Musharraf's Economic Boom and Energy Demand for Pakistan

Posted in Other | 30-Jul-07 | Author: Imran Khan

"Musharraf's economic boom is attributive to the Musharraf government’s tentative allying with the U.S."
"Musharraf's economic boom is attributive to the Musharraf government’s tentative allying with the U.S."
After 60 years of Pakistani independence President Pervez Musharraf is dancing on a thin tightrope and juggling some hot issues. Among them: criticism for not fighting the Taliban sufficiently in their safe havens on Pakistan’s territory; criticism for not giving up his double role as President and head of the armed forces; and criticism from the Muslim side for raiding the Red Mosque. Yet others say he raided too late.

The booming economy gives him some relief. But for how long? Behind the current problems there looms a burning mid-term issue: energy security. The growing demand for energy supply meets declining availability of energy – at home and abroad. Energy shortages and high prices might have a negative impact on Pakistan’s economy, threatening an already fragile domestic situation.

In the long run it will be decisive for Pakistan’s economic and political future whether Pakistan can cope with the widening energy supply gap while competing with energy-hungry neighbours like India and China.

At the crossroads of a burgeoning economy, an expanding industrial structure, a growing population and mass urbanization, Pakistan faces the energy-boom-and-economy-bust scenario. Like the country’s political troubles, the economy confronts trails of an energy demand stir. Straddling the crosscurrents of transition, the economy suffers an energy deficit just like the polity’s democratic crisis. As the latter is a direct result of military misadventures and an authoritarian political culture, the previous is impacted partly by economic growth, mismanagement of the political economy, and population explosion — nevertheless geo- economic- and -political bouts.

Pakistan’s economic growth is historic; so is the surge in energy demand. The government’s approach towards energy security has unfortunately been anti-economic and anti-progressive. One after another, it has manipulated boom-and-bust projections to legitimize Pakistan’s nuclear program, to rationalize its geopolitical regional ambitions of a forward policy towards the western fringe of Afghanistan and of containment on the eastern front of India, to augment its geoeconomic potential by building pipelines and ports, and to craft an energy-plus-economic compact on the northern front with China.

The purpose of this newsletter, however, is beyond these geopolitical conspiracies and conjugations. It articulates the scale of Pakistan’s energy insecurity by scaling the demand and supply gap, and outlines Pakistan’s pursuit of energy security by analyzing the causes of the worsening energy crunch. The newsletter also evaluates the scope of Pakistan’s energy optimizing strategy. Finally, the newsletter recommends legal, political, economic and structural measures in line with Pakistan’s energy security pursuit.

Pakistan’s Energy Economy

Over the years, Pakistan’s economy has demonstrated a remarkable growth rate, recovering from decades of sluggishness — though economists have been questioning its sustainability, expositing worst-case scenarios of crash landing and growth bubbling. The economic boom is attributive to the Musharraf government’s tentative alliance with the US in the “with us or against us” post-9/11 era, tactful renting out of its armed forces and frontiers to the counter-terrorism coalition as a front-line state against US$10 billion, and notably the privatization spree that came with structural and monetary reforms.

With its resiliently growing economy, the demand for energy in Pakistan has surged by 10% annually, corresponding to an average 7% GDP growth since 2000. In 2006, Pakistan was the world’s 30th largest energy consumer. Demand is projected to grow by 3.5 times greater from the current level of consumption, 56 Mtoe (million tons of oil equivalent), to 198 Mtoe by 2030. However, the Pakistani government projects an annual increase in supply of 7.5%, corresponding to a GDP growth rate of about 7% — an over-optimistic projection. The supply growth rate was 6.8% during 2006.

Pakistan is a gasoline-intensive energy economy. Oil and gas together make up 80% of energy demand. Coal, hydro and nuclear energy make up the remaining 20%. Likewise, indigenous resources substantiate 3/4 of requirements, falling short of supply by 25% annually. The supply lag is projected to increase to 62-64% by 2025-30, provided a growing demand. Until now, the deficit has mainly been in petroleum and marginally in coal sectors — although proven coal reserves in Pakistan are the world’s sixth largest.

