Archive for August, 2011

Power crisis and policy failures

Posted on August 29, 2011. Filed under: Energy crisis, Pakistan |

IN SPITE of the present government’s many promises, power shortages continue to take a heavy toll on the country’s economy. Why has this problem proven so hard to tackle for the policymakers in Islamabad?

The simple answer to the question is that an effort is still to be made to find a solution that addresses all aspects of the problem: supply and demand sides of the equation, the institutional imperatives for taking care of the shortages, and planning the future so that this problem does not reappear again.

It is not that the present government in particular has failed to develop a coherent strategy for this important sector of the economy. This has happened many times in the past. Pakistan has experienced shortages several times before. Each time the government response was different based on whatever was the thinking at that time not only in Pakistan but also among development experts around the world.

Several aid providing agencies have had a profound impact on the development of the power sector in the country. This process of evolving an approach as the country went from crisis to crisis means the absence of coherence in the way the governments at various times have dealt with the subject of electric power.

The Lahore-based Institute of Public Policy (IPP), carried out a survey of 65 industrial firms operating in various sectors of the economy to develop a better understanding of how electric power shortages were affecting the economy and how various firms were dealing with the problem.

The institute found that power outages averaged at four hours and 36 minutes for the firms surveyed. Those that were affected the most did not need continuous operation while those that could not interrupt the production cycle suffered the least amount of outages. This suggests that an effort was made by the distribution companies to ration the supply of power taking into account needs of the end users.

There were several different types of responses to the outages by the firms surveyed. Some 75 per cent of the sampled firms went for self-generation, not confident that power shortage was a short-term phenomenon. This was a costly solution. The average cost of selfgeneration is estimated at two and a half times the cost of power obtained from the distribution companies. The firms not involved in continuous production made adjustments by changing the hours of operation.

On the whole, the IPP concluded that a significant proportion of the potential losses were recovered through self-generation or adjustments in operations. “For the sample as a whole, the extent of recovery of output is approximately 60 per cent.

Highest recovery rates were observed in the industries which have acquired self-generation capabilities at 85 per cent. Units which are unable to acquire generators lose about 73 per cent of the output.” Extrapolating from the results provided by the sample of industrial units surveyed, the IPP estimated that “the total cost to the economy of power loadshedding in the industrial sector…was equivalent to two per cent of the gross domestic product.” The cost to the economy of the shortages of this important input was because of policy lapses. Those responsible for making public policy had not given enough attention to ensure the regular supply of power by making sufficient investments. For instance, Pakistan has not been able to make up its mind as to which source of power it should depend upon.

Hydro electricity would be far the cheapest source and was the focus of attention by the government at one time. Two massive dams were built, one at Mangla (1,000 MW, inceasing to 1,666 MW after the dam’s height is raised) on the Jhelum and the other at Tarbela (3,478 MW), on the Indus almost half a century ago.

The only significant addition since then was with the construction of the Ghazi Baroda power station (1,450 MW). For political reasons various governments have not been able to proceed with some other mega projects such as the dam and power station at Kalabagh and also on the Indus.

When in the 1990s, the government of the day invited private capital into the generation part of the power sector, it allowed those interested to use natural gas as the fuel. The conventional wisdom at that time was that the country had enough gas available to supply the power stations with the amounts needed. That did not turn out to be the case.

The governments have also ignored the impact a rational price regime for electricity would have had on total demand and its distribution among different users. Demand increased significantly in the 2000s. The rate of growth was estimated at seven per cent a year compared to four per cent in the 1990s and 11 per cent in the 1980s. The price regime subsidised household consumption at the expense of industry and the modern service sectors. Accordingly, the share of household demand in the last decade doubled from 23 per cent of the total in 1980-81 to 46 per cent in 2007-08.

The government headed by President Pervez Musharraf miscalculated the demandelasticity for power, assuming that the high rate of growth in the first few years of its tenure would not translate into an even larger rate of increase in the demand for electricity. No significant new investments were made to generate additional power and the supply-demand gap continued to widen. The share of public sector expenditure on the power sector which averaged about 28 per cent of the total in the two decades before the Musharraf period declined to less than three per cent while he was in office.

Then there was confusion on the institutional side. In the late 1990s, the World Bank used its lending programme of several hundred million dollars for the power sector to persuade the government to reorganise the Water and Power and Development Authority. According to the plan drawn up by the Bank and accepted by Pakistan, the authority was to be split up into several smaller units responsible separately for hydro-power, thermal power, transmission and distribution.

This structure reflected the thinking in development circles at that time according to which even natural monopolies such as the entities responsible for power distribution were to be run as for-profit corporate bodies.

