a sign o achievement. Defnitional mistakes,

he warns, have led to major environmental problems in the past.

In brie concluding observations at the Wilson Center conerence,

Pakistani businessman Zaar Khan re-emphasized the centrality o se-cure and aordable sources o energy or Pakistans uture. Job genera-

tion, economic growth, and political stability go hand-in-hand with

plentiul and aordable energy supplies, he averred. Pakistan, by virtue

o its location and natural endowments, has many technologically ea-

sible options to meet its growing energy requirements. The challenge

lies in establishing the commercial and political easibility o these op-

tions, and in utilizing the countrys limited capital and execution capac-

ity optimally.Khans sanguine views appear warranted. Pakistanis are not being

asked to fnd a cure or cancer, or to discover entirely new methods or


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Introduction

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technologies in order to meet their energy needs down the road. The

presentations prompting Khans optimism, and the essays in this volume,

indicate that there already exists widespread agreement on at least thebroad outlines o an energy strategy or Pakistan. Pakistanis know what

needs to be done.

But solemn promises and soaring rhetoric will not get the job done.

Preparing or Pakistans energy needs over the next quarter century will

require long-term vision, a national commitment widely shared among

the countrys political and business leaders, inspired leadership sustained

rom one government to the next, and most o all, political will to

make and carry out difcult choices. Pakistanthe country, not justthe government o the dayneeds to decide that muddling through is

not enough. Pakistan, as a country, has to decide that it must get seri-

ous about creating an energy strategy, and thenand this is the hard

partabout implementing it.

Pakistan will not fnd itsel alone in this task. Islamabads riends

around the world believe that it is in their own national interests or

Pakistan to succeedwhich means, among other things, that Pakistan

succeed in its quest or energy security. At the end o the day, Pakistanisthemselves must solve the problem o energy insecurity, but the outside

worldboth the private and the public sectorscan and will help.

Speaking at the Wilson Center conerence, the U.S. Department o

States Paul Simons noted that Pakistans rising energy demand has cre-

ated new opportunities or regional cooperation in South and Central

Asia. Seeking to promote this objective, the U.S. Trade and Development

Agency convened a meeting in Istanbul in June 2006 that explored op-

tions or exporting Central Asian electricity to Pakistan. Senior of-cials in the State Department have also spoken enthusiastically about

building new energy corridors that would link Pakistan with its Central

Asian neighbors. Less happily, not all departments and agencies within

the Bush administration have embraced the presidents promise to work

with Pakistan on energy issues, and the administration as a whole has

been slow in ollowing up on the pledges Bush made in Islamabad dur-

ing his March 2006 visit. President Bush would do well to remind his

Cabinet that working with Pakistan on its energy needs is not a questiono American largesse, but a matter that is very much in Washingtons

own interests.


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Robert M. Hathaway

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Energy matters or Pakistan. I Pakistan is to ourishi it is to suc-

ceed in its ambitious plans or economic developmenti it is to raise

the grossly inadequate living standards o its peoplei it is to achievethe economic growth necessary to ensure political stabilityi it is to

create democratic institutions and practices capable o providing good

government and reecting the will o the peoplei it is to establish the

conditions or long-term fnancial solvencyi it is to begin to address

the many environmental problems that up to now have been largely

ignored, and which have a hugely adverse impact on the daily lives o

Pakistani citizensi it is to live in peace with its neighbors, several o

whom are directly impacted by Pakistani decision making in the energysectori Pakistan is to move toward all these goals, it must successully

address the many challenges it aces in the feld o energy.

* * * *

As has been the case with the two previous volumes produced under

the auspices o the Wilson Centers Pakistan program, this compilation

reects the hard work and unselfsh dedication o numerous riends andcolleagues. The authors whose essays appear here deserve commenda-

tion or their seriousness o purpose, their patience, and their good-hu-

mored and (almost always) prompt responses to the stream o emails that

poured orth rom our computers. To my coeditors and esteemed Asia

Program sta, Bhumika Muchhala and Michael Kugelman, I give spe-

cial thanks or their proessionalism, their attention to detail, and their

perseverance. Amy Thernstrom, Aisha U-Kiu, and Grace Kim provided

excellent editorial and editing assistance. Without the generosity o theFellowship Fund or Pakistan and its beneactors, neither this volume nor

the Wilson Centers Pakistan program would be possible. And fnally,

a heartelt thank you to Munawar Noorani, Zaar Khan, and Ayesha

Haq, who have given that most precious o gitstheir own time.

Notes

1. Government o Pakistan Planning Commission, Approach Paper: Strategic

Directions to Achieve Vision 2030(Islamabad, February 2006), 11. Emphasis in original.


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MukHtaRaHMed

With a population o 152 million, the economy in Pakistan

is currently growing at a rate o over 8 percent, supported

mainly by an expanding industrial sector that currently

contributes to 38 percent o the economic output and is growing at a rate

o 12.5 percent. Per capita energy consumption o the country is esti-

mated at 14 million Btu, which is only a raction o other industrializing

economies in the region such as Thailand and Malaysia. With 40 percent

o the households that have yet to receive electricity, and only 18 percent

o the households that have access to pipeline gas, the energy sector is

expected to play a critical role in economic and social development.

Policy FRaMewoRk

Key elements o the policy response o the country to meet the energy

requirements o an expanding economy are summarized below:

Adequate Energy Supplies: The energy sector plans ocus on develop-

ment o indigenous energy resources, import o energy at competitive

prices to meet the defcits, inrastructure or delivery o energy to the

MeetIng PakIstans energy needs

Mukhtar Ahmedserves as Energy Advisor to the Prime Minister o Pakistan, aposition he has held since May 2005. He has 20 years o proessional experi-

ence in the midstream and downstream oil and gas industry, with private and

public sector entities, in the United Kingdom and Pakistan. He has also worked

with the Asian Development Bank or 16 years on energy sector operations in

Pakistan, Indonesia, China and the Philippines. While on deputation rom the

ADB, he served as Managing Director/CEO o Sui Southern Gas Company, Ltd(a large integrated natural gas utility in Pakistan). He received his academic

training in chemical engineering rom the University o Edinburgh.


