Back in 2013, China and Pakistan officially launched China-Pakistan Economic Corridor (CPEC), a partnership between the two countries that focuses on economic cooperation, trade, and infrastructure. CPEC was hailed as a “game changer” for Pakistan’s economy, with most investments targeting the power sector in a bid to address the country’s surging electricity demand. Under CPEC, China pumped $62 billion into the Pakistan economy, with nearly $35 billion funding 21 power projects, most of them coal-fired, with a capacity to generate 6,000 MW to Pakistan’s national grid. According to the Economic Survey (2023-24), Pakistan’s power production capacity stands at 42,131 MW – almost double its domestic electricity demand.
Unfortunately, these projects have burdened Pakistan with huge debt thanks to exorbitant fees paid to Chinese independent power producers (IPPs) by the Pakistan government. At the heart of the matter are the high “capacity payments” mandated by Power Purchase Agreements (PPAs), which obligate the Pakistan government to pay IPPs regardless of electricity consumption or even production. Many Chinese IPPs reportedly enjoy 27%-34% returns on equity guaranteed by the government, far exceeding the 1994 policy’s 15-18 percent rate. Currently, the Pakistan government pays more in capacity payments to the Sahiwal coal power plant than it paid to all of the IPPs combined in 2002..
CPEC power projects have burdened Pakistan with unsustainable loans and high electricity costs. Yet, Pakistan is the only South Asian country facing chronic power shortages, with load-shedding rampant even in cities like Karachi. According to AidData, Pakistan’s debt exposure to Beijing for the period from 2000-2021 clocked in at $67.2 billion, with CPEC having added almost $26 billion to Pakistan’s government debt. Yet, the repeated calls by Islamabad to Beijing to restructure its $15 billion energy debt have gone unheeded.
Thankfully, Pakistan might be able to cut its energy costs–if it can get its act together. Last year, a long exploration effort led to the reportedly massive discovery of oil and gas reserves in Pakistan’s territorial waters, a cache so large that it is said it could change the economic trajectory of the beleaguered country.
According to DawnNewsTV, the three-year survey was undertaken to verify the presence of the oil and gas reserves. “If this is a gas reserve, it can replace LNG imports and if these are oil reserves, we can substitute imported oil,’’ former Ogra (Oil and Gas Regulatory Authority) member Muhammad Arif told DawnTv.
However, Arif has cautioned that it would take years before the country could be able to exploit its newfound fossil fuel resources, adding that exploration alone required a hefty investment of around $5 billion and it might take four to five years to extract reserves from an offshore location.
Pakistan covers 29% of gas, 85% of oil, 50% of liquefied petroleum gas (LPG), and 20% of coal requirements through imports, according to the Economic Times. Pakistan’s total energy import bill in 2023 clocked in at $17.5 billion, a figure projected to rise to $31 billion in seven years, as per an Express Tribune report. The new discovery is no doubt a big boon for the struggling economy.
Since 2021, Pakistan has been hit with mounting debt and skyrocketing inflation, with inflation hitting nearly 30%. Meanwhile, the economy only expanded 2.4% in 2023, missing the 3.5% target. This has forced the country to rely heavily on foreign aid, which is often elusive. In January this year, Pakistan sought $30 billion for gas production to cut its fuel import bill.
According to Pakistan’s Energy Minister Mohammad Ali, Pakistan has 235 trillion cubic feet (tcf) of gas reserves, and an investment of $25 billion to $30 billion would be enough to extract 10% of those reserves over the next decade to reverse the current declining gas production and replace the import of energy.
The persistently high inflation could push Pakistan over the edge, “There is no precedent in Pakistan’s history of such a long and intense spell of inflation gripping the country,” columnist Khurram Husain has written in Dawn.
So why is no one rushing to Pakistan to drill?
Shell Plc. (NYSE:SHEL)announced it was selling its Pakistan business stake to Saudi Aramco in2023, and an auction for 18 oil and gas blocks at the same time last year got a muted response from international bidders, at best. No international companies even bid on 15 of the blocks, according to The Nation. In July, the country’s Petroleum Minister, Musadik Malik, told a parliamentary committee that no international companies were interested in offshore oil and gas exploration in Pakistan ,and those in the country largely had the exit door in view.
It comes down to security, and risk versus reward with Malik explaining to the committee that the cost of security is a major deal-breaker because “in areas where companies search for oil and gas, they have to spend a significant amount to maintain security for their employees and assets”. And security is provided by Pakistan, which has not been up to the task.
In March 2024, five Chinese engineers were killed in a suicide attack in Pakistan’s northest, when a vehicle rigged with explosives rammed into a bus transporting staff from Islamabad to the giant Dasu dam project in the Khyber Pakhtunkhwa province. The project is part of the $62-billion China-Pakistan Economic Corridor (CPEC). This incident sparked a series of temporary shut-downs across other projects, as well.
Earlier that same month, insurgents attacked Chinese assets in Pakistan’s southwest, storming the Gwadar Port Authority complex, which is run by China. The attacks were perpetrated by the Balochistan Liberation Army (BLA), separatists fighting for an independent Balochistan, as reported by the Lowy Institute.
Essentially, what this means is that it will be China or bust for Pakistan, as state-owned or state-controlled Chinese explorers have a vastly different appetite for risk. And these massive reserves are not likely to get out of the ground without Aramco showing more desire or the Chinese stepping in, for which discussions are already underway, according to Malik.
In the meantime, Iran is said to be smuggling a billion dollars in fuel into Pakistan every year, as the country’s oil and gas crisis emboldens the black market trade.
Source: By Alex Kimani from Oilprice.com