Pakistan is a net importer of petroleum. With 27 billion barrels (Bbbl) “balance recoverable” crude reserves, domestic production is less than 20% of demand – importing slightly more than 80%. Due to limited growth in the domestic supply line, imports are increasing. Petroleum imports are straining the economy dearly, which ranges between 25-33% of gross imports. This predicament doesn’t improve matters as demand is projected to double by 2015. In the foreseeable future, Pakistan’s dependency on external sources of oil will aggravate furthermore. This leaves it vulnerable to fluctuations in international supply line and price hikes, compounding the existing trade imbalance, budgetary deficit, inflationary tendencies and scaling-down of foreign exchange reserves.

Having a perennial petroleum supply constraint, the energy economy is in transition, becoming gas-intensive. As a “bridge-fuel,” natural gas is bridging the energy shift from fossil to alternative fuels, because gas can be refined into pure hydrogen – seen as the fuel of future. The transition is no aberration whatsoever, but is a culmination of the gas development process that began in mid-1955 when the first gas-gusher was developed in Sui (the south-western Baluchistan province) — now the gas complex of the country. The progression has been swift since 2000. Year on year, consumption of gas has increased by about 10.4%, while petroleum consumption has decreased by an average 3.3%.

The prize: Smoothing out the oil-based worst predicament and reducing the petroleum premium on economic growth. The ultimate payoff: energy security, given Pakistan’s reasonable gas reserves and geographic position as the pivot of the heart-and-rim-lands of the Eurasian energy El Dorado. Its domestic natural gas reserves are 32,928 trillion cubic feet (Tcf). But production is falling short of meeting the needs of growing consumption. Until recently, gas production was in surplus, and levelled off at around 55 Mtoe in 2005 with demand.

The gas cornucopia is a passé. As projected, the share of gas in the energy mix will dip from 50% to 45% by 2030. Gas reserves are projected to peak by 2010, but overall demand will double. By then, Pakistan will become dependent on foreign sources. The available options are Central-West Asia, the Persian Gulf and Russia, provided pipelines are constructed and/or LNG terminals become operational.

Reviewing the aforementioned supply-demand linear configurations, the economy seems to be in the first phase of energy insecurity, characterized by “demand shock.” It is still a long way from seeing its first “supply shock” — at worst an energy crisis — though it is facing an electrical power crisis. In any case, the economy carries an energy insecurity baggage: An “aggregate supply disruption.” It implies a supply cut-off or temporary discontinuity of supply that can result from war, acts of terrorism, political instability, or natural disaster. All these variables are quite frequent happenings in Pakistan, like insurgency in Baluchistan, militancy across the country, the seasonal torrential floods and the recent devastating earthquake. The inefficient supply cycle is critical.

Lackadaisical energy structure and governance is also important. The demand shock partly results from the poor rate of energy production and the sluggish supply line. Energy security has been approached piecemeal without any direction. Under the aegis of the state, national monopolies were consolidated and private corporations marginalized, leaving no margin, or at most only a small one, for private entrepreneurship. Investment has been inexorably ill-advised. The economic nationalism and state entrepreneurship of the socialist, authoritarian Prime Minister Zulfiqar Ali Bhutto for instance has created a straightjacket energy economy.

Even on regional turf, succeeding governments since the early 1990s have failed to contract energy supplies, particularly gas, by building trans-regional pipelines from the West (Iran and Qatar) and Central Asia. They have instead subjected pipeline development projects to geopolitical ambitions and anomalies — such as the offensive-in-defensive security approach towards Afghanistan and India, and China versus Western foreign policy. Its failure to vitalize energy security trans-regional linkages shows Pakistan’s strategic spin masters’ incongruous approach: failing abysmally to adapt to a new era, following the “end of history,” orienting geopolitics from confrontation to cooperation.

