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The News

Published Date: Oct 24, 2013

IP project under existing GSPA termed unviable

The
Iran-Pakistan (IP) gas line project under the existing gas sale and
purchase agreement (GSPA) would not serve Pakistan, rather electricity
generation on the said gas would incur additional cost to the country,
stated the Sustainable Development Policy Institute (SDPI).

In
its report on ‘Rethinking Pakistan’s Energy Equation: Iran-Pakistan gas
pipeline’ launched on Wednesday, the Pakistan’s eminent think-tank said
this project can be very beneficial if Pakistan manages to sign gas
price deal on flat rate as done in Turkmenistan-Iran gas price deal.

This
will be a death sentence for Pakistan’s economy if the gas is imported
from Iran under IP gas line project under the existing gas sales price –
which is linked with the Japan Crude Cocktail price.

The
report authored by Arashad H Abbasi, eminent energy expert, argues Iran
is importing gas at the price of $4/MMBtu from Turkmenistan and it is
assumed that this price has not been linked with crude oil.

The
report mentions that Iran, while importing gas at such a nominal price,
is exporting gas at $14/MMBtu, which is subject to periodic revisions
in accordance with the prevailing market conditions.

The
Pak-Iran sovereign agreement stipulates construction of Pakistan’s side
of the pipeline by December 2014. The latter will be liable to heavy
daily penalties if failed – which can run into millions of dollars per
day. Iran has already made the investment and it has a legitimate
expectation of return. If the Pakistani government is serious about this
project, it must renegotiate the price in line with the GSPA.

Iran
had also signed memorandum of understandings with United Arab Emirates,
Oman, Bahrain, Kuwait and Syria. Yet as of 2013, none of these
memorandums culminated in a General Sales Price Agreement (GSPA). Other
than political misunderstandings, the prime cause of breakdown in
natural gas negotiations was pricing disputes. For example, in its
contract with UAE, a pipeline was constructed in 2008, but the countries
had disagreements on pricing.

Abbasi said historically
the pipeline gas imports by European countries and LNG imports by
countries in Far East have been linked to oil products. However, the gas
prices have been decoupled gradually from oil prices in current context
of high oil prices and increased supply of gas.

This
enhanced supply of gas is principally due to dramatic increase in
development of unconventional resources. This decoupling of oil and gas
prices have resulted in the price ratio of a barrel of crude oil to a
MMBtu of natural gas rising to over 25:1 on a sustained basis well in
excess of 6:1 the ratio based on pricing energy content at parity. The
report also mentions the transformed energy landscape across the world
has also significantly influenced the international gas markets,
substantially bringing down gas market prices.

The
international statistics of gas prices from 2007 to 2011 identify that
the economic bubble had subsided and the gas prices had fallen
significantly all of three hubs as by the end of 2012, the Henry hub
prices of gas was dropped to $2.76/MMBtu and $9.46/MMBtu in case of UK
NBP.

The LNG import price after incurring the shipping
and regasification cost (3 percent for transportation, 20 percent for
liquefaction and 30 percent for re gasification) for year 2012 was also
around $4.15/MMBtu, which identifies the price of IP gas is even
costlier than the LNG import price.

The reports said the
major driver behind IP gas agreement was high cost of electricity
generation from power plants using furnace oil and it was considered
that importing gas under IP will be the only penance for endemic energy
crisis by reliving the import bill of Pakistan. The annual savings were
estimated to be $2.44 billion per annum. This cost of electricity
generation is based on the cost of gas provided to thermal power plants
of Wapda and KESC at the rate of Rs488.23 per MMbtu.

In
one year before the commencement of IP, the report said the improvement
of thermal efficiency is indispensable for reducing the power shortfall
in Pakistan. In this regard, Pakistan should learn from Iranian
experience, which being the leader in natural gas reserves is converting
its open cycle power plants into combined cycle power plants for
optimising the use of gas and cost of electricity generation.

Pakistan
with depleting gas reserve and suffering from endemic gas shortfall
urgently needs to improve the efficiency of its power plants. The
increase in efficiency will lead to more production of electricity as in
the baseline with same quantity of gas, which will also reduce overall
CO2 emissions.