Understanding the gas crunch | Pakistan Today

Understanding the gas crunch

  • Current crisis is a manifestation of decades of neglect

Pakistan is in the grip of a gas crisis. A shortage of natural gas has meant that millions of people do not have gas to cook, or hot water to bathe in. There are mile long queues at Compressed Natural Gas (CNG) stations, on which most of our public transport vehicles run. So half of Karachi’s buses are off the roads creating chaos in the public transport system. There is even a report that a rickshaw driver set fire to his vehicle in protest. He said he’d not been able to feed his family for a week because he could not get CNG to run his rickshaw.
What is going on? What’s behind this sudden and acute shortage of natural gas? Well, as they say, it’s complicated.
The proximate cause is that winter has ramped up demand for gas, and supply has not kept pace. But that is not the whole story. First, let’s be clear that Pakistan has not, overnight, run out of gas. The gas is there. But we cannot produce it. To understand why, you first need to know some basics of oil and gas production: Oil and gas occur naturally deep in the ground in what are called fields or reservoirs. There are two basic types of reservoirs. One type has mainly gas in it. In Pakistan the Sui and Kandhkot fields are of this type. The other type contains both oil and gas. The Nashpa and Adhi fields are examples of this type.
In reservoirs which contain both oil and gas, the fluid coming out of the ground is processed in a plant known as a gas oil separation plant, which separates the gas from the oil. The gas is then delivered by pipeline to the gas distribution companies, which supply it to homes and businesses. The oil is sent to oil refineries by truck or pipeline, which convert it to petrol, furnace oil (a type of fuel used in power stations), diesel and the likes.
Pakistan produces gas from both types of reservoirs. Much of it comes from the mainly gas type and the remainder from the oil and gas type. The gas reservoirs, such as Sui, are continuing to supply gas normally. The present gas crisis is related to the second type of reservoirs – the ones that produce both oil and gas. And that’s because the operators of these fields, companies such as Pakistan Petroleum Limited (PPL), have of late not been able to sell all the oil they produce. So they have cut back on oil production. And when they cut back on oil, the result is an automatic reduction in gas production, because both are produced together. And hence the present gas shortage.
Why are the producing companies such as PPL not able to sell all the oil they produce? Because the refineries, to whom they sell the oil have cut back on their production, because they, in turn, are not able to sell their furnace oil to power plants. Why? Because escalating indebtedness in the energy sector, known as circular debt, has left the power plants with no money to buy the furnace oil. And since the refineries are also operating at well below capacity, some have said that they may have to shut down if the situation continues. So to add to the gas crisis we may well soon have a fuel crisis.

The petroleum division is run by career civil service officers who have zero knowledge or experience of the oil and gas industry

But the story is still not complete. In recent years Pakistan has invested in facilities to import Liquified Natural Gas (LNG) from abroad to address the shortage of domestic supply. This was a good decision. But, paradoxically, because of poor implementation, it has created problems. Largely because not much has been done about integrating LNG supplies with the existing national pipeline network. Not to mention putting in place the necessary distribution and control system to optimise availability for all users. The absurd consequence of this poor integration is that on some days output from domestic fields is actually reduced to accommodate imported LNG into the system.
It should be clear from the above that managing Pakistan’s highly interconnected petroleum ecosystem is not a simple job. The prime minister, Imran Khan, faced with a crisis like situation has blamed the gas distribution companies for the gas shortage and ordered an enquiry into their managements. He’s clearly been misinformed. The gas distribution companies can only supply the gas they get. If they don’t get it, they can’t be held responsible for not supplying it.
All the main protagonists of the industry, oil and gas producers (such as PPL), distribution companies (such as Sui Gas), oil refineries, and power stations, are doing what they should be doing and cannot be reproached for the present crisis. The failure is of planning and regulation. This task falls squarely on the shoulders of the petroleum ministry — or the petroleum division as it’s now called.
And here we really have a problem. Unfortunately, the petroleum division is run by career civil service officers who have zero knowledge or experience of the oil and gas industry. It is unrealistic to expect them to manage such a specialided, highly integrated ecosystem. The present crisis is proof of their abject failure.
But in some sense they also cannot be blamed. They are only doing, or trying to do, the job that they’ve been tasked to do. The fault is in the system. It puts singularly unqualified people in positions which they are woefully unprepared to occupy.
The challenge for the prime minister is to understand this basic issue. The solution, surprisingly, is not difficult. What he needs to do is to cut through the red tape and replace the top bureaucrats at the petroleum division with qualified industry professionals who have worked in the oil and gas industry, and who have a solid understanding of this highly technical business.
Finally, it is important to appreciate that the current crisis is a manifestation of decades of neglect in the search for new oil and gas in Pakistan. For much of Pakistan’s history Exploration and Producing (E&P) companies made little or no effort to search for new resources. PPL, for example, relied on its main asset, Sui, discovered by the British in 1952, thinking that it would last forever.
The harsh reality is that our gas fields such as Sui, Marri and Kandhkot are reaching the end of their producing lives. The gas crisis we see today will only get worse whenever the system is stressed. So It is absolutely critical that activity in E&P is ramped up sharply. This will involve radical improvement in the regulatory regime and culture. It will necessitate enticing back overseas Pakistani E&P professionals, many of whom work in the Gulf region, and giving them the responsibility to revamp the sector.
The need to bring back overseas professionals cannot be overstated. The lack of activity in the E&P sector in Pakistan over the past decades has meant that we’ve not been able to develop local talent who can understand and address the challenges, and are familiar with the leading edge technology needed in today’s world to find new oil and gas resources.
There are more, possibly many more, large oil and gas fields out there. Let’s find them. We will be much better off than relying on imported, expensive and unreliable LNG.

Nadeem M Qureshi

Nadeem M Qureshi is Chairman of Mustaqbil Pakistan. He has served on the Board of Pakistan Petroleum Limited, and has degrees from MIT and the Harvard Business School.