Suggestive of President Pervez Musharraf’s energy security dictum on “war footing”, the government has chalked out an ambitious master plan — mixing hope and hype — outlining the contours and contents of energy security maximization.

The Roadmap for Energy Security

"The Gwadar sea port: With its resiliently growing economy, the demand for energy in Pakistan has surged annually by 10%…
"The Gwadar sea port: With its resiliently growing economy, the demand for energy in Pakistan has surged annually by 10% corresponding to an average 7% GDP growth since 2000. In 2006, Pakistan was the world’s 30th largest energy consumer. Demand is projected to grow by 3.5 times greater from the current level of consumption (56-Mtoe (million tons of oil equivalent)) to 198-Mtoe by 2030."
Under the “Energy Security Plan 2005-2030,” a roadmap for energy security was formulated, conceptualizing broad-based structural, legal and financial measures. The state’s role has been oriented toward management, supervision and regulation. Authority of the Ministry of Petroleum and Natural Resources has been restructured; the Pakistan Alternative Energy Board (PAEB) and Oil and Gas Development Authority (OGRA) constituted the new sector managers. Energy improvisation options, objectives and targets were reassessed and revised. Diversified, sustainable, reasonable, cost-effective and continuous energy input became the vision. To avoid supply shock, energy output is projected from about 79 Mtoe by 2010 to around 361-Mtoe by 2030.

An ambitious free market reform and privatization program has been implemented and is gradually beginning to dismantle the straightjacket. Until 1999, the state assumed commercial risks and many contingent liabilities in the form of business subsidies and price concessions. In 2003, the World Bank reported that measures like “competition in imports, fortnightly adjustment of prices consistent with international markets and significant progress in the privatization program” had been carried out. Domestic petroleum prices were adjusted to international market prices.

A “natural gas allocation and management policy”, the first of its kind, was drafted to ensure efficient and optimum use of natural gas and effective demand management. Efficiency incentives have been introduced to reduce energy losses and increase the energy-to-GDP utilization ratio.

To expand conventional energy, there is a focus on integrating up- and down-stream, on- and off-shore exploration and development of the 827,268 square kilometres of sedimentary area. Setting up coastal refineries, the building oil cities — or petroleum islands — are planned as part of the gasoline expansion agenda. By 2025, the government projects to add up to 1,450 Mcf gas output annually and plans to increase oil output 100,000 bbl a day by 2010. This will help reduce oil imports by 4.5 Mt per year, saving approximately US$650 million per year. The government projects investments of about US$16 billion in the sector. One major project is the development of a petrochemical complex at Gwadar, comprising refineries, depots and logistical infrastructure. China has invested US$12.5 billion in the project.

The government’s LNG Policy 2006 stipulates increased gas supplies by importing liquefied natural gas, which will require the establishment of terminals. Two are planned by 2011 and 2013. Qatar is a potential LNG supplier. An international consortium of DANA Gas (UAE), Single Buoy Moorings (SBM) and Granada Group (USA) has signed up for building a terminal at Port Qasim parallel to Qatar’s Ras Laffan terminal. Its capacity is pegged at 3.5 Mt annually.

Liquefied petroleum gas (LPG) is another energy diversification option. The government is planning to uplift LPG production from the current 1,600 Mt per day, and is encouraging its use as a domestic and automobile gas. Its expansion is expected to help increase per capita energy consumption.

The government is stoking a compressed natural gas (CNG) boom as well — which made up 1.2% of the gas share in the energy mix in 2004; it is expected to reach 6.3% by 2020. In August 2006, about 990 stations were funnelling CNG into one million vehicles, rendering Pakistan the world’s third largest CNG guzzler after Argentina and Brazil.

The government is manoeuvring to diversify energy resources by improvising alternatives to gasoline. These are renewable sources such as wind, bio-fuels, solar and nuclear power, liquefied coal and other alternatives. In the long run, renewable energy is pegged at 10% of the mix, and the nuclear power target is set at 8,800 MW.