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Mukhtar Ahmed

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consuming sectors, and systems to assure reliability, efciency, and

economy o supply.

Security o Energy Supply: Recognizing the uncertainty in the in-

ternational energy markets and emerging requirements o other de-

veloping economies such as India and China, the energy plans ocus

on maximum utilization o indigenous energy resources to lower the

dependence on imported energy, and diversifcation o the energy

mix to manage risks and external shocks.

Long-term Viability o the Energy Sector: The cornerstone o thegovernment policy to assure long term sustainability o the energy

sector is shiting rom a predominantly state controlled industry to a

structure where the government maintains a strategic presence, while

the private sector plays a leading role in development o the energy

sector. Supporting policies to achieve this objective include appropri-

ate distribution o responsibilities within the government institutions

or policy ormulation, regulation, administration to avoid overlaps

and conicts, policies and regulations that provide appropriate incen-tives and encourage competition in the private sector, and sustainable

pricing regimes that account or cost-o-service and subsidies that are

transparent and address the social and environmental concerns.

iMPleMeNtatioN aPPRoacHaNd stRategy

To achieve these objectives, the government has adopted an approachbased on implementation o integrated energy development plans that

take into account cross-sectoral economic impacts o energy options

and projects through the supply and demand chain. Policies and plans in

place target urther development o indigenous conventional energy re-

sources including oil and gas, hydel (hydroelectric), and coal by provid-

ing appropriate incentives and a level playing feld to the private sector.

Plans or meeting the energy needs o rural areas give special emphasis

to exploitation o renewable energy potential, taking into account theeconomic cost o delivering energy rom alternative sources and ben-

efts associated with decentralized resource development. Finally, longer


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Meeting Pakistans Energy Needs

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term strategies ocus on meeting the energy defcits by establishment o

energy trade corridors to capitalize on the proximity o Pakistan to re-

source rich countries in the Middle East and Central Asia.

PRiMaRy eNeRgy suPPlyaNd deMaNd

Pakistan has a well developed inrastructure or energy. The gas trans-

mission inrastructure connects to 4.26 million households and com-

mercial establishments in addition to the bulk o the industries and ther-

mal power generating units in the country, and includes 9,060 km ohigh pressure transmission pipelines and over 225,000 HP o compres-

sion capacity. The power transmission and distribution network serves

over 16.3 million residential and commercial and 0.23 million industrial

customers, and includes 40,500 km o high voltage transmission lines.

In addition, a network o oil pipelines transports crude oil and products

to inland refneries and market centers, and the ports at Karachi are well

equipped to handle import o crude oil and petroleum products that ac-

count or a major raction o the countrys demand, and limited quanti-ties o coal imported into the country.

Exhibit1summarizes the primary energy supply picture or the coun-

try. Total energy supplies were 56 MTOE (million tons oil equivalent)

in fscal year 2005. With an annual production o 3,685 MMscd (28

MTOE), gas accounts or 51 percent o energy supply, ollowed by oil at

29 percent, hydel at 11 percent, and coal at 8 percent. Pakistan currently

meets only 19.9 percent o its oil demand rom indigenous resources.

The power sector accounts or 23 MTOE or 41 percent o energysupply, o which 55 percent is gas, 27 percent hydel, and 15 percent is

oil. Nuclear energy accounts or only 3 percent o power generation.

Current installed capacity in the country is 19,160 MW o which 34

percent is hydel, and the bulk o the remaining is thermal.

FY 2005 energy consumption by sector is illustrated in Exhibit2.

The industrial sector dominates the market with 41 percent o the de-

mand, ollowed by the transport sector at 31 percent and the residential

at 21 percent.


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Mukhtar Ahmed

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Exhibit : Total Primary Energy Supplies: Million TOE and

Energy Supply or Power Generation: Million TOE

Source: Pakistan Energy Yearbook 2005

Exhibit : Final Energy Consumption: Million TOE

Source: Pakistan Energy Yearbook 2005

PRojected eNeRgy deMaNdaNd deFicits

Projected energy demand, assuming a GDP growth rate o 6.5 percent

consistent with recent trends, is summarized in Exhibit 3. Over the

next 20 year period, overall demand or energy is expected to increase

by a actor o 3.5, rom a current level o 56 MTOE to 198 MTOE.The projections assume current long term plans or power genera-

tion with emphasis on development o coal, hydel and nuclear resources,

Oil 29%

Gas 51%

Coal 8%

Hydro

11% Nuclear 1%

Oil 15%

Gas 55%

Hydro 27%

Nuclear 3%

Domestic21%

Commercial3%Industrial

41%

Agriculture2%

Transport31% Other Govt.

2%


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consistent with the policy o the government to develop the indigenous

resource base and diversiy the energy mix. The share o oil in the en-ergy mix is expected to drop in view o higher oil prices in the interna-

tional market, and the policy o the government to switch to lower cost

alternatives or power generation, including an aggressive program or

development o nuclear power and renewable energy sources.

