Pakistan's Energy Options: Domestic Shale Gas & Iran-Pakistan Gas Pipeline

[VCheng]

............but if US can afford natural gas for such a low price.... why not Pakistan in future ?

Because the drop that you describe is due to free market economics at work, a mechanism that will not be allowed to operate in Pakistan by design.

 

[RiazHaq]

I am basing my estimates on the basis of international energy cartels ensuring that the current pricing for Pakistan energy sources remains high enough to ensure their profitability given their collaboration with the political structures in place within the country.

Let's talk reality.

Gas companies in Pakistan are doing quite well charging retail rates in a range from about $2-10 per mmBTU for domestically produced gas....less than the $12 per mmBTU for Iranian gas at wholesale.

DOMESTIC CONSUMERS: The minimum charges for domestic consumers have also been increased by Rs17.34 per MMBTU (million British Thermal Unit) per month. The first slab of domestic consumers (using 100 cubic meters per month) will now be charged at Rs107.87 per unit, up by Rs12.87 per unit. For the second slab (using 100-300 cubic meters per month) it will go up to Rs215.74 per unit from Rs190 per unit, up by Rs25.74 per unit.

A substantial increase has been allowed for the third domestic slab (of over 300-500 cubic meters per month and the new rate will be Rs908.39 per unit over the existing rate of Rs800 per MMBTU. Domestic consumers using more than 500 cubic meters per month will be charged at Rs1,142.75 per MMBTU, up by Rs136 per unit from the existing rate of Rs1006.

COMMERCIAL RATES: Commercial consumers like cafes, bakeries, milk shops, tea stalls, canteens, ice factories, barber shops, laundries, entertainment places including cinemas and clubs, private offices and clinics would now be charged at Rs526.59 per MMBTU, up by about Rs63 per unit. Minimum charges in this category have been increased by Rs297 per month to Rs2,485.88.

INDUSTRIAL RATES: The price for industrial consumers has been increased by Rs52 per MMBTU to Rs434.18 per unit.

The minimum charge for industrial consumers has gone up by Rs1,747 per month to Rs14,640 from Rs12,893.

FERTILISER: While rates for feedstock have remained unchanged, the price of gas used by fertiliser plants for fuel or electricity generation has been increased by Rs52 per MMBTU to Rs434.

POWER STATIONS: Gas rates for power stations of Wapda and KESC and captive power plants have been increased by Rs54 per MMBTU to Rs447 and while the minimum charge to Rs15,077 per month from Rs13,278 – up by Rs1800 per month.

Likewise, gas rates for independent power producers have been raised by Rs45 per unit to Rs377 per MMBTU.

Gas prices up by 13.5pc | DAWN.COM

@Vcheng

I hardly agree with RiazHaq on his economic anaylsis and exeggarated figures he mentions in most of his articles but one thing has really surprised me to witness the price drop of Natural gas from about 14 dollars to only $1.90 dollars right now.... I remember I used to trade natural gas at 5-6 dollars and used to consider it very safe.... now the down trend is not coming to an end and shockingly reached 1.901 dollars a little while ago. (I am a trader of commodities so know little bit about the prices).

The figures he mentioned could be incorrect as I have no knowledge about shale gas or natural gas or whatever you are discussing with him but if US can afford natural gas for such a low price.... why not Pakistan in future ?

You don't have to agree with me.

All you need to do is check the highly credible sources I cite along with links for every piece of data I share here and on my blog.

Haq's Musings

 

[VCheng]

Let's talk reality...........

Other than the very low limits for the basic tiers, the costs are mostly above $10 (about Rs 1000) per unit, are they not?

 

[RiazHaq]

Other than the very low limits for the basic tiers, the costs are mostly above $10 (about Rs 1000) per unit, are they not?

No, they are not.

The average RETAIL price is in $3-$5 per mmBTU range...look at the industrial customers (Rs. 447 for power producers, Rs. 434 for factories) which the biggest users.

The WHOLESALE price of Iran gas is $12...it'll be higher for retail and industrial consumers.