The Alternative Energy Development Board (AEDB) is institutionalized to realize the “Manhattan” pursuit of alternatives to fossil fuels by engaging venture capitalists — but in Pakistan venture capitalism rarely flourishes given the political uncertainty, legal and institutional black hole, as well as the terrorism risk premium. To marshal the next generation of energy resources, it is seeking partnership with the Asian Development Bank, the World Bank, the US, and Australia. Federal Minister for Petroleum Amanullah Khan Jadoon stated that 48 companies are engaged in renewable energy generation, involving an investment of about US$8 billion.

The energy security vision has an outward perspective, too. Economic managers look to the Eurasian geological, geopolitical landscape, conceptualizing collective energy security and lobbying for energy transmission axes from south to north, east to west. These are the Iran-Pakistan-India (IPI), Gulf-South Asian (Qatar-Pakistan), and Turkmenistan-Afghanistan-Pakistan (TAP) gas pipelines, including the TAP’s Central-South Asian oil pipeline. All of these projects are either facing a quandary of geopolitics or are lost in a geopolitical quagmire. In June 2006, the optimism echoed in Pakistani government circles regarding these projects, projecting IPI and TAP pipelines to be flattened by 2015 and 2018-20 respectively.

Retrospectively, Pakistan is revitalizing a geoeconomic, geopolitical agreement with China to maximize its energy security. The Gwadar deep-sea port realized with Chinese capital, erecting an outreach staging point for the Chinese navy, sees Pakistan as a geographic bridgehead of the Eurasian “heartland” and an anchor in one of the five “pearls” of the world’s oceans of “rimland.” The port has rendered Pakistan a hub of a transcontinental energy transit and trade — both overseas and overland. Beijing is proposing the 21st Century energy “Silk Route,” the Gwadar-Xinjiang pipeline, along the existing Himalayan Silk Road. Simultaneously, the Shanghai Cooperation Organization’s push for a trans-Eurasian “network of energy,” Asian Development Bank’s proposal for the trans-Asian pipeline, and the Sino-Indian proposed gas cartel, all leave the country in a favourable position as a geographic crux of any future energy axis. This leaves Pakistan prone to Western (primarily US) opposition to any axis of energy detrimental to Western interests in Eurasia. The US has been opposed to building the IPI, any OPEC-like energy consumer cartel involving India, China, Iran and Russia, because with such projects comes a grand geopolitical prize — energy, wealth and power. Whatever trans-regional realizations there will be, set aside the geopolitical and geo-strategic gains and the country’s energy economy will receive a buck out of the boost in a global energy economy.

Conclusion: Achieving Maximum Energy Security

"Set aside the geopolitical and geo-strategic gains Pakistan's energy economy will receive a buck out of the burst in a…
"Set aside the geopolitical and geo-strategic gains Pakistan's energy economy will receive a buck out of the burst in a global energy economy"
Pakistan’s energy supply-demand difference has widened over the past seven years, culminating into a “demand shock.” The difference stands at a ratio of 80:20 respectively, with three-fourths of total demand met through domestic resources. Given the element of aggregate supply disruption, an energy supply shock is looming on the horizon. Imports will account for the deficit. Import options are numerous, as Pakistan straddles the Eurasian energy El Dorado – like imports of CNG from Qatar, gasoline from Iran via roads and pipelines, from Central Asia and Russia by roads and pipelines, and oil from Saudi Arabia and the Gulf region. It is safe to conclude here that the energy “crisis” in Pakistan is yet too far off and even too early to presume. Given a long history of “cyclical” growth pattern, the economy can dip anytime, followed by a flattening of energy consumption.

Anticipating a robust economic growth rate, the government’s energy consumption forecasts range between 168-361 Mtoe in the long run. Many analysts describe a mere “wish-list.” Cost estimates for improvising the projected supplies are staggering: between US$37-40 billion, suggesting an annual investment of about US$1.5 billion. This is overly optimistic, given the country’s low rate of domestic savings. The way out is foreign direct investment, aid and borrowings. All these are unlikely due to the country’s political volatility, competitive disadvantage, economic uncertainty regarding investment payoffs, and dysfunctional legal regime.