The sensitivity o demand or energy to the economic growth rate

is illustrated in Exhibit4. Alternative scenarios or economic growth

assuming growth rates o 5.5 percent and 7.4 percent were considered

to test the impact o GDP growth rate on the demand or energy. The7.4 percent scenario corresponds to an optimistic economic growth

rate assumed in the Medium-Term Development Framework (MTDF),

while the 5.5 percent scenario represents a reasonably conservative out-

look or economic growth, based on a historic average. Over the next

20 year period, the demand or energy under these scenarios varies by

more than 25 percent, dropping to 155 MTOE corresponding to an eco-

nomic growth rate o 5.5 percent, and increasing to 246 MTOE corre-

sponding to an economic growth rate o 7.4 percent.Projected indigenous energy supply and defcits corresponding to the

6.5 percent GDP growth rate are summarized in Exhibit5. Production o

Exhibit : Projected Energy Demand

FY0 FY FY FY0 FY FY

Million TOE % Share

Oil 16 29 47 30 27 24

Gas 28 56 93 48 50 47

Coal 4 9 17 8 8 8

Hydel 7 13 29 12 12 15

Renewable - 1 5 0 1 2

Nuclear 1 2 7 1 2 4

TOTAL 56 110 198 100 100 100

Source: Medium-Term Development Framework: 200510, Planning Commission

Note: Government o Pakistan adjusted to GDP growth rate o 6.5% and updated or power

generation plans


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Mukhtar Ahmed

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0

50

100

150

200

250

300

1996 2000 2005 2010 2015 2020 2025

Projected Energy Demand at 7.4% GDP



*

MTOE

Exhibit : Energy Demand at Various Economic Growth Rates

*Medium-Term Development Framework: 2005-10. Planning Division assumed a GDP

growth rate o 7.4%

Exhibit : Projected Energy Decits (Million TOE)

FY0 FY FY

Oil 3 4 2

Gas 26 34 19

Coal 2 5 13

Hydel 7 13 29Renewable and Nuclear 1 3 12

Total Indigenous Supply 39 61 75

Total Energy Requirement 54 110 198

Decit 15 50 122

Decit as % o Energy Requirement 28 45 62

Source: Medium-Term Development Framework: 200510, Planning Commission

Note: Government o Pakistan adjusted to GDP growth rate o 6.5% and updated or power

generation plans


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oil and gas in the country is expected to improve slightly in the near term

but decline in the long run, given the current onshore exploration activities

and resource outlook, and a low likelihood o a major oshore discovery.Availability o coal, hydel, nuclear and renewable energy is projected

to improve signifcantly, in line with current resource development

plans. The availability o energy rom these sources, however, will not

be enough to meet the growing demand o the economy. The energy

defcit which stands at 15 MTOE or 28 percent o the energy demand

presently will increase to 122 MTOE by 2025, corresponding to 62 per-

cent o the demand. This outlook clearly indicates a need to place devel-

opment o the indigenous resource base on a high priority, ollowed bylong-term arrangements to acquire energy rom external sources that are

aordable and reliable.

eNeRgy ResouRce PoteNtialaNd Risks

Energy resource potential or the country is summarized in Exhibit6.

The reserves to production ratio is currently 13 and 22 or oil and gasrespectively, while or coal it is 720, and only 16 percent o the hydel po-

tential has been realized. Major unexploited reserves o coal are located

in the Thar Desert in the Sindh province.

Development o these reserves, however, presents a major challenge as

the coal is o inerior quality, with a heating value o 5,700 Btu/lb, sulur

content o over 1 percent, ash over 6 percent, and moisture o about 50

percent. The over burden that will have to be removed to access the coal

seams is also sot and has a depth in the range o 175-230 m, indicatingthe need or open pit mining that will involve signifcant upront invest-

ments. Other constraints that increase the costs and commercial risks

in development o Thar coal resources include limited road and power

inrastructure to support the initial phases o project development, and

scarcity o resh water in the area.

In case o hydel projects, government plans include an aggressive pro-

gram to develop sites that have been identifed, recognizing the eco-

nomic benefts associated with power generation as well as storage owater or agricultural use. Constraints and risks that can limit the extent

to which this potential can be realized in the near term include location


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Mukhtar Ahmed

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o most o the sites in mountainous regions in the north where con-struction o access roads can involve signifcant investments, cost o re-

settlement o aected populations, and longer lead times associated with

detailed technical studies required or project design.

In view o the above outlook or exploitation o the domestic resource

base and associated risks, Pakistan has given high priority to tapping the

energy resources in the region, and several projects or import o natu-

ral gas rom the gas-rich countries in the Middle East and1Central Asia

have received serious attention. These include pipelines or import ogas rom Turkmenistan, Iran, and Qatar. In addition, import o power

rom Tajikistan and Kyrgyzstan, which are rich in hydel resources, is

also under active consideration. The development o these options or

importing energy has been constrained by the sensitive regional security

environment, special technical issues, and complexities associated with

commercial and operating arrangements typical o large projects requir-

ing inter-country agreements.

Exhibit : Indigenous Resource Potential

Oil 41 MTOE 309 Million bblGas 629 MTOE 29 tc @ 900 btu/sc

Coal Proven 991 MTOE 3,303 MT

Coal Inerred 22,680 MTOE 50,700 MT

Coal Hypothetical 50,410 MTOE 112,700 MT

Installed Hydel 6,600 MW

Potential Hydel 41,700 MW

Fuel Annual Production Reserves toProduction Ratio

Oil 24.12 Million bbl 13

Gas 1.34 tc @ 900 btu/sc 22

Coal 4.59 MT 720

Hydel Potential Realized 16%

Oil Gas Coal


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ecoNoMic coNsideRatioNsiN eNeRgy PlaNNiNg

Exhibit 7 illustrates the comparative economic costs o uels or thecountry, assuming a crude oil price o $60/bbl and prevailing prices o

other uels in the international market. While delivered cost or local and

imported coals is under $3/MMBtu, delivered cost o natural gas and

LNG is estimated at $4 and $6/MMBtu respectively, allowing or price

dierentials associated with liqueaction, transportation, and regasifca-

tion or LNG and netback values available to the suppliers. The delivered

prices o petroleum products are substantially higher than those or coal

and natural gas, and are currently estimated at over $8/MMBtu or highsulur uel oil (HSFO) and over $13/MMBtu or transport uels includ-

ing diesel and motor gasoline.