 

[Jango]

Not meaning to bug in here, but their are reports that the government has stopped finding of that coal project, after lobbying from importing companies and ipp , the government gets some kick backs as well, an the import companies still get their business in a healthy state

 

[VCheng]

Not meaning to bug in here, but their are reports that the government has stopped finding of that coal project, after lobbying from importing companies and ipp , the government gets some kick backs as well, an the import companies still get their business in a healthy state

There has been very little progress with developing coal over the last 25 years, and what you mention is merely another indication that this paralysis will likely continue for one reason or another.

 

[RiazHaq]

Not meaning to bug in here, but their are reports that the government has stopped finding of that coal project, after lobbying from importing companies and ipp , the government gets some kick backs as well, an the import companies still get their business in a healthy state

Let's not believe every conspiracy theory that comes along.

Pakistan needs foreign investment in coal which is difficult to get, particularly from WB and ADB and other IFIs which see coal as an environmental issue. Neither US nor EU want to fund coal projects. Even the Chinese have pulled out.

It's easier to get investment in shale gas because gas burns much cleaner and poses a much lower risk for the environment. Coal gasification is an option but it's not proven yet in large scale production.

 

[niaz]

What's the basis of your claim?

Experience shows that with local production, the price as well as foreign exchange component of almost everything, particularly commodities, is almost always much lower than imports.

In my view gas future price has no relationship with the production cost. US and Chesapeake Energy have the most experience in Shale gas production but as Zachary Shahan writes in his article ’ Shale Gas Production Currently not Profitable ( Feb 2012). At that time Gas was selling at $3.01 per mm BTU versus wellhead price of $4.48.

‘Shale Gas Production Currently NOT Profitable - CleanTechnica

Another article
U.S. shale gas: Less abundance, higher cost
By Arthur E. Berman and Lynn F. Pittinger, indicates well head costs between $7.98 & $4.30 per mm BTU at different production rates after many years of production experience at the Barnett, Fayetteville & Hayneville Shale gas production facilities. As you are probably aware, the longest shale gas production project is at the Barnett Shale deposit in northern Texas.

U.S. shale gas: Less abundance, higher cost | Energy Bulletin

In 2010, nine shale gas exploration projects were launched in Europe (five of those in Poland). In Poland, another country short of gas, cost of production is about $9 per million BTU.

http://climatepolicyinitiative.org/...ale-Gas-Polish-Geological-Inst-P.-Poprova.pdf

In my view, applying US data to other countries is incorrect as conditions for shale gas production can be very different. It could be that Shale layers are located much deeper thus cost a lot more to exploit. Besides, no other oil and gas production technology impacts nature as much as shale gas production. For example it is estimated that to produce one ton of shale gas, a producer needs to inject at least 100 kilograms of sand and 2 tons of water

Another setback for large-scale deployment of shale gas wells is their short lifespan. Shale gas production rate depletes within 5-10 years; to maintain the gas production level a company is forced to continuously drill new wells linking them with gas pipelines

I would go therefore along with a figure of $10 per million BTU for Pakistan. It may even be higher, given the corruption climate of our beloved country. However, I don’t mean to discourage the development of Shale gas. Even if it costs $20 per mm BTU (about the same as imported oil); less we depend upon imported energy the better for Pakistan. Just imagine how many jobs will be created if development of Shale gas is embarked upon.

My purpose of this debate was to highlight the fact that there is no ‘Panacea’ for Pakistan’s energy problems. We need serious efforts to tackle the energy shortage and look at all the possible avenues.

Strong defence needs strong economy. Strong economy can only be achieved thru industrial progress and you can’t have industrial progress if there is 18 hours per day of load shedding. Therefore it is incumbent upon every Pakistani to try to find ways and means of solving Pakistan’s endemic energy problem.

I sincerely thank Hon Riaz Haq to highlight the possibilities of Shale Gas. I was totally ignorant in this field and I have learnt a lot since reading his post.

 

[VCheng]

................the possibilities of Shale Gas. I was totally ignorant in this field and I have learnt a lot since reading his post.

If you are new to shale gas, you may find these articles interesting:

http://web.mit.edu/newsoffice/2012/shale-gas-revolution-report.html

http://www.thestar.com/opinion/editorialopinion/article/1154124--the-shale-gas-revolution

http://www.nytimes.com/2011/11/04/opinion/brooks-the-shale-gas-revolution.html

 

[Jango]

Let's not believe every conspiracy theory that comes along.