A new regulatory agency looking after all these new organisations and also fixing tariffs at various levels – from generation to transmission, from transmission to distribution and from distribution to final consumers – was set up. This restructuring has been done in a halfhearted way. The result is considerable institutional confusion. In the meanwhile some experts at the World Bank have begun to think that integrated systems as Wapda was at one point may not, after all, be a bad way of running the power sector.

The conclusion one should reach from this quick overview is that the power sector development in Pakistan has suffered from government neglect.

This also happened in several other sectors in which shortages critical inputs for the economy have appeared. Islamabad should take a careful look at the current situation and put in place a policy framework that would be consistent with the demands of a growing economy and would also take cognisance of the resources available in the country for power generation.

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KP’s plans for hydropower projects

Posted on August 29, 2011. Filed under: Hydal |

REPEATED attempts by the Khyber Pakhtunkhwa governments have failed to attract private investment for developing hydropower projects.

According to officials, the private sector’s financial constraints and poor security situation in the KP are mainly responsible for the poor response.

Hydropower happens to be a capital intensive sector. The average cost of developing hydropower projects, according to experts, comes to $2.5 million to $3 million per MW. Construction cost of even a small hydropower station runs into hundreds of millions of rupees. This induces local private enterprises receiving Letters of Interest (LoI) to form consortium to manage the needed funds. In the case of KP investors, loans are more difficult to obtain. Private and nationalised banks alike are cautious in giving loans to investors in the high security risk area.

Even the international lending institutions do not invest in the public sector projects located in the troubled areas. For example, the Asian Development Bank did not provide funds for the Daral Khwar hydropower project due to deteriorating law and order situation in the area.

Similar is the fate of at least three private sector hydropower projects in the security-troubled areas. They are: a 157 MW hydropower project in Madian in Swat, 197 MW power station at Kalam-Asrit and 548 MW project at Kaigah, district Kohistan.

“The investors are concerned about the future of their investments in these areas,” said a Peshawar-based official.

The work on the Kalam-Asrit project has not been initiated due to non-completion of the feasibility study. In the case of another project, the private party is finding difficult to arrange the funds required to finance the project.

“The sponsor now wants the provincial government to become an equity partner” says a wellplaced official. However, the government is unlikely to oblige.

According to a Peshawar-based official, land acquisition for the 147 MW Patrind hydropower project on the borders of KP and Azad Jammu and Kashmir is under progress. The project is scheduled to become operational by December 14, 2014.

The Suki Kinari hydropower project with an 840 MW generation capacity is passing through a crucial stage as the Lahore-based private party needs to meet the financial close deadline, being issued Letter of Support in July this year.

Situated on River Kunhar in the Hazara region of KP, the Suki Kinari hydropower project has been through a difficult time after the last KP government moved the Supreme Court to claim the province’s right over the project ownership.

However, the incumbent government withdrew the case, allowing the Private Power and Infrastructure Board to move ahead with its plan to allow the project in the private sector.

As per the 2002 power policy, provinces can set up in the public sector or involve private investors for projects up to 50 MW.

The previous KP government was of the opinion that after it was allowed to execute the 81 MW Malakand-III hydropower project, it was its due right to own and execute the Suki Kinari power project, too, involving a 840 MW generation capacity. The project, with an investment of over $1.1 bn, is supposed to become operational by December 17, 2017.

The provincial government’s new strategy prepared and executed by the Sarhad Hydro Development Organisation (Shydo) is likely to compete with the private sector. Its three hydropower projects earned over Rs2bn revenue last year.

The Shydo plans to set up 24 projects in the public sector and complete them in the next ten years. Twelve of them has a generation capacity beyond the 50 MW upper limit set for the provinces under the 2002 power policy.

Officials say that after the passage of the 18th Amendment this bar on provinces stands removed and, according to the KP government circles, the federating units can now execute hydropower project(s) with over 50 MW generation capacity.

They, however, say that the KP government will move the Council of Common Interest because as per the 18th Amendment, the provinces cannot engage private investors even for executing projects as small as of one MW generation capacity. “This is an anomaly,” says a development planner.

The Shydo is working on a project to conduct pre-feasibility studies on hydropower generation potential at 10 sites situated in Chitral, Dir, Shangla, Mansehra, and Swat. Each of the sites, said an official, involves up to five MW generation capacity. After the prefeasibility studies, said the official, the sites would be offered to the private sector for developing the hydropower stations there.

However, after the 18th amendment, the KP government circles believe that the province can only run projects in the public sector. “Under the given situation, private sector can only be engaged by the federal agencies,” said the official.

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Surge in investment in Wind Mills

Posted on August 29, 2011. Filed under: Alternative |

AS many as 16 windmills with a combined capacity of 800MW of electricity, being installed in the 60 km wide Gharo — Jhimpir Wind Corridor in Thatta District, are expected to go into operation by 2013.

The electricity produced in these windmills (each unit of 50MW) would be supplied to the National Grid.