The economic cost o energy supplied in 2005 (Exhibit8) on the

basis o these prices is estimated at $15.3 billion, o which 48 percent is

attributable to the oil used in sectors other than power (mainly transport

Exhibit : Comparative Cost o Fuels

Note: HSFO price corresponding to US$60/bbl crude. Delivered price o imported coal

assumed at US$75/ton

4.0

6.0

8.1

2.7 2.8

13.3

0

2

4

6

8

10

12

14

Gas LNG HSFO Coal

Imported

Coal Thar Oil for

Transport

US

$/MMBtu


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Mukhtar Ahmed

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and agriculture), 8 percent to HSFO used mainly or power generation,

17 percent to gas used in the industry (inclusive o ertilizer), residential,

and commercial sectors, 12 percent to gas used or power generation,and the remaining 15 percent shared by hydel, coal, and nuclear en-

ergy. In view o this distribution o energy costs, sectors and end-uses

that require special attention in energy planning include oil use in the

transport sector, provision o natural gas or sectors other than power

where the economics o switching to alternative liquid petroleum and

solid uels such as uel oil and coal are not avorable, and selection o uels

and technologies or power generation.

Cost o power generation or alternative technologies and uels as-suming prevailing capital and operating costs and economic cost o en-

ergy as indicated in Exhibit7are illustrated in Exhibit9. While the

economic cost o electricity produced rom coal, natural gas, hydel, and

nuclear power plants alls in the range o US cents 5-6/kWh, the cost o

producing electricity rom LNG approaches 7 cents/kWh, and that rom

HSFO exceeds 9 cents/kWh. The country thereore cannot aord to in-

stal l and operate power generation capacity on imported LNG or HSFO.

Priorities or meeting the energy needs o the country in the long-terminclude import o natural gas, generation o electricity rom indigenous

and imported coal, and development o hydel and nuclear resources.

eNeRgy oPtioNsaNd sceNaRios

While the cost o meeting the energy requirements o a rapidly expanding

economy will be substantial, the country has a range o options availableto manage the supply and demand or energy. The choices made will also

determine the extent to which the risks associated with variations in energy

prices and availability o uels in the international market can be managed,

and the cost o delays or inability to develop indigenous resources can be

absorbed. The ollowing cases were analyzed in terms o total energy re-

quirements, energy defcits and imports, and cost o imported energy:

Base Case: Unconstrained gas import Low Gas: Imported gas not available, LNG and imported coal to

replace imported gas in Base Case


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Oil (Power)8%

Oil (Non-Power)48%

Gas (Power)12%

Gas (Non-Power)17%

Coal3%

Nuclear

1%

Hydro

11%

Exhibit : Cost o Energy, US$, Million

Source: Assumed prices o energy: Oil (power) 8.13 US$/MMBtu, Oil (non-power)

13.30 US$/MMBtu, Gas 4.00 US$/MMBtu

Note: Coal 2.70 US$/MMBtu, Hydro and Nuclear 5.73 cents/kWh (equivalent to

electricity generated rom imported coal)

Exhibit : Cost o Power Generation

1.6 1.7 1.72.5 2.3

5.04.6

1.0 0.9 0.9

1.01.0

0.16.5

4.1

2.7

2.51.1

2.4

0

1

2

3

4

5

6

7

8

9

10

HSFO LNG Gas Coal,

Thar

Coal,

Imported

Hydel Nuclear

USCents/kWh

Capital Cost O & M Cost Fuel Cost


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units operating on imported natural gas.

The Low Gas Case represents the scenario where imported gas is not

available, and the defcit has to be made up with the least costly uelin absence o natural gas. In this case, the country will have to import

LNG to meet the established demand or natural gas in the residential,

commercial, ertilizer, and industry sectors, and generation capacity in

the power sector that can operate only on natural gas. The gap in power

generation capacity, flled by imported gas in the Base Case, was as-

sumed to be flled by capacity based on imported coal, which is the low-

est cost option in absence o the CCGT option.

The High Thar Case represents the option o enhanced utilizationo Thar coal to replace imported coal in the Low Gas Case. The Low

Hydel Case represents the case under which the risks associated with de-

velopment o hydel capacity, such as the negative outcome o easibility

studies or higher than expected resettlement costs, come into play. The

hydel capacity additions were reduced by 30 percent or this case, to be

replaced by the next economic option, which is imported coal. In the

High Nuclear Case, installed nuclear capacity was increased rom 4,400

MW in the Base Case to 7,200 MW, assuming a 100 percent increase incapacity additions by 2015, and 200 percent by 2025. Finally, the Energy

Conservation scenario assumes a conservative penetration rate or en-

ergy efcient technologies and demand side management, resulting in

a reduction in demand o about 9 percent across the economy. Exhibit

10summarizes the energy demand and the power generation capacity

required in each o the above scenarios.

The economic cost o imported uels under the Base Case is illus-

trated in Exhibit11. Fuel imports under the base are projected to in-crease rom the current level o $7.5 billion to $38.2 billion in 2025,

with oil accounting or 65 percent o the energy imports, ollowed by

gas at 30 percent.

Additional cost o uel imports under each o the scenarios studied is

illustrated in Exhibit12. Annual additional cost o imported uels or

the Low Gas Case is estimated at $0.8 billion in 2015, increasing to $3.2

billion in 2025, and represents the additional cost o energy imports in

case the country is unable to import gas through pipelines.Comparable fgures or the Low Hydel Case are $1.2 billion in 2015 and

$4.1 billion in 2025, and or the High Nuclear Case are $0.6 billion in 2015


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Mukhtar Ahmed

| 0 |

0

5

10

15

20

25

30

35

40

2005 2010 2015 2020 2025

U

S$

Billion

Oil Gas LNG Coal

-1

0

1

2

3

4

5

2015 2020 2025

US$Billion

Low Gas High Thar

Low Hydel High Nuclear

Exhibit : Base Case Forecast o Fuel Imports

Exhibit : Additional Cost o Imported Fuels


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and $1.7 billion in 2025. The High Thar Case yields a saving o $0.3 billion

in 2025 over the Base Case, on account o lower energy cost o Thar coal.

coNclusioNsaNd PRioRity aReasFoRactioN

An assessment o the current and projected energy requirements o the

country and additional costs or energy imports under alternative sce-

narios and options leads to the ollowing conclusions:

While Pakistan has substantial coal and hydel resources, it is not pos-sible to develop and utilize these resources in the short term in view

o inherent constraints.