The pursuit of energy security is not a passing concern, rationalized on the pursuit of potential for economic growth, wealth and power — because a sustained energy supply sustains a vibrant economy. This comes from a well-guided, unrelenting pursuit of real conditions and scope for a diversified energy economy.

The roadmap, designed to accomplish maximum energy security, anticipates a diversified energy. It promises more in terms of amplifying the conventional resource base, but augurs less well for development of the next generation of energy resources. The next structural shift is unlikely to be from fossil fuels to renewable energy sources and is more likely to be from gas to coal. At its best, renewable energy will remain marginal, with wind and solar energy providing energy to areas located far off the national supply grid. The ultimate alternative energy source could be nuclear, with Pakistan having the structure for energy generation through fission.

Given its political, technological, and economic predicament, I recommend A Decalogue: Nine Steps Forward regarding Pakistan’s pursuit of energy security:

Step.1: Keep on Searching. The Earth keeps in reserve, beneath and above the crust, an almost infinite reservoir of energy resources. The rub: untenable energy security comes out of a constant pursuit, because the more we look for energy resources, the more we find. Pakistan should keep floating contracts to “wildcatters” for exploring and extracting fuels from fossils and brewing ideas with “venture capitalists” to harness alternatives through the application of innovative technology and cutting edge research techniques.

Step.2: Promoting an Indirect Search. This is led by the business for profit principle. By raising payoffs, international companies, which are on the hunt for making wealth out of energy resources, will venture into the underdeveloped sector. Investment and innovation of international energy majors will add value and valour to the pursuit. Thus, Pakistan should privatize and liberalize the sector and deregulate national oil equity holdings to a manageable extent. A strong private sector means robust search, more active exploration and optimal development.

Step.3: Perfecting Rule of Law. Markets do not work in a legal vacuum. A sound legal system builds private sector confidence and ensures considerable returns on investment, thus providing a level playing field for competition and the containment of vested interests. As Phil Ginsberg propounds, the rule of law, transparency and good corporate governance are prerequisites for investment. Legal frameworks and institutional mechanisms, such as arbitration, dispute settlement, business insurance, negotiation and contractual sanctity, all smooth out complications encouraging foreign investors to seek business. The government needs to minimize legal and structural hiccups in starting and closing business, and standardize issuing tenders by making it open to competition rather than taking place in ministerial chambers. The government should employ creative business models and public policies conducive to its energy security vision, like giving commercial guarantees in exceptional cases but in a transparent manner. A perfect rule of law in Pakistan, that is, a statesmen’s housemaid, will have a paramount impact on the pursuit.

Step.4: Political Stability. One cannot discredit political stability. As converged politics and economy may be, so are political stability and energy development. Constitution is the memento of political stability. A stable polity can best ensure private business and profit. On this front Pakistan has a lot to do. The polity is in a dismal state of governance. Regime changes are arbitrary through military interventions, interim measures, or executive decrees, but not elections—the bullet-and-buck, not the ballot principle, rules in Pakistan. It needs to institutionalize governments and policymaking and execution, providing safeguards for governments to complete tenures with succeeding governments keeping track with principal policies. The principle of continuation -- not aberration -- is necessary. Politics needs to be cleansed of militancy and fanaticism. The federation needs to be stabilized, which is faltering in the face of ethno-nationalism, through equal resource distribution. Baluchistan, the natural gas basket of Pakistan, should be pacified and recovered from the resource curse. But this is unlikely unless an adequate share in the natural wealth is materialized, effectively ending the sense of deprivation and ensuing structural development. Political tranquillity is the harbinger of sound energy economy. Without it, the energy security vision is void and the pursuit of it is merely dipping a toe in the water. Attaining political stability is all about reducing political premium.