According to an estimate, the southern part of Sindh possesses the potential to produce 50,000MW electricity through wind energy. Wind energy is now the focus of Sindh Board of Investment which has facilitated setting up of these ongoing projects.

As per official policy, tariff fixed for the wind power would be 10 to cents per kwh for the first 10 years, to be reduced to four cents per kwh in the following decade.

Of the 16 under-construction windmills, three are expected to start production by next year. These are (a) a project of Zoriu Enerji Company of Turkey located at Jhimpir. In the first phase six MW unit was commissioned in 2009 while the project is extendable up to 300MW. (b) Fauji Fertiliser Wind Mill at Kuti Kun Island and (c) China International Water and Electricity Company project at Jhimpir.

The rest 13 units, expected to start operation in Jhampir and Bahmabore by 2013, are: Sapphire Wind Power, Metro Power, Gul Ahmed Wind Power, Master Wind Energy , Zehphyr Power, Lucky Power, Beacon Energy, Green Energy, Kuttikin (Jhimpir), Temaga Generasy, Daoud Power, Sachal Engineering Works, Wind Eagle and Abbas Steel Group.

Besides, six more companies are reported to have applied to build windmills in this belt and have even deposited the required guarantee amount.They are in the initial stage of pre paring feasibilities etc.

The investment in wind energy has been encouraged by Sindh government’s policy to provide following incentives and facilities: (i) leasehold land available for the life of project to eligible investors on attractive annual rentals ( $10 per acre), (ii) long-term (20 year) agreements with the power purchaser i.e. Wapda backed by Government of Pakistan’s sovereign guarantee (iii) guaranteed purchase of all electricity produced by the project for the entire concession period of 20 years with adequate compensation for periods when power purchaser is unable to take up the energy produced, (iv) comprehensive coverage to investors against political risk and risk of change of law through force majeure provisions, (v) guarantee of buy-back of the facility in case of termination of the project, (vi) wind data from various sources to be made available for five years, enabling a great degree of accuracy for the purposes of calculation of wind speed, direction, density, frequency etc, ( vii) coverage of wind speed risk for the pioneering projects based on benchmark wind speed set by AEDB, (viii) development of benchmark wind speeds for Gharo-Jhimpir Corridor, (ix) comprehensive tariff regime on a cost plus basis, (x) fiscal incentives through a zero tax/duty regime.

The only contribution to national exchequer would be through a 7.5 per cent withholding tax on dividends declared across the life of the project, (xi) Attractive return on equity of 17 to 18 per cent – offered under the NEPRA tariff guidelines, (xii) Certified Emission Reductions (CERs) available on a shared basis with the Government of Pakistan, (xiii) environmental issues facilitation by AEDB to investors including EIA and relevant government permissions, and ( xiv) development of standardised project documentation keeping in view the norms of international wind power industry.

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Iranian gas still a long way

Posted on August 29, 2011. Filed under: Natural Gas |

NOTWITHSTANDING Iranian optimism over completion of IranPakistan Gas Pipeline by the end of 2012, a delay seems inevitable beyond December 2014 deadline set under the bilateral implementation agreement between the two states. A late starter, Islamabad has sounded Tehran to allow a six-month grace period beyond December 31, 2014.

A formal discussion on extending the deadline is expected soon. Islamabad is seeking extension in the cut-off date because of a penalty clause in the agreement that makes mandatory for it to buy gas from Tehran or pay for the equivalent quantities if it is unable to purchase.


Iran is quite comfortable with construction schedule as it is already laying pipeline from its gas fields to border towns around Iranshehr.


Pakistan has lost a lot of time mainly to internal wrangling over who should prepare technical studies related to route survey, front end engineering design (FEED) etc. Sui sisters, Sui Southern Gas Company Ltd (SSGCL) and Sui Northern Gas Pipeline Ltd (SNGPL) that together have one of the largest gas transmission system in the world, were forced to stay out of the race to pave the way for foreign firms.


Then security agencies had their concerns over the proposed aerial survey by foreign consultants for the pipeline’s Gwadar to Multan and Nawabshah route. They thought the petroleum ministry should have sought security clearance before taking the decision for the survey, particularly in Balochistan. .


Under the petroleum policy and other relevant rules, aerial survey for the identification of minerals and oil and gas deposits should be done by the Geological Survey of Pakistan in coordination with the security agencies. Sui gas companies had shown interest to complete the physical survey of the pipeline route in 8-10 months because of their expertise in the area.


But the petroleum ministry decided to award the contract to a foreign consultant — a local representative of the ILF of Germany – in joint venture with the National Engineering Services of Pakistan at a bid price of $22 million that was later intriguingly increased to $55 million.


As the contract signing for route survey and FEED remained hostage to minor disputes over taxation and security related issues, authorities panicked that further delays could attract penalties from Iran, starting with about $200 million by December this year. The real worry is that Iran may not restrict itself to just penalty and also demand construction cost of the pipeline from South Pars field to Sistan.