The dependence o the country on imported energy is thereore ex-

pected to increase considerably in the near to medium term.

Gas import pipelines can deliver energy at competitive prices in the

near term to meet the demand o priority consumer segments such as

the residential, industrial and power sectors.

Development o Thar coal and nuclear power in the medium term cansecure the country against high energy prices in the global markets

and risks associated with large scale development o hydel resources.

Development o indigenous coal can be coupled with inclusion o

imported coal or greater diversity in the mix o imported uels.

Key elements o an action plan to meet the energy requirements o

the country in the long term, to balance the risks associated with rising

world energy prices, and to protect the economy against uncertainties indevelopment o domestic resource base include:

Import o Energy

Implementation o gas pipeline projects, LNG projects and projects

or import o electricity rom Central Asia on a ast track basis

Development o Indigenous Energy Resources

Enhanced oil and gas production


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Mukhtar Ahmed

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Detailed technical and economic assessment o coal mining and coal

based-power generation

Assessment o advanced technology options or coal gasifcation andcoal bed methane

Enhanced hydroelectric power generation

Enhanced nuclear power generation

Mainstreaming renewable energy

Energy Efciency and Management

Optimization o energy mix Demand side management in industrial sector

Mass transit or major urban centers

eMeRgiNg iNvestMeNt oPPoRtuNitiesiNtHe eNeRgy sectoR

The government expects the private sector and oreign direct investment

to play a central role in development o the energy sector in the country.Specifc investment opportunities in the energy sector where the private

sector can participate are summarized below:

Oil and Gas Industry

LNG Project: Consultants have been engaged to provide advice on

technical, fnancial, and commercial issues, and an RFP (Request or

Proposal) will be issued to short-listed frms in the near uture. Gas Import Pipelines: Technical parameters have been defned

through preeasibility studies and technical working groups, and joint

working groups have been established to address technical, commer-

cial, project fnancing, and other issues.

Oil Refning: Expressions o interest are being invited or a 200,000

to 300,000 barrels per day coastal refnery located near Karachi.

Electricity and Power Generation

Import o Electricity rom Central Asian states: Further work is being


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initiated to evaluate the technical and economic aspects o power

import.

Hydroelectric Generation: Proposals have been invited rom the pri-vate sector or 7 projects with a total capacity o 1,620 MW.

Power Generation rom Thar Coal: Private sector is currently involved

in preparation o easibility studies or mining and power generation.

Power Generation rom Imported Coal: Work has been initiated or

involving private sector in setting up power generation units in the

coastal areas.

Power Generation rom Renewable Sources: A renewable energy

policy ramework has been drated and an incentive package has beendefned or ast-track capacity additions.

In addition to the above, the government plans to divest 51 percent

o its shareholding in the ollowing concerns to give majority ownership

and management control to the private sector:

Power Generation and Distribution: Jamshoro Power Company,

Faisalabad Electric Supply Company, and Peshawar Electric SupplyCompany.

Oil Marketing: Pakistan State Oil Co. Ltd., the largest oil marketing

company in the country with approximately 70 percent share o the

market.

Gas Transmission and Distr ibution: SNGPL and SSGCL, state owned

utilities that currently account or over 86 percent o the gas transmis-

sion and distribution business in the country.

Petroleum E&P: Pakistan Petroleum Ltd. and Oil & Gas DevelopmentCo. Ltd., state owned companies that account or 45 percent o gas

and 53 percent o oil production respectively in the country. In the

case o Oil & Gas Development Co. Ltd, divestment o 10-15 percent

equity through simultaneous GDR oering and domestic secondary

oering will precede the divestment o 51 percent shares.


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the WeIght of hIstory: PakIstans

energy ProbleM

sHaHid javed buRki

In the summer o 2006, Pakistan was once again aced with a serious

energy crisis. The crisis was particularly severe in the electric power

sector, where demand now exceeded supply. This was the second

time in a decade that this situation had developed. The frst time was in

the late 1980s to early 1990s, ollowing a rapid growth in the countrys

economy. Then, as in the 2003-2006 period, the economy was growing

rapidly but investment by the public sector in generating electricity had

not kept pace with the rapid increase in GDP. This situation has reap-

peared again with public sector investments in energy alling well short

o generating the additional supplies demanded by a rapidly growing

economy. It was clear that the government had to increase the supply o

energy or the economy would begin to stall. Solving the energy problem

has to become the ocus o public policy.

Why had the country ollowed this roller-coaster course? Why had

dierent administrations at dierent points in the countrys history

ailed to develop strategies that would ensure a sustained supply o en-

ergy or the development o the economy? The administration headed

by President Musharra claimed that the economy had the potential to

grow at a ast pace, equaling that o the rapidly expanding Asian econo-

mies. There were good reasons to be optimistic about the uture, but

optimism had to be translated into policy that would help to realize it.

Shahid Javed Burki served as Pakistans nance minister rom 1996 to 1997.

He held numerous senior positions with the World Bank over a 25-year career,

including vice president o Latin America and the Caribbean, and director o

China operations. Beore his World Bank career, he was chie economist o the

government o West Pakistan. Mr. Burki currently writes a weekly column or

Dawn. He was a Woodrow Wilson Center Public Policy Scholar in 2004, workingon a book tentatively titled Pulling Back rom the Abyss: Musharras Pakistan

Project, 1999-2004.


