Consortium to cede stake in Kazakh gas field

Posted on June 17, 2011. Filed under: Fossil fuels |

ASTANA, June 16: A global consortium that includes ENI and Chevron has agreed to give up a part of its holding in a Kazakh gas field at a discount after being accused of legal violations, a report said on Thursday.

The report comes amid continuing efforts by the resource-rich republic’s government to win back stakes in energy companies it sold to Western giants in the 1990s when oil prices were low.

The Interfax news agency said the Karachaganak Petroleum Operating Group (KPO) was ready to give up a five per cent stake in the Karachaganak gas field for free, along with another five per cent stake at “market prices.” The operating consortium includes Italy’s ENI and Britain’s BG Group, which each holds 32.5 per cent stakes, along with the US firm Chevron and Russia’s private producer Lukoil, which holds 20 per cent and 15 per cent.

The report, which was based on an unnamed source close to the Kazakh oil and gas ministry, said the government would in return drop all charges against the group except for those related to taxes.

Kazakhstan accuses KPO of violating immigration laws and tax evasion.

Company officials issued no immediate comment to the report.

The Central Asian country has grown more assertive over its natural resources, pushing to revise agreements signed in the years immediately following the fall of the Soviet Union in 1991.

Prime Minister Karim Massimov in 2008 said the government could seize both energy fields and mineral deposits “if contractual obligations … are not respected.” Diplomats and investors have privately said that such moves could scare off foreign investment, complicating the government’s efforts to finance new projects.—AFP

Dawn.com

Fallout of volatile oil prices

Posted on June 14, 2011. Filed under: Fossil fuels |

PAKISTAN’S economy is often affected by developments that take place outside the country’s borders and over which the policymakers in Islamabad have no control. Policies such as those adopted in framing national and provincial budgets and in determining the structure of tariffs matter.

But what also matter is what happens in some of the international markets. One of these is the oil market, given Pakistan’s large and increasing dependence on imported oil.

This is why it is important to take note of the decision taken on Wednesday June 8 by the representatives of the eleven states that make up the OPEC, the cartel of oil producers. The meeting ended in considerable acrimony and dashed expectations that the members of oil cartel will increase production to steady the markets. The development led to an increase in the price of Brent crude by $2 to $118.59 a barrel.

Saudi Arabia, with the OPEC-allocated level of production of 8.9 million barrels a day, is the largest member of the OPEC followed by Iran with 3.7 mbd, UAE 2.5 mbd, Kuwait 2.4 mbd, Venezuela 2.2 mbd and Nigeria 2.1 mbd. The remaining four – Angola, Algeria, Ecuador and Libya together account for 4.4 mbd. Ecuador is the smallest producer in the group with production of only 400,000 mbd. Iraq, the twelfth member, has not been subjected to a production quota since the country was invaded by the United States. The OPEC production of 26.2 mbd is 40 per cent of the world total. In December 2008, the members had agreed to produce 24.85 mbd but the actual production is about 10 per cent higher. Some of the large oil producing and exporting countries such as Russia have not joined the cartel.

The production quotas fixed by the cartel are not always followed by its members. Saudi Arabia, for instance, unilaterally increased its production to compensate for the decline in exports from Libya. It increased it again in May by about 200,000 and is set to add further production of 200,000 and 300,000. In spite of the OPEC determined quotas and the powerful oil ministries that manage production in their countries, no firm estimates are available as to how much the cartel really produces. This lends to a great deal of speculation and volatility in the oil market. There is a consensus among experts that the cartel is currently pumping about 1.3 mbd more than the agreed limit.