Pakistan needs foreign investment in coal which is difficult to get, particularly from WB and ADB and other IFIs which see coal as an environmental issue. Neither US nor EU want to fund coal projects. Even the Chinese have pulled out.

It's easier to get investment in shale gas because gas burns much cleaner and poses a much lower risk for the environment. Coal gasification is an option but it's not proven yet in large scale production.

I highly doubt this is a conspiracy theory. Do you think the companies that gain a lot from imports, ipp, and rental power plants will not try to lobby against the production of local energy , thus hampering the business of aforementioned companies? Bribing some officials might not be a very hard part considering the pervaiz ashraf corruption case.

 

[RiazHaq]

In my view gas future price has no relationship with the production cost. US and Chesapeake Energy have the most experience in Shale gas production but as Zachary Shahan writes in his article ’ Shale Gas Production Currently not Profitable ( Feb 2012). At that time Gas was selling at $3.01 per mm BTU versus wellhead price of $4.48.

‘Shale Gas Production Currently NOT Profitable - CleanTechnica

Another article
U.S. shale gas: Less abundance, higher cost
By Arthur E. Berman and Lynn F. Pittinger, indicates well head costs between $7.98 & $4.30 per mm BTU at different production rates after many years of production experience at the Barnett, Fayetteville & Hayneville Shale gas production facilities. As you are probably aware, the longest shale gas production project is at the Barnett Shale deposit in northern Texas.

U.S. shale gas: Less abundance, higher cost | Energy Bulletin

In 2010, nine shale gas exploration projects were launched in Europe (five of those in Poland). In Poland, another country short of gas, cost of production is about $9 per million BTU.

http://climatepolicyinitiative.org/...ale-Gas-Polish-Geological-Inst-P.-Poprova.pdf

In my view, applying US data to other countries is incorrect as conditions for shale gas production can be very different. It could be that Shale layers are located much deeper thus cost a lot more to exploit. Besides, no other oil and gas production technology impacts nature as much as shale gas production. For example it is estimated that to produce one ton of shale gas, a producer needs to inject at least 100 kilograms of sand and 2 tons of water

Another setback for large-scale deployment of shale gas wells is their short lifespan. Shale gas production rate depletes within 5-10 years; to maintain the gas production level a company is forced to continuously drill new wells linking them with gas pipelines

I would go therefore along with a figure of $10 per million BTU for Pakistan. It may even be higher, given the corruption climate of our beloved country. However, I don’t mean to discourage the development of Shale gas. Even if it costs $20 per mm BTU (about the same as imported oil); less we depend upon imported energy the better for Pakistan. Just imagine how many jobs will be created if development of Shale gas is embarked upon.

My purpose of this debate was to highlight the fact that there is no ‘Panacea’ for Pakistan’s energy problems. We need serious efforts to tackle the energy shortage and look at all the possible avenues.

Strong defence needs strong economy. Strong economy can only be achieved thru industrial progress and you can’t have industrial progress if there is 18 hours per day of load shedding. Therefore it is incumbent upon every Pakistani to try to find ways and means of solving Pakistan’s endemic energy problem.

I sincerely thank Hon Riaz Haq to highlight the possibilities of Shale Gas. I was totally ignorant in this field and I have learnt a lot since reading his post.

Natural gas prices follow the law of supply and demand. As the supply increased, the prices dropped in US.

Unlike the Iran gas price formula of 60% of the price of oil in terms of mmBTUs, free markets simply follow supply and demand unless hampered by a cartel like OPEC.

As to production costs, American experience shows that the more you do it the more experience you have and the lower the cost.

Production cost in Pakistan could be considerably lower using American expertise and Pakistani land and labor.

I'll write a more comprehensive post on it soon.

 

[RiazHaq]

I highly doubt this is a conspiracy theory. Do you think the companies that gain a lot from imports, ipp, and rental power plants will not try to lobby against the production of local energy , thus hampering the business of aforementioned companies? Bribing some officials might not be a very hard part considering the pervaiz ashraf corruption case.