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Shahid Javed Burki

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Given the belie that the country could do well in the uture, why did

the Musharra administration allow power shortages to develop, a sit-

uation that was certain to hamper growth as had happened in the past?Why, as had happened in earlier periods, was the government once

again resorting essentially to ad hoc measures to deal with the situ-

ation? This essay will attempt to provide answers to these questions.

The main conclusion to be oered here is that as in several other sec-

tors o the economy, there was a serious ailure o public policy. The

government once more was ai ling to address a deep-rooted structural

problem in the economy.

This paper has fve parts. The frst provides an overview o the en-ergy sector beore shiting the discussion to the electric power sector.

It highlights some o the main dierences between Pakistans energy

sector and those in other developing countries at the same stage o de-

velopment. The second part o the paper ocuses on what I have called

the weight o history to explain the current energy problem. Over

the last six decadesin act since the country gained independence

no serious attempt was made by a succession o governments to supply

various orms o energy to dierent types o consumers. There was acolossal ailure o public policy in this respect, which let the coun-

try with weak institutions, inappropriate pricing policies and insu-

fcient public sector investment that contributed to what appears to be

an inexorable march towards another crisis. The third part analyzes

the current demand and supply situation in the power sector, the most

important component o the sector o energy. It highlights some o the

costs that will be imposed on the economy as a result o the anticipated

increase in the demand-supply gap. The ourth part looks at the cur-rent administrations strategy or addressing the situation. This strategy

is incorporated in the Medium-term Development Framework, 2005-2015,1

which is a weak document in terms o laying down what the govern-

ment needs to accomplish in order to address the various structural

weaknesses the economy aces in the early 2000s. The fth part will

indicate some o the new technologies Pakistan could exploit in deal-

ing with the problem o energy, including the enormous potential o

the under-tapped agricultural sector.


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The Weight o History: Pakistans Energy Problem

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tHe cuRReNt eNeRgy situatioN

Electric power, natural gas, petroleum, coal and wood are the principalsources o energy in Pakistan. The total primary energy supply measured

in terms o tons o oil equivalent (TOE) was estimated at 50.8 million

in 2003-04 (see Table 1). Demand or energy was increasing at a slightly

greater rate than GDP, suggesting an elasticity o consumption o more

than one, as is normal or developing countriesthis is why energy must

remain a high-priority sector or public policy and public sector invest-

ment. The structure o consumption has changed over time, especially

since 2000-01. The consumption o petroleum products declined at anaverage rate o 6.5 percent a year while that o gas, electricity and coal

increased at the rates o 10.4, 6.0 and 14.6 percent, respectively. The

Table : Primary Energy Supply and Per Capita Availability

YEAR ENERGY SUPPLY PER CAPITA

Million TOE % Change Availability (TOE) % Change

1990-91 28.469 0.253

1991-92 30.475 7.0 0.264 4.4

1992-93 32.953 8.1 0.278 5.4

1993-94 34.778 5.5 0.286 2.9

1994-95 36.062 3.7 0.290 1.2

1995-96 38.746 7.4 0.304 4.9

1996-97 38.515 (0.6) 0.295 (3.0)

1997-98 40.403 4.9 0.305 3.31998-99 41.721 3.3 0.313 2.7

1999-00 43.223 3.6 0.317 1.2

2000-01 44.456 2.9 0.319 0.6

2001-02 45.237 1.8 0.318 (0.4)

2002-03 47.061 4.0 0.321 0.9

2003-04 50.820 8.0 0.340 5.9

2004-05 55.533 9.3 0.371 9.1

Source: Government o Pakistan, chap. 15 in Pakistan Economic Survey, 2004-05 (Islamabad:

Ministry o Finance, 2005), Table 15.8, p. 224.


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Shahid Javed Burki

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consumption o gas increased since the government encouraged its use

in power generation as well as uel or transport. As suggested by these

rates o increases in demand, coal has become important, and in 2003-04 accounted or 6.5 percent o total energy supply.2 Pakistan had begun

to ocus on the use o coal, as people realized that coal was a major do-

mestic source o energy.

The government was also promoting the use o compressed natu-

ral gas (CNG) in vehicles to reduce urban pollution. By March 2005,

about 700,000 vehicles were converted to CNG, up rom 450,000 in

March 2004. This rate o conversion is likely to continue in line with the

alarming increase in urban pollution. Some o Pakistans major urbancentersincluding Lahore, the countrys second largest city and the

capital o the booming province o Punjab, the largest province o the

countryare counted among the most polluted cities o Asia. But there

was hope that the rapid conversion o vehicles to CNG would arrest this

trend. According to a government report, with these developments,

Pakistan has become the leading country in Asia and the third largest

user o CNG in the world ater Argentina and Brazil.3

The weight o history, as discussed in the section that ollows, hascreated a number o distortions in the sector. O these, at least three are

worth noting. First, the share o household consumption is much higher in

Pakistan than in other countries at the same stage o development. For elec-

tric power, domestic consumption in 2005-06 was estimated at 7,199 MW,

46 percent o total supply (see Table 2). In rapidly developing countries

such as those o East Asia in the 1970s and 1980s, the fgure was around

20 percent. Industry, with 38 percent consumption o total supply, was the

second most important sector, while agriculture, with 11.4 percent, was inthird place. Commerce claimed 7.8 percent o the total. The structure o

demand was the consequence o the pricing policy and institutional devel-

opment policies ollowed or decades. For instance, electric power taris

encouraged the use o air conditioning in residences. Air conditioning pen-

etrated Pakistan much more deeply than India. On the institutional side,

the setting up o two gas distribution companiesthe Sui Northern Gas

Company and the Sui Southern Gas Companyled to the development o

a vast network o gas pipelines that covered most o the country.4

Within aperiod o 25 years1960 to 1985Pakistan was able to construct one o

the largest gas pipeline networks in the developing world.