The oil ministers met in Vienna on June 8 to decide on the levels of production and it’s sharing among the members. Vienna is the city where the OPEC has its headquarters.The meeting was held as political turmoil in the Middle East was raging. Libya because of the civil war was not producing much oil and exporting even less.The country’s 1.3 mbd of exports seemed lost for as long as the struggle in the country remained unresolved. Its place at the meeting was contested by the government and the rebels. The ranks of the rebels were strengthened by the defection of the former oil minister. Small of the smaller Arab producers were also having political difficulties. Syria’s 150,000 barrels a day of oil exports were in jeopardy because of the mounting violence in the country.Yemen’s 260,000 barrels a day of production had virtually halted. The country’s president had gone to Saudi Arabia on the eve of the Vienna meeting. His future as well as that of his country remained uncertain. A complete breakdown in law and order could conceivably threaten the nearby Bab el Mandeb shipping lane through which an estimated 3.7 mbd passed. According to one oil expert, “Yemen was wild card. It could be the failed state in the middle of the gulf and it threatens the stability of the largest oil producer, Saudi Arabia.” In light of all these uncertainties, there was hope expressed on the eve of the meeting that the oil ministers, meeting in Vienna, will act to stabilize a jittery market. The decision to increase production would have been the first taken in nearly four years. The aim would have been to put a lid on the continuing increase in the price of oil following political problems in many countries of the Middle East. Saudi Arabia wanted the price of crude to settle down well below the current levels. Ali elNaimi, the Kingdom’s oil minister had indicated on several occasions that he wanted oil prices to remain between $70 to $80 a barrel, much below the trading range between $105 and $125 which has been in place for more than four months.

The Saudis were also concerned that the world demand would increase as the refineries, following the pe riod during which they shut down for maintenance, return to full production and that would add to the pressure on prices. Riyadh was nervous that at the current levels, the global economy may not be able to sustain the tepid recovery from the Great Recession of 2008-09. ElNaimi described the Vienna meeting “the worst we have ever had”. His attempt to raise production was blocked by Iran. Terhran was joined by several small producers who did not have the capacity to increase in output. A decline in the price of oil would have reduced their earnings. The Saudi minister wanted to add 2.5 mbd to the club’s production level. OPEC’s spare capacity of some $4 mbd is in the hands of just three countries – Saudi Arabia, Kuwait and the United Arab Emirates. All three were in favor of raising the level of output.

There was also some concern in several quarters about what is called “demand destruction” – when consumers begin to reduce consumption on a permanent basis by making changes in their life style while investments are made in developing non-oil sources of energy. Experts believe that this is likely to happen if the price of oil remains above $125 a barrel for a long period of time. After the difficult meeting in Vienna it has begun to approach that level.

What should be the reaction in Islamabad to the Vienna decision? Pakistan, like several other developing countries, tightly controls the oil market. Sale price at the service stations are set by the government and are well above the price at which the companies buy the product. The difference is collected by the government as a form of oil tax. There is uniform price in the country which means that the areas near the ports through which much of the oil comes subsidize those that are upcountry. This kind of regime produces enormous distortions which are not helpful for an economy that is so troubled most of the time.

Among the several structural changes the government needs to introduce is in the area of oil marketing. Ideally the government should let the price at the pump and at the points of distribution to be set by the market. It should reflect competition among the distributors. The state can charge a tax on sales so as not to affect the revenues generated by oil. The market should be allowed to develop instruments that will take out the wide fluctuations that have become the norm in oil trade.

Dawn.com

‘Lobbying’ against coal-based power projects

Posted on June 14, 2011. Filed under: Fossil fuels |

TWO ministers of Sindh have accused the ‘petroleum lobby’ and ‘supporters of large dams’ of manoeuvring to prevent productive use of enormous coal reserves of Thar region and creating hurdles in building of coal-based power stations. This is the first such explanation by any government functionary why the Thar coal deposits discovered in 1992 remain unutilised till today.

The two ministers are Syed Murad Ali Shah and Ayaz Soomro. They were on a visit to Karachi Chamber of Commerce and Industry on May 17 to discuss matters relating to the provincial budget. Shah, the provincial finance minister, said that a powerful lobby in oil import business, which has a strong influence on government’s decision-making, ensured that only the expensive oil was used for electricity generation, and discouraged efforts for use of coal. And the supporters of big dams, who always argued that dams were imperative for Sindh’s water and power requirements, he said, saw to it that the province and the nation remained deprived of electricity generation from coal.

Ayaz Soomro, the law minister, said that Sindh had been forced not to pursue coal development. “Bureaucracy in the federal government has a major role in nondevelopment of coal resources,” he added.