The completion of route survey and FEED study is a prerequisite to hold an investor conference, bidding for EPC contract, financial close and start construction of 785 kilometer piece of the pipeline from Iran border to Nawabshah in Sindh at an estimated cost of $1.25 — 1.5 billion. Under the agreement, the FEED study should be ready by December 2011 and after some other project milestones, the first flows from the pipeline should start by December 2014.


Apart from the World Bank and the Asian Development Bank’s interest to be part of the financing to lay pipeline inside Pakistan, the Russian and Chinese companies are competing to get the construction contract for the pipeline project. Given their existing bilateral relationship, Pakistan is more likely to assign engineering, procurement and construction (EPC) contract to Beijing which is also said to have shown willingness to provide financing for the project.


Such an equation also involves Chinese interest in extending the pipeline, perhaps at a later stage, to its Eastern regions or at the very least take advantage to set up industrial units in a specialised zone around Gwadar. Nevertheless, senior executives of the Russian energy giant — Gazprom — have been visiting Islamabad quite often to bid for the project and have already submitted formal expression of interest. The IPI (IranPakistan-India) as the project was originally known was conceived in 1990. One should hope it materialises in 2015.


The SSGC and the SNGPL — with vast domestic pipeline experience are also in the run for the project to improve their profile as international pipeline engineering firms and to enhance cash flows through IP contract to flow about 750 mmcfd per day of gas from Iran’s South Pars gas field. The gas flows could ultimately be enhanced to 3.2 BCFD in view of the Chinese interest.


After New Delhi pulled out of the project on being wooed by the US through the landmark civil nuclear deal, former Finance Minister Shaukat Tarin, as head of the Economic Coordination Committee (ECC) decided to go for importing only 750MMCFD — instead of originally planned 3.2 BCFD — from Iran to limit foreign exchange outflow to a single source.


The bilateral agreement has the provision to enhance supplies to 1BCFD, although the project design envisages throughput enhancement to 3.2 BCFD at a later stage given a 42” diameter of the pipeline.


Pakistan has been interested in attracting both Chinese firms and Gazprom in view of Russian experience in pipelines and Chinese expertise in engineering and ability to provide funds. Discussions with Chinese officials at a joint economic commission’s meeting were reportedly held early this month in Beijing by a Pakistani delegation led by Water and Power Minister Syed Naveed Qamar.


Separately, Islamabad had also invited Gazprom, the largest extractor of natural gas in the world, to participate in the Iran-Pakistan pipeline project in a meeting of the Pakistan-Russia Inter-governmental Commission held on September 22, 2010 in Russia.


Pakistan would prefer to fund the project through public-private partnership in an attempt to ensure at least a part of the return on financing to remain within the country.


Pakistan and Iran had signed the gas sale purchase agreement in June 2010. A segmented approach has been adopted for the IP gas pipeline project whereby each participant country — Iran and Pakistan — are responsible for building and operating the pipeline transportation network in their respective territories.


Pakistan gas supplies have stagnated at four bcfd while the demand has risen to 6.5 BCFD. The constrained demand is estimated to rise to eight bcfd in three years. Iran has an estimated 982 trillion cubic feet (TCF) or 27.8 trillion cubic meters (TCM) of proven natural gas reserves which are the world’s second largest after Russia but has been finding difficult to develop them in view of the US and the UN sanctons.


The most significant gas field in Iran is the offshore South Pars field, which is estimated to have 450 TCF proven natural gas reserves. It is the dedicated gas supply source for the IP project.

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BHP completes Petrohawk takeover

Posted on August 29, 2011. Filed under: Corporate |

FRIDAY, 26 AUGUST 2011 09:16

SYDNEY: Mining giant BHP Billiton said on Friday it had completed its US$12.1 billion takeover of the US-based Petrohawk Energy Corporation.

The company, which posted a record-breaking financial year profit of US$23.6 billion this week, said the deal was sealed through a short-form merger under Delaware law.

This was the final step of the acquisition process and follows the previously announced completion of the tender offer by BHP to acquire all outstanding Petrohawk common stock.

BHP Billiton petroleum chief executive Michael Yeager said the takeover adds high-quality growth to the company.

“With the completion of this transaction, BHP Billiton Petroleum is on track to deliver compound annual growth in production volumes of 10 percent for the remainder of the decade,” he said.

“We are excited that Petrohawk’s sizeable US workforce is joining our talented group of professionals and we are ready to grow this business over the long-term.”

It follows BHP’s purchase earlier this year of US-based Chesapeake Energy Corp’s shale gas holdings in Arkansas, along with some pipeline assets, for US$4.75 billion, as it seeks to diversify beyond mining and minerals.

Copyright AFP (Agence France-Presse), 2011

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