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The reality of the energy crisis

By Munawar B. Ahmad

As the hapless nation suffers the twin burdens of power and gas outages, it is imperative for those in the corridors of power, the people of Pakistan, as well as professionals to ascertain the reality of the energy crisis. Talk show hosts lambaste the current and previous governments but it is obvious that neither they nor the media in general understand either the reasons for this situation or its finer points. Nor does anyone pinpoint a specific ministry, government department or the public utilities. So the question remains, who is to blame and where does the buck stop.

The Supreme Court in its eye-opening judgment on March 30, 2012, has clearly put the blame on the relevant ministers, federal secretaries and the public sector organizations, which transgressed their authority and awarded projects in a dubious manner. Most notably, an analysis of the Karkay project has revealed that loans were taken by Lakra Power Generation Company (Genco 4), which had a negative balance sheet of about Rs5 billion. The NBP-provided loan of about Rs6 billion for the 14 percent advance payment was clearly in violation of the State Bank’s prudential regulations as well as the Companies Ordinance, which forbids lending to bankrupt concerns. Further, the standard Rental Power Project contract was revised to put the onus of fuel oil supply on PEPCO/Genco 4. Neither Pepco nor Genco 4 had the capacity, finances or infrastructure to provide the Karkay power ship with fuel oil, with the result that instead of the contract capacity of 230 MW, an average of just 30 MW was being produced. Meanwhile, Karkay was being paid the full capacity charge, which resulted in an effective tariff of nearly Rs50 per kwh. In its detailed judgement, the SC has noticed these matters along with other issues related to Techno 1, Techno 2, Reshma, YoungGen and other RPPs.

However, there are some details in the SC judgement which are not clearly understood. One such example is that regarding the opening up of the contracts of Bhikki (the Pakistan Power Resources project) and Sharakpur (the GE USA project), which were contracted in 2006 for a three-year term. Both contracts were completed in 2009 and both companies have since re-exported their equipment (as allowed in the contract). In both cases, full generation could not be achieved primarily because of Wapda/Pepco’s failure to supply gas. This, in itself, entails negligence on part of the authorities, which caused losses to the companies due to limited operations.

In the days to come, it is expected that several RPPs will file appeals/ review petitions, alleging violation of contractual arrangements, which are legally binding as per international law. This may also lead to cases being filed overseas under international arbitration laws. One downside of this judgement may be to scare away overseas investors.

That said, there’s plenty of other, similar material – regarding overreach of authority by government functionaries – where the dubious award of projects is concerned. Among these are the brickwalling of the Nandipur 425 MW and the Chicho Ki Malian 525 MW – both PEPCO initiated and commercially financed projects. The Guddu Power CCGT replacement project of 740 MW met a similar fate. (If the figures of approved and financed projects that were put in cold storage were to be calculated, their combined capacity would have been 1,700 MW.) Were these projects sidelined because the Chinese companies refused to favor requests for pay-offs and commissions? That is a no-brainer.

A similar situation is seen at OGDCL, which – despite having changed six MDs in four years – has not managed to award field development contracts for 350 mmcfd gas. The first MD OGDC under the new government resigned because he was unwilling to follow unlawful dictates. The next four MDs came and went without achieving any success while the current one continues on acting charge. In the same period, lack of security cover inhibited MOL from bringing online an additional 150 mmcfd of gas. Thus SSGC and SNGPL have been deprived of much needed 500 mmcfd of gas.

This situation was further aggravated with the Ministry of Petroleum and Natural Resources violating the integrated structure bids of the Mashal LNG project, which landed the case in the SC. Instead of following the court’s clear directive to implement or reinitiate the project under an integrated format as per the original Request for Proposal, the ministry chose to shelf the project. The question is, why a four-year hold-up in LNG imports? If Mashal and private sector LNG import projects had been facilitated rather than hampered, Pakistan would have today had 1,000 mmcfd of additional gas, which – together with the local fields supply from TAY, KPD, Dars, Gurguri, etc. of about 500 mmcfd – would have fully covered the gas supply demand gap. But today the government seems more eager to consider India’s offer to provide 1,000 mmcfd gas by way of LNG imports.

In the context of the energy crisis, the issue of circular debt – the second most crucial aspect – must also be understood. In 2009-2010, the government/Ministry of Water and Power set-up Power Holding Company Ltd (PHCL) and transferred the entire debt of the power sector – Rs301 billion at the time – from the books of the DISCOs and the NTDC to the PHCL. Unfortunately, neither the government nor the ADB (which supported the Power Sector Debt Resolution Plan) recognized or corrected the fundamental issues resulting in the huge circular debt. The result is the piling up of additional Rs365 billion payables on power sector companies (which is matched somewhat with Rs320 billion receivables) from the provincials, FATA, AJK and the federal government (Rs111 billion), KESC (Rs54 billion) and the private sector (Rs. 155 billion). Sadly, the Ministry of Finance seems to be doing little to reconcile or adjust the above amounts.

This, in turn, has resulted in non-payment to the IPPs, oil/gas companies, refineries etc., resulting in short-supply of oil/gas, due to which as much as 3,000 MW generation capacity is unutilized. Another 1,000 MW is off-line due to mismanagement and poor operations and maintenance of PEPCO and the GENCOs.

The resulting acute energy crisis and the ever-increasing supply-demand gap for both power and gas are now upon the nation. With few projects currently planned or in stages of implementation, this situation will get worse, as shown in Figures 1 and 2.

Meanwhile, it has become common practice for the president and prime minister to take “serious note” of the power and gas situation and issue orders (to whom is still a mystery) to end outages, sometimes in 24 hours, and sometimes on an “urgent basis”. In the last four years, the prime minister has held more than fifteen strategic or roundtable dialogues, energy conferences with the World Bank, FODP, USAID, ADB as well as provincial chief ministers, federal secretaries, the minister of finance, the deputy chairman of the Planning Commission and all and sundry. However, there continue to be increasingly more power outages, which bring industry and business to a virtual standstill, and ever more agonizing gas cut-backs for all segments, including the poorest, who rely on gas for cooking fuel.

One cannot help wonder, what really transpired at these conferences? Why were no solutions agreed upon and implemented? What contingency plans were outlined? Why has the donor agencies’ stated objective of “rapidly closing the supply-demand gap” only been a cosmetic exercise? Surely, there must be more to these conferences than the people are told. Why is it that the prime minister and many ministers grandly announce ends to power and gas outages but each date passes unnoticed, unheeded?

Considering the reality of the energy crisis and my own correspondence with various government functionaries during my time at Pepco, it’s clear they neither comprehend the gravity of the crisis not do they have any intent of looking past their personal agendas. This has become evident from the botched-up RPPs program wherein Rs22 billion has been doled out as ‘advance’ for generating about 1,200 MW although barely 150 MW are currently being generated, that too mostly on an interim basis.

Equally clear is that the energy sector has virtually collapsed under the combined weight of the government’s complacency, callousness, misgovernance and incompetent management of key energy sector organizations as well as the dubious objectives, corruption and political needs of its managers, who dictate everything – hiring staffing, transfers, promotions, contracts. With no corrective action underway, the people, business and industry can either brace themselves for more shortages, outages and shutdowns or they can pray for a messiah.

The energy crisis is here to stay.

The writer is a former MD of PEPCO and SSGC.

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