Step.5: Pushing the Demand Up. The best defence against insecurity is insecurity itself. The economic managers should push economic growth as much as possible, which in return will generate greater energy demand. As critical as the demand shock becomes, the supply improvisation gets robust. As a result, the previously non-conventional sources become economically feasible. As proportionate is the scale of demand to the breadth of GDP growth, so is the scope of investment in diversification of energy supply, development of new technologies and research and development of energy resources An energy supply restraint to a burgeoning economy implies a rigorous pursuit of alternatives. Pakistan can sustain the waves of a resilient economy through broad structural changes and reforms, adapting its economic governance to market variables and open and free trade regimes. This in turn will keep the energy boom-and-bust cycle intact to the best, leaping the energy economy forward into the next level of growth and development, generating capacity for energy improvisation.

Step.6: Managing Consumption and Supply. Energy wasted is the energy lost. “The largest source of immediately available ‘new energy’ is the energy we waste,” writes Samuel W. Bodman, US Secretary of Energy, in Newsweek in December 2006.

On the consumption side, energy efficiency is the best policy that improves energy utilization in production of a unit of GDP. Pakistan should reduce the volume of unproductive energy. The government needs to execute effective energy management policies and measures for boosting utilization. This requires frequent check and chase policies, forcing individuals and industries by law to adopt energy conservation technologies and techniques, making it more productive. This is called “energy elasticity”, which represents an energy-economic growth ratio. Put it this way: How many units of energy are consumed in producing a unit of GDP? Pakistan needs to improve this ratio.

On the supply front, this means reduction in losses during extraction and refining, transmission and distribution. This will help energy security. Pakistan already has the base, an expanded transmission network, which needs improvement, a constant maintenance and sound operational techniques.

Energy security in effect is about a positive change in human behavior, living standards and business modalities. Energy is as much about making lives comfortable and healthy as much as about making money. So, environmental safety measures must be applied so as to reduce CO2 emissions. The government should also take effective measures against the wasteful use of energy and improve conservation, increasing the utility of energy as much as supply. This works under the Joseph Schumpeter’s “creative destruction” principle where innovations destroy obsolete technologies and techniques.

Step.7: Making It Collective. Mutualism is a best safeguard against total loss. This step is premised on mutual loss and mutual gain. It is basically a cohabitation of energy insecurity—together we overcome and sustain. The Energy Charter Treaty of 1994 is the way forward to forging a collective quest towards energy security. Pakistan became an observer to the charter in 2006. The charter does hold legal credence in Pakistan. Still, regionalism serves best fruition of energy security. Pakistan should also get real about trans-regional pipelines either as a transit-state, consumer, or both. Construction of tow pipelines, either of the proposed options, will help Pakistan streamline outlandish energy resources. It will never attain self-sufficiency, which is a chimera anyhow, so a pipeline will guarantee sufficient energy over a long period, especially gas to the gas-intensive energy economy. It should now re-orient its pipeline diplomacy to be more accommodative and make its geopolitics more adaptive to cushion the supply shocks well in time.

Step.8: Nuclear Energy. Nuclear fission is quickly becoming a commercially and technologically viable source of generating energy. For Pakistan, which is facing a deadlock over the construction of mega hydel projects, nuclear energy is the best alternative to produce requisite power. In doing so, it should hold its nuclear program accountable to the International Atomic Energy Agency (IAEA), become party to the Non-Proliferation Treaty (NPT) and take reasonable measures for storing waste material safely, particularly in permanent geologic repositories, rather than dumping it in the open air. It should also act responsibly by subjecting its nuclear program to IAEA safeguards and the nuclear weapons and technology exporting group’s set of rules. Peaceful, civilian use of energy is getting credence as a viable source of energy.

Step.9: Building Strategic Reserves. Finally there should be a contingency plan, too. As a safety valve against emergencies or energy crisis, strategic reserves should be developed, conserving resources sufficient to cater at least one month’s demand.