Oil Prices Have Nosedived. Why Aren’t Air Fares Doing The Same?
Is Oil Heading to Fair Price Era?
Hydro or Coal: Diverse Interests
Cheap Energy is the New Cheap Labor
The SAGA of OGDCL
Gadani Power Project: Challenges
Crude Response: Saudi Arabia Strikes Back
Letter From Mumbai: Coal Mining Imbroglio
Local Natural Gas Immediate Solution to Power Crisis
Long Delayed Wapda Hydropower Projects
ERA of Nationalising Energy Assets Coming to an end
TDAP’s ‘Aalishan’ Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Oil Prices Have Nosedived. Why Aren’t Air Fares Doing The Same?
 
Oil prices are down almost 50 per cent from their peak this year, and jet fuel has plunged 33pc since last December. Given energy costs consume almost a third of airline operating expenses, shouldn’t we expect airfares to decline as well? In short, don’t hold your breath.

As one might expect, airfares react more quickly to a rise in the price of a barrel of oil than to a decline. As economists would say, the prices are sticky on the way down. Long-term contracts, a lack of competition and profit maximisation all play a part, and airlines aren’t in any hurry to give up that extra income at a time when seats are already packed for the holidays.

In the UK, there’s some good news. The government said this week that airfares have begun to decrease along with the lower fuel costs. Could the same thing happen on this side of the Atlantic?

The numbers don’t look good so far. The price of an average airline ticket climbed 1.63pc this year through October, compared with a 6.96pc decline in energy prices over the same period, according to Consumer Price Index data.

And even as the decline in oil prices accelerated in recent months to a five-year low, carriers haven’t cut their airfares as a result, according to George Hobica, founder of airfarewatchdog.com.

“Airlines are going to use this windfall to buy new planes, refurbish terminals . . . there’s no incentive to reduce prices,” he said. “In the past, when fuel goes down, airfares don’t.”

Inflation-adjusted airfares have increased in three out of the last four quarters for which data are available, while oil prices have declined in all four, on a year-over-year basis, according to US government data.

In the second quarter of this year, average airfares were up 2.5pc from a year earlier, compared with a 0.8pc decline in the price of oil.

According to the International Air Transport Association, jet fuel constituted 30pc of airlines’ total operating costs in 2013, and the price of it was down 33pc at the beginning of December from a year earlier. All else being equal, that means airline operating costs are about 10pc lower than they were last year.

Let’s look at three facts we can glean from an analysis of the historical data from the Department of Transportation.

First of all, oil prices are much more volatile than airfares. Second, looking at the quarterly data, the two move in the same direction only about two times out of three.

Third, when airfares and oil prices do move in the same direction, on average a 17pc change in oil price is associated with a 1pc shift in average airfares. This implies that a 50pc drop in the price of oil should yield a 3pc fall in fares.

Whether airlines will actually pass those lower fuel costs on to the consumers will depend on their energy hedging strategies and the intensity of competition in the industry.

Fuel hedging, which involves signing contracts that keep the cost of fuel fixed for a designated period of time, makes sense if the airline expects prices to rise.

If an airline hedges, and the price of fuel falls as in the present situation, the carrier will find itself paying more for fuel than it should.

And it can be assumed that many airlines are in that situation now, meaning that even though prices are down, their fuel costs may well be above the market rate.

European carriers have already begun ending their hedges as early as this summer, according to Bloomberg. And it seems US carriers are following suit.

This suggests the airlines are indeed already taking advantage of the drop in jet fuel prices and as a result simply fattening their profit margins, rather than lowering airfares.

And that can be explained by the state of competition in the industry, one of only two things that typically cause airfares to decline, according to Hobica (the other being a recession). Competition among the major carriers in the US is insufficient to create incentives for passing the fuel cost savings along to passengers. The mega-mergers and consolidation over the last decade have left the US market with only four large airlines, plus a few smaller carriers such as Alaska Air and JetBlue.

While one might think that four rivals is enough to create a competitive landscape, the fact that the airlines interact continually and operate in so many markets can lead to what economists refer to as tacitly collusive behavior.

In other words, there’s soft (little or no) competition over prices but not explicit price fixing.

Moreover, mergers have substantially increased the number of routes in which the major airlines are competing with one another.

While it might seem like that would lead to more competition and lower prices overall, in fact, economic studies suggest increased so-called multimarket contact can lead to collusion.

That is, the airlines would keep prices artificially high rather than try to undercut one another with cheaper fares out of fear their rivals will harm them in another market where they both compete.

Are the mergers to blame?

This kind of soft price competition might also be responsible for the airlines’ unwillingness to get rