Oil refineries in the country would reduce their production in case power plants do not lift the restriction on furnace oil, which is an expensive fuel compared to local or imported liquefied natural gas (LNG).
Last year in winters, the oil refineries had cut down their production and had threatened to shut down their plants after power producers were not allowed to purchase furnace oil.
Following a drop in the production capacity of the refineries, the oil and gas producers were left with no option but to shut down some fields, which resulted in a gas crisis in the country. Heads of two gas utilities were also removed from their posts after last year’s gas crisis. As a result, the government directed the refineries to export furnace oil and set up conversion plants.
However, officials working in the oil industry maintained that furnace oil prices in the international market were lower compared to the prices of locally produced furnace oil, adding that its export would be impossible due to high rates.
They further said that setting up of conversion plants was an expensive process which would take around three to four years to become fully operational.
“We have decided to take less LNG supplies for power plants and will avoid running the plants on furnace oil in the upcoming winter season,” Power Division Secretary Irfan Ali had informed a sub-committee of the Public Accounts Committee (PAC) on Tuesday. The secretary informed that LNG-based power plants could not be operated on a continuous basis.
According to oil industry officials, the stock of furnace oil would start piling up and a crisis situation could emerge similar to what was witnessed last year. They said that power producers have been giving wrong projections of furnace oil and gas demand, thus causing many problems for the entire oil and gas industry.
Pakistan State Oil (PSO) had signed agreements with Qatar and commodity trading company Gunvor for the supply of 500 million cubic feet of LNG per day (mmcfd). In addition, Pakistan LNG Limited had also signed agreements with Italy’s Eni and Gunvor for the supply of 200 mmcfd.
Though, the power sector has been consuming up to 800 mmcfd of LNG but it is expected that consumption would drop to 100 mmfcd during peak winter season.
It merits mention here that these LNG supply agreements are based on a take or pay basis. In case, the power sector fails to utilise available gas, then the government could divert supply to the domestic sector for which it would pay subsidy amounting to billions of rupees.
Meanwhile, the Power Division secretary informed the committee that Rs812 billion worth of circular debt had been parked in Power Holding Private Limited to clear the debt. He further said that out of the total amount, around Rs300 billion worth of subsidy claims were disputed.
He also apprised the committee of the reasons behind the accumulation of circular debt, including transmission and distribution losses, less recovery of electricity bills, lack of subsidy allocation in budget and delay in application of tariffs determined by the National Electric Power Regulatory Authority (Nepra).
Moreover, the secretary claimed that Rs35 to 40 billion was being added to the stock of circular debt every month in 2018 but the amount has been brought down to Rs20 billion. “This amount would be reduced to zero by December 2020,” he added.
Referring to the renewable energy policy, Ali said that the Power Division was working on formulating a policy and a draft in this connection would be submitted for approval to the Council of Common Interests (CCI) in the next two months.
“Under the new policy, competitive bidding would be ensured to bring down the tariff to 2-2.5 cents per unit,” the secretary said.