Energy Sector - 2

[Naresh]

[center]<b><span style='font-size:14pt;line-height:100%'>Energy corridor : myth and reality</span></b>[/center]

PRIME Minister Shaukat Aziz told the third annual Oil and Gas conference that Pakistan will proceed with plans to build a gas pipeline from Iran even if India pulls out of the project because its energy needs are expected to more than double by 2020.

<b>It has taken a few years for the government to realise that transporting gas from the Central Asian republic of Turkmenistan is not a practical option.</b> On December 27 in 2002, Foreign Minister Kasuri signed an agreement - in the presence of Afghan President Hamid Karzai - in Turkmenistan to construct a gas pipeline that was supposed to pass through Afghanistan.

The announcement stipulated that the trans-Afghanistan pipeline would export Turkmen gas via Afghanistan to Pakistani ports, from where it could reach world markets. Nothing has happened since then because little or no thought was given to the fact that laying any pipeline through Afghanistan might not be possible for a long time to come, and Turkmenistan — a dictatorship with a rather closed economy — sells most of its nearly 60 billion cubic meters (bcm) annual output of gas to Russia and has a history of reneging on agreements.

It has been almost 15 years since the governments and the military strategists in Islamabad have been talking about the potential for trade from Central Asia and citing that as one of the drivers of their Afghan policy.

Now the prospect of building an energy corridor has been given as a principal reason for building the Gwadar port. Given the global energy security situation, Pakistan’s own gas reserves and the geo-political considerations, the country must give top priority to its own needs as a matter of national and energy security.

More specifically, while Pakistan imports about 80 per cent of its oil requirements, it may become an importer of natural gas by as early as 2010. Therefore, it can no longer afford to waste time on some far-fetched plans for building trade routes. Its hopes of becoming an energy corridor for the West or China have turned out to be just pipedreams while Turkey and China have already built or are in the process of building oil/gas supply routes to the Central Asian republics, principally Kazakhstan and Azerbaijan.

Some vested interests in the establishment appear to have exaggerated the real potential of trade/energy routes from Central Asia through Pakistan to further their own agenda. Ironically, while there was no tangible progress in the past decade toward meeting even our own energy needs let alone building energy routes for others, Turkey has emerged as the new “silk route” of the 21st century and the energy corridor for Central Asia and Europe.

On the other hand, China has been working to establish direct oil/gas pipeline routes with Russia as well as with Kazakhstan - Central Asia’s largest oil producer, estimated to account for about 3.3 per cent of world’s proven oil reserves and 1.7 per cent of gas reserves.

Pakistan is one of the most gas-dependent economies globally. Natural gas meets more than 50 per cent of its energy needs compared to a global average of 23 per cent. Power generation sector is the largest consumer of gas at 45 per cent of the consumption, followed by fertiliser and household at 22 per cent and 18 per cent respectively. In addition, the government estimates that by 2010, Pakistan will have to increase its power generating capacity by more than 50 per cent to meet increasing demand. Hence, gas is much more critical to the economy and industry than it is in many other countries.

Over the past three years, gas has gained further prominence over oil as an energy source. The three-year annual average growth rate in demand for gas was 12.1 per cent while for oil it was actually a minus 6.4 per cent and for electricity 10 per cent. The decline in the use of petroleum products in the household, agriculture, transport and power sectors was due mainly to the availability of alternative and relatively cheaper sources of fuel e.g. liquefied petroleum gas (LPG). Furthermore, compressed natural gas (CNG) for transport has been an additional growth segment.

Although proven natural gas reserves are officially estimated at around 821 billion cubic meters (bcm), many experts believe it may need to start importing gas by 2010. Pakistan’s gas consumption rose to about 33 bcm in 2006 from 20.6 bcm in 2002. A February 7, 2007 report by Goldman Sachs – the American investment bank - states, “recognising that Pakistan will face an imminent gas shortage, the government is currently in discussions with Iran, Qatar and Turkmenistan for potential gas importation . We believe a sub-sea pipeline or shipment of LNG from Qatar is likely to prove an expensive option, while gas ownership uncertainties make Turkmen gas imports improbable in the near-term. In our view, piped gas from Iran seems to be the most likely option although pricing disparities need to be resolved.”

<b>According to a new formula proposed by Iran, the cost of gas will translate at the Pakistan-India border as $4.93 [India is not willing to pay more than $4] per million British thermal units (mBtu), plus $1.5 per mBtu that India would have to pay to Pakistan as a transit fee. Iran has offered to pay as much as 60 per cent of the estimated $7 billion cost of building the pipeline However, Indians have not yet come on board, as is implied in prime minister’s remarks, and are keeping their options open including that of buying LNG from Iran under their $22 billion bilateral agreement.</b>

Unlike oil, which is traded and transported globally, natural gas tends to have regional markets due to the obvious logistical and cost constraints. Outside North and Latin America, 60 per cent of the world’s natural gas reserves are concentrated in just three countries – namely - Russia, Iran and Qatar who account for 29, 16 and 15 per cent respectively of the world’s total reserves outside Americas. Turkmenistan’s proven gas reserves are barely 1.6 per cent of this total [though Turkmenistan officials claim these to be much larger] and it sells all its gas to Russia and Ukraine through the old network of pipelines from the Soviet era.

Not only that, it cannot meet Pakistan’s gas needs let alone of other western countries. According to an Asian Development Bank study, it’s small size (population of 4.8 million and GDP of $7 billion) and unstable political regime do not qualify it to be a reliable long-term source of gas for Pakistan specially given the fact that any pipeline from Turkmenistan will have to pass through Afghanistan.

It is a pity that the policy makers have only recently recognised that importation of gas from Iran is the only viable option for Pakistan after spending over a decade on the unrealistic pursuit of building an energy corridor from Central Asia through Afghanistan. Iran consumes almost all of its current gas production but is producing only a small share of its huge gas reserves. This means that Iran is one of the few countries capable of supplying much larger amounts of natural gas in the future.

While it is true that Kazakhstan and Azerbaijan have large oil reserves, they have never shown any serious interest in transporting oil through Afghanistan. In fact, secular and liberal Kazakhstan has always been weary of the Taliban and the warlords and is highly unlikely to participate in any project that involves Afghanistan. Oil and minerals exports dominate the economies of these Central Asian states and account for about 73 per cent of their exports. Much of their other trade is with Russia and other former Soviet republics according to a February 2006 World Bank report.

<b>Historically, these states have depended entirely on Russia to export their oil but that complete dependence ended on July 13, 2006 with the inauguration of the $4 billion world’s second longest Baku-Tbilisi-Ceyhan (BTC) pipeline, the east-west hub intended to connect energy supplies in the Caspian region and Central Asia to Western markets.</b> Earlier in March 2005, Kazakhstan and Azerbaijan agreed to build the Aktau-Baku pipeline, connecting the Kashagan offshore oil fields in Kazakhstan to the BTC in Baku via a sub-Caspian in 2008. The Kashagan field is expected to produce 1.2 million bpd by 2016, when 600,000 bpd of its production is to be shipped across the Caspian Sea to be fed into the BTC line.

The BTC pipeline will account for only a small percentage of global oil, that is, about one million barrels/day (bpd) by 2009. However, the West considers a stable -- and not Moscow-controlled -- supply to be worth the financial and political costs. Planning for the pipeline that carries oil from the landlocked Caspian to the Mediterranean Sea -- while avoiding Russia and politically unstable areas such as Armenia -- began in 1999 and construction commenced in September 2002. The Western governments and oil firms intended for it to rival the Russian-backed Blue Stream pipeline, which sends Russian gas to Turkey and Italy.

Blue Stream gas pipeline between Turkey and Russia was officially inaugurated in November 2005. Its construction, undertaken by Russia, Turkey and Italy -- involving a joint venture between Russia's gas giant Gazprom and Italy's energy major ENI – took eight years.

Another gas pipeline project underway is the $5.8 billion Nabucco pipeline; a major part of the European Union's strategy to diversify its gas sources away from Russia. This will carry natural gas from Azerbaijan and will go through Turkey, Bulgaria, Romania, Hungary and Austria. Construction is slated to begin in 2008 and conclude in 2011. Nabucco is expected to achieve a maximum transport of 30 billion cubic meters of gas per year. In addition, Turkey is in discussions to build another pipeline that would send Russian gas through Turkey to Italy and Greece.

It is clear that Turkey by capitalising on its position as the geographic link between Europe and both Central Asia and the Middle East and on its ties with both the European Union and Russia, has emerged as the pre-eminent strategic supplier of energy routes between Central Asia, Russia and Europe.

<b>On the other hand, China has been busy building direct supply routes from Central Asia and Russia. In December 2005, the state-owned China National Petroleum Corporation (CNPC) inaugurated an oil pipeline running from Kazakhstan to northwest China. The China-Kazakh pipeline opening is one part of a massive Chinese plan to secure as much of Kazakhstan's oil riches as possible. Earlier in October 2005, China spent $4.2 billion on acquiring PetroKazakhstan that produces 12 per cent of Kazakhstan’s oil output.</b>


With completion of this major project, China will for the first time have secured a source of imported energy not vulnerable to US aircraft carrier battle groups, as is the case with oil deliveries from the Persian Gulf and Sudan at present.

Before opening the new pipeline, China imported only 25,000 bpd from Kazakhstan. Once the link between Kenkiyak and Kumkol is finished, connecting existing infrastructure near the Caspian with the portion inaugurated in December 2005, the project will pump one million bpd. That would be about 13 percent of China crude oil needs.

In summary, the above facts indicate that our energy policies and security strategies have been grounded on either some great misperceptions or deliberate distortion of facts to serve some vested interests. <b>While India or China may or may not participate in building supply routes through Pakistan given their economic and geo-political considerations, the government’s decision to go ahead with Iran pipeline is a right one because it is eminently sensible for Pakistan to secure the future gas supplies from its next-door neighbour that also happens to have the second largest natural gas reserves in the world after Russia.</b>

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