These same players can make plenty of money on coal development too, if they get someone to finance it. So I think the basic issue is still financing and not corruption.

http://www.riazhaq.com/2010/04/abundant-cheap-coal-electricity-for.html

 

[RiazHaq]

Here's a Business Recorder report on Pakistan to renegotiate Iran gas price:

Pakistan will renegotiate gas price with Iran under the (IP) gas pipeline project as the price of Turkmenistan-Afghanistan-Pakistan-India (Tapi) gas is cheaper, sources close to Petroleum Secretary told Business Recorder.

This was disclosed at a meeting of Economic Co-ordination Committee (ECC) of the Cabinet held on April 12, 2012 under the chairmanship of Finance Minister Dr Abdul Hafeez Shaikh.

The IP gas price was $11 per mmcfd while Tapi was estimated at $13 per mmcfd.

However, a week ago in a meeting in the Ministry of Petroleum and Natural Resources it was revealed that Turkmenistan has agreed to reduce the price from 55 percent price parity with international crude price to 45 percent.

In addition, Pakistan would also earn a transit fee from Tapi while India is not party to IP anymore.

Official documents available with Business Recorder reveal that the ECC was informed that matter for signing of Gas Sales Purchase Agreement (GSPA) with regard to TAPI gas pipeline project, during the visit of the Turkmen President on 14th November 2011, was placed before the ECC in its meeting held on 11th November 2011.

However, the ECC decided that, instead of signing GSPA at this stage, a single-page document containing the intention of both the governments of Pakistan and Turkmenistan, may be signed during the visit of the Turkmen President and the draft GSPA be annexed to that one-page document, for subject approval of the government.

The ECC also constituted a committee for drafting the proposed one-page document.

The committee prepared the requisite one-page document (Joint Declaration), which was accordingly signed by both sides on 14th November 2011.

Subsequently, the matter of TAPI GSPA including gas price formula, agreed base price, risk sharing mechanism with regard to transportation cost, transit fee and gas price review mechanism was considered by the ECC in its meeting held on 20th January, 2012.

The ECC constituted a committee headed by the Minister for Water and Power to examine the details concerning price and pricing formula for gas to be imported from Turkmenistan and submit its recommendation to the ECC.

Qamar-led committee in its meeting held on 6th April, 2012 examined the gas price formula, agreed based price, risk sharing mechanism with regard to transportation cost, transit fee and gas price review mechanism and recommended it for approval of the ECC.

Based upon the foregoing, the ECC was requested to approve the draft GSPA for execution by Inter State Gas Systems (Pvt) Ltd with Turkmenistan (Turkmengaz) including gas price formula, agreed to, risk sharing mechanism and gas price review mechanism.

During the ensuing discussion, it was explained that gas to be imported from Turkmenistan will be cheaper than the gas to be imported from Iran.

Resultantly, Pakistan will be able to re-negotiate the gas price with Iran.

On a query, the ECC was informed that penalty clauses in TAPI GSPA are similar to those contained in Iran-Pakistan GSPA, where-under Pakistan will be liable for payment towards cost of gas even if no gas is imported.

These conditions will be effective after construction of pipeline.....

Gas price to be renegotiated with Iran | Business Recorder

 

[RiazHaq]

Here's Economic Times report on $10 per mmBTU TAPI gas price for India--cheaper than the $12 per mmBTU Iran is charging Pakistan in spite of shorter distance:

Natural gas from Turkmenistan would be delivered to India at an estimated price of about $10 per unit, including $3 as transportation charges and transit fee, in the proposed 1,680-km pipeline via Afghanistan and Pakistan, three persons with direct knowledge of the matter said.

Gas would be purchased at about $7 per unit at Turkmenistan but its cost would rise as it transits across two countries before reaching the Punjab border. It would be cheaper than some long-term LNG contracts, government and industry officials said. Gas-starved India pays a spot price of about $16 a unit for liquefied natural gas. Petronet LNG has recently contracted LNG import from Australia's Gorgon project at $15.8 per unit while Gail's 20-year contract with US' Sabine Pass works out to be around $10 per unit.

India likely to pay $10 per unit for TAPI gas - Economic Times