The ministers’ narrative absolves the political elite of Sindh of any role in delaying the utilisation of precious coal deposits. Although the clout of the so-called oil lobby can hardly be denied, the fact that it can succeed in freezing a project of great national importance for almost two decades, is not convincing enough.

In fact, the successive governments in Sindh are more to blame for the unforgivable delay for they have never been keen, nor shown any resolve, to implement this project on a fast pace. The 185 billion tonnes coal deposits, which are lying like a huge waste, could not be exploited primarily because of bureaucratic intrigues, cabinet ministers’ inefficiency and indifference and then the prolonged power tussle between the Sindh government and the federation over control of these deposits.

As a result, the body tasked with handling the project kept reshaping itself and changing its name with the changes in the government with no progress on the ground .

It seems incredible that no concern for nation’s urgent power needs was shown by either the central government functionaries or the Sindh ministers. The senior government officials were more interested in settling tariff rates and kickbacks with both foreign and domestic investors over purchase of electricity.

Dr A.Q. Khan, the reputed nuclear scientist, recently wrote in a column that with the help of Riaz Mohammad Khan, the former ambassador to China and later foreign secretary, he had arranged a deal in 2002 with one of the largest coalmining and processing companies of the world, Shenhua Group of China. The company was willing to provide electricity at 5.39 cents per unit and had committed to set up four power plants of 325 MW each, by 2010. But since no commission was involved, the deal was cancelled. Shenhua employs about 170,000 people and produces thousands of megawatts of power. It has put up plants in Mongolia, Indonesia and Australia.

Such has been the prevalent at titude for more than a decade although Sindh government has been spending a huge amount on building infrastructural facilities as well. The political figures handling the project acted more like rent-seekers and less like responsible administrators, treating coal deposits as a source of personal profits rather than of national pride.

In 2009, confrontation between Islamabad and Karachi over Thar became so intense that it resulted in non-allocation of funds for the development of mines in the Thar project in the PSDP 2009-10. The Annual Plan Coordination Committee decided to put on hold the allocation until the 16-year old dispute was resolved.

The two Sindh ministers while blaming the oil lobby have not talked of resisting the anti-coal ‘conspiracy’ by expediting the work on power projects in Thar. While the coal-fired power stations are no more welcome in the world for reasons of global warming (Pakistan is turning to gasification), they are still providing nearly half of total electricity compared to other sources.

No developed country has yet abandoned the use of coal for power although new plants are either in decline or not coming up. The United States has at present more than 600 coal-based power plants but no new plant has been added since 2008. Republicans’ loyalty to coal is evident from the fact that on February 18 this year, the House of Representatives, controlled by them, voted to block the Environmental Protection Agency from regulating greenhouse gases. On May 25, deputy assistant secretary of department of energy said that new EPA regulations mean a lot of coal-fired power plants will shut down soon.

The largest producers of coal, based on 2008 estimates are: China 2761 million tonnes; USA 1007 million tonnes; India 490 million tonnes; Australia 325 million tonnes; Russia 247 million tonnes; Indonesia 246 million tonnes; South Africa 236 million tonnes; Kazakhstan 104 million tonnes; Poland 84 million tones; Colombia 79 million tones and Pakistan mere 150MW.

To attract investment in Pakistan, the Federal Board of Revenue has allowed a 30-year tax holiday for companies intending to produce power from Thar coal fields. In a notification on April 24, it exempted 10 per cent income tax on the dividend of any project at Thar coal fields for 30 years from the launch. Similarly, the payments for goods, services, construction and other operations of the project would be exempted from up to 3.5 per cent withholding tax.

The concession has been given on the recommendations of the Privatisation Commission and Thar Coal Development Board, which want a tax-free environment for investors. Currently, the electricity produced from coal is less than one per cent of the overall national energy mix in the country. It is mainly used for firing brick kilns.

It is interesting to note that everywhere as here in Pakistan natural gas is preferred to coal for electricity generation although Pakistan’s gas reserves would last for only 20 years and coal reserves would take about 200 years to consume.

Dawn.com