Tapping Central Asian Natural Gas Resources: Need to avert Future Crisis in Pakistan

Author Name: Ali Haider Saleem       27 Oct 2021     Domestic Economy

Winter has not yet arrived but alarm bells have started to ring in Pakistan. Recent increases in fuel prices indicate that consumers will be pushed to consider alternative energy sources for domestic and commercial needs. Locally-produced natural gas contributes 35% to Pakistan’s overall energy mix, but the domestic supply falls short of demand, which gets covered to some extent by imported LNG. During the cold season, the local supply falls still further in meeting demand, so gas suppliers are pushed to increase their share of LNG in the supply mix. The cost of imported LNG is very high and vulnerable to external shocks as it is dependent on global oil prices, so a better alternative to cover the shortfall in the coming years is to import gas via pipelines from Central Asian countries.

As pointed out earlier, Pakistan’s energy dependence on imported LNG has made it even more vulnerable to shocks in global energy markets. The recent shortage in Europe due to Russia’s reluctance to increase its supply has not only increased the global prices of natural gas, but also put pressure on fuel prices as countries confront the spectre of winter. Such external factors are beyond Pakistan’s control but, at the end of the day, the government comes under severe criticism as higher input costs push up prices of many essential items.

While Pakistan has signed an agreement with Qatar to secure LNG supplies for the long-run, the costs are not fixed which adds to the vulnerability and places added pressure on the decision-makers. Pakistan purchases a major portion of imported LNG at 12.5% of the crude oil price, while approximately 30% is purchased at spot price which can be very costly. On 6 October, the Asian LNG spot prices reached a record high of over USD 56 per million British thermal units (mmBtu) which is equivalent to USD 320 per barrel of oil.

As present indigenous supplies of natural gas are depleting, the country might be forced to add more imported LNG into its energy mix in the future. Unlike in the past, the authorities need to consider long-term implications of any agreement of LNG purchases. Pakistan had to renegotiate the LNG supply deal with Qatar as the original terms proved very costly.

In this regard, the development of cross-border gas pipelines will be critical to address the future needs of the country. It is important to note that the process of converting natural gas into LNG and shipping it is costlier than gas transmission through pipelines. Ensuring completion of the cross-border gas pipeline projects would be economically beneficial in the longer run. The supply of gas through pipelines will also not as vulnerable to external shocks and will serve as a reliable source. Recently, the Petroleum Secretary apprised the National Assembly Standing Committee on Foreign Affairs that Turkmenistan-Afghanistan-Pakistan-India (TAPI) would be economically viable as Pakistan only has to pay a fraction of the total project cost. According to an official document, the project is expected to be completed by 2023.

For household needs in particular, securing access to natural gas resources of Central Asian countries will be critical. Many domestic consumers are already struggling to meet their energy needs within their meagre budgets, so the government must work towards providing cheaper solutions. The government has been providing subsidies to domestic users but it cannot sustain this model as it urgently needs resources to address the wide-ranging economic shortfalls. Households are the second largest consumers of natural gas in the country so the government will need to make tough and timely decisions for the sake of long-term prosperity. Recently, the Minister of Information and Broadcasting stressed that the country’s economy has to adjust according to global markets and that the ‘whole country cannot run on subsidies.’

The increase in consumption in the winter months leads to supply shortages which the state- owned gas supply companies cover with imported LNG at overly subsidized rates to prevent political backlash. This year, it appears that the domestic consumers will have to bear more costs than usual as the global prices of LNG are extremely high. Last month, Pakistan’s Minister of Energy stated that ‘The Ministry of Energy shall be sharing with the Cabinet a proposal to boost the consumption of surplus power and conserve the utilization of scarce indigenous gas in winters.’ His words are a clear indication that the gas crisis will hit consumers hard this winter.

Along with households, other sectors of the economy will also be adversely affected by the rise in global energy prices. Industries and exports will suffer due to rising costs which will add to the woes of the economy. Therefore, pursuing cross-border gas pipeline projects will also reduce cost of production in the country which will attract more investment and increase export volume. Doing so will help strengthen the Pakistani rupee and even make imports more affordable.

Along with TAPI, Pakistan should explore more projects to address future demand. Other Central Asian countries like Kazakhstan and Uzbekistan also have ample gas reserves and could turn out to be cost-effective options for Pakistan’s economy.

Pakistan had to pull away from the Iran gas pipeline project signed back in 1995 due to US sanctions on Tehran, as well as cost issues. With Iran’s own resources coming under stress due to lack of investment, this option is no longer viable. That leaves Central Asian countries as a reliable long-term source for affordable natural gas.

To make TAPI and similar projects possible, peace and stability in Afghanistan is a prerequisite. The Central Asian Republics are rich in natural resources which can be beneficial for the wider region if the right environment is provided for the implementation of cross-border projects. For Pakistan, securing its energy future is dependent on supporting and encouraging reconstruction and rehabilitation efforts in Afghanistan.

Ali Haider Saleem is a researcher at Centre for Aerospace & Security Studies (CASS), Islamabad, Pakistan. He can be reached at cass.thinkers@gmail.com.

 

Image Source:  Mudabber Z.2016, "Afghanistan’s Role in the Central Asia-South Asia Energy Projects." The Diplomat, 12 July. 

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