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The Musharra government believes that its policies will lead to a

reduction by 2009-10 in the share o total supply consumed by house-

holds, to 44.3 percent o projected supply. At the same time, the share

o industry will increase signifcantlyby fve percentage points, to

43.1. Islamabad has not clarifed how public policy would bring about

this change.The distribution o sources o energy supply is very dierent in the

case o Pakistan compared to other countries in the region (see Table 3),

only partly reecting the existence o domestic resources. In spite o the

availability o signifcant domestic resources o energy such as coal and

hydropower, Pakistan has allowed dependence on oreign supplies to in-

crease to the point at which the burden on oreign earnings has become

unsustainable. While in 2005 natural gas accounted or slightly more than

hal o total energy consumption, the shares o hydropower and coal wererelatively small. The burden on oreign exchange was exacerbated by the

sharp increase in the price o oil in 2006, when spot prices touched $78

a barrel o crude oil during the summer.5 In 2005, 80 percent o energy

demand was met by oil and gas, and oil was mostly imported.

As shown in Table 4 below, the current sources o energy supply in

Pakistan were vastly dierent rom those o several other developing

countries, including neighboring India. While oil and gas supplied our-

fths o Pakistans energy requirements, in India coal alone accountedor over hal o energy used. Hydroelectricity, at about one-seventh

o total demand, had a much higher share in Pakistan than in India.

Table : Distribution o Demand or Power, 00-00

(Megawatts o electric power)

YEAR DOMESTIC COMMERCIAL AGRICULTURE INDUSTRIAL OTHERS TOTAL

2005-06 7,199 1,216 1,763 5,891 1,035 15,500

2006-07 7,585 1,251 1,820 6,481 1,086 16,600

2007-08 8,127 1,312 1,893 7,252 1,159 17,900

2008-09 8,783 1,354 1,979 8,181 1,243 19,600

2009-10 9,531 1,408 2,079 9,267 1,341 21,500

Source: Government o Pakistan, Medium-term Development Framework, 2005-15(Islamabad: Planning Commission, 2006)


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Signifcantly, more than a quarter o Pakistans total energy supply came

rom abroad in the orm o uel oil and crude oil. The ormer was used

or electricity generation, while the latter was processed into gasoline

and diesel oil or use in transport. For a country that once again aced

a serious overall trade defcit, such a large dependence on imports was

neither easible nor prudent.

Table : Sources o Energy Supply, 00-00

(Million tons o oil equivalent)

Description 00 00 0 00 00

Oil 16.80 20.69 32.51 45.47 66.84

Natural Gas 27.10 38.99 52.98 77.85 162.58

Coal 3.30 7.16 14.45 24.77 68.65

Hydro 6.43 11.03 16.40 21.44 38.93

Renewable - 0.84 1.60 3.00 9.20

Nuclear 0.42 0.69 2.23 4.81 15.11

TOTAL 54.05 79.40 120.17 177.34 361.31

Table : Sources o supply in various countries, 00

(Percentages)

Pakistan India Malaysia UAE UK USA Canada China

Oil 30 35 42 32 35 40 30 23.8Natural Gas 50 7 51 68 35 23 27 2.6

Coal 6.5 55 4 - 16 23 24 67.0

Others (Hydel,

Nuclear, etc.)13.5 3 3 - 14 14 19 6.6

Source: Government o Pakistan, Medium-term Development Framework, 2005-15

(Islamabad: Planning Commission, 2006)..


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develoPMeNtoFtHe PoweRsectoR: tHe weigHtoF

HistoRy

Electricity is a major source o energy in Pakistan, a signifcant develop-

ment since the countrys birth in 1947. At the time o independence the

country had only two power generating units with installed capacity o

60 MW: one at Malakand in the Northwest Frontier Province (NWFP)

located on a tributary o the Indus River, and the other at Shahdara near

Lahore that used coal. For several months, the country continued to im-

port electricity rom India, but stopped with the frst trade war between

the two South Asian nations that started in 1949 and lasted or severalyears. Until that time Pakistan and Indias northern states had ully inte-

grated economies.6 A hydroelectricity plant located at Warsak in NWFP

was the frst major public sector investment in the power sector in the

1950s. With its inauguration the county briey achieved a surplus in

power and did not depend on supplies o electr ic power rom India. This

surplus turned into a defcit as the pace o economic growth picked up in

the 1960s when Ayub Khan, the countrys frst military ruler, took steps

to accelerate the rate o gross national product (GNP) growth. GNPgrowth increased to 6.7 percent a year in the 1960s, the decade o de-

velopment presided over by President-General Ayub Khan.

The sharp upswing in the rate o GNP increase did not immediately

place a burden on energy supplies because o some o the investments

made by the government o Ayub Khan. Energy generation picked up

in the 1970s with the commissioning o a major power plant at Mangla

dam on the Jhelum River. The dam was a part o the major replacement

works undertaken by the government ollowing the signing in 1960 othe Indus Water Treaty with India. The treaty gave three western rivers

o the Indus system (the Indus itsel and its two northern tributaries, the

Jhelum and the Chenab) to Pakistan and three southern rivers (the Ravi,

the Beas and the Sutlej) to India. The replacement works involved the

construction o two reservoirsat Tarbela on the Indus and at Mangla

on the Jhelumor storing water while a series o link canals trans-

ported water rom the Jhelum to the Chenab and rom the Chenab to

the Ravi. The government o Ayub Khan was able to persuade Indiaand a number o donors, principally the World Bank, to allow Pakistan

to use the reservoirs or generating electricity.7 The government also


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Leghari on charges that included corruptionincluding corruption al-legedly associated with the grant o permits to independent power pro-

ducerstwo dozen IPPs had received Islamabads permission to build

power plants in the country.9 As a result o this policy, the IPPs installed

almost 6000 MW o generating capacity, and accounted or more than

30 percent o the capacity in the power sector in 2004-05 (see Table 5).

In Pakistan, an energy crisis occurred ater every period o rapid

growth. For example, there was pressure on the power supply in the

mid-1970s ollowing a decade-long economic expansion under AyubKhan (1958-1969). As already discussed, this period saw massive invest-

ment as part o the Indus Water replacement works. However, the ull

impact o that investment was not elt until the completion o the mas-

sive Tarbela dam in the early 1970s, ater electricity shortages had begun

to be elt. The shortage did not cost the economy, since the economic

growth rate had declined signifcantly under President/Prime Minister

Zulfkar Ali Bhutto, Ayub Khans civilian successor. Bhuttos massive

restructuring o the economy slowed down the rate o increase in GNPto 4.4 percent per year rom 1970 to 19772.3 percentage points lower

than in the 1960s.10

Table : Total Installed Generation Capacity (MTOEs)

Source opower

Installedcapacity00-0

% ShareInstalledcapacity00-0

% Share % Change

WAPDA 58.2 58.3 0.9

- Hydel 6460 57.7* 6463 57.2* 0

- Thermal 4741 42.3* 4835 42.8* 2.0

IPPs 5835 30.3 5873 30.3 0.7

Nuclear 462 2.4 462 2.4 0

KESC** 1756 9.1 1756 9.0 0TOTAL 19254 100.0 19389 100.0 0.7

*Share in WAPDA System

**Karachi Electric Supply Company.

Source: Hydrocarbon Development Institute o Pakistan; Government o Pakistan, Medium-term

Development Framework, 2005-15 (Islamabad: Planning Commission, 2006).


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It was during the 1990s that Pakistan experienced the frst major mis-

match between economic growth and increase in power. Between 1977

and 1988the third time the military was in control11

GDP increasedby 6.5 percent per year and GDP per capita by 3.5 percent. But the

energy supply ailed to keep pace with the increase in demand caused

by growth. The predictable happened, and the economy slowed down.

Constraint on energy supply was one o the many reasons or sluggish

perormance o the economy during the 1988-1999 period. However,

as already discussed, the rich incentives provided to IPPs by Benazir

Bhuttos government brought in external fnance. Within fve years the

country moved rom a serious power defcit to power surplus. By then,Benazir Bhutto was out o power and Nawaz Shari was prime minis-

ter. His government, convinced that the previous one had indulged in

corrupt practices, harassed the IPPs and brought an end to the ow o

oreign direct investment into the energy sector.

Nawaz Sharis government also carried out long and protracted

negotiations to draw up a new contract with the Hub River Power

Company, a consortium o oreign investors put together by the World

Bank. This group had developed the largest generating unit in the coun-try in the private sector, which produced 1200 MW o power and was

o critical importance to Karachi, Pakistans largest city and the center o

the countrys fnance and commerce. But the Shari government seemed

unconcerned about the damage the dispute might do to either Karachis

economy or Pakistans ability to attract oreign capital or the power sec-

tor. This episode had a serious impact on how the oreign community

o investors looked upon Pakistan as a possible destination or green feld

investments, particularly in the energy sector.Beore the controversy over the Hub River erupted, the project was

considered a model o what could be achieved in combating energy-sup-

ply shortages in the developing world by multilateral development agen-

cies such as the World Bank, working in partnership with the private

sectors in both developed and developing countries. Ater the prolonged

dispute over the Hub River, the project began to be cited as an example

o the difculties encountered in doing business in the emerging econo-

mies. The eect on Pakistan was particularly severe. The country did notreceive oreign investment in energy or almost a decade. There was no

new direct oreign investment in the energy sector rom 1997 to 2006.


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When the military returned to power in October 1999, this time

under General Pervez Musharra, it showed a willingness to work with

the private sector and settle a number o old disputes. An agreement was

reached with the owners o the Hub River project, and power rom the

large uel-oil plant in Karachis vicinity began to ow into WAPDAs

extensive power grid. Agreements with other IPPs were also reached.At the same time, the rate o economic growth began to slow down

signifcantly as Pakistan adopted the stabilization program developed by

the International Monetary Fund (IMF). As Pakistan achieved a healthy

balance o payments situation, constraints on the growth in aggregate

demand, and hence on the increase in GDP imposed at the urging o the

IMF, were removed in 2002. IMF resources were no longer needed to

build up oreign exchange reserves; ofcial capital had begun to arrive

in large amounts as the attention o the donor community once againreturned to Pakistan ater the terrorist attacks o September 11, 2001.

During this period o economic stabilization, the IMF orced constraints

on the public sector, and the share o the public sector development

program (PSDP) declined to a historical low o 2 percent o GDPit

had reached almost 11 percent under Zulfkar Ali Bhutto (1971-77).12

Energy, and electric power in particular, was one sector that suered.

As shown in Table 6, a airly precarious situation had developed by the

late 1990s in the power system operated by WAPDA. Forgone demandhad increased to 30.5 percent, calculated as a percentage o maximum

demand to peak demand. The situation was partly resolved by additional

Table : Electricity Shortages in the WAPDA System

Year

Peakdemand

MW()

Maximumdemand

MW()

Forgone demand[() as percentage

o ()]

1986 3,933 1,746 44.4

1989 5,440 2,151 39.5

1992 6,532 1,048 16.0

1996 8,166 2,492 30.5

Source: Pervez Hasan, Pakistans Economy at the Crossroads: Past Policies and PresentImperatives (Karachi: Oxord University Press, 1998), Table 6.8, p. 297.


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capacity that came on line as a result o the investment made by indepen-

dent power producers.

Pakistans economy picked up in 2003 and since then has grown at anaverage annual rate o 7 percent per year, touching 8.4 percent in 2004-

05. But, as happened beore, the supply o energy

asia fueling the future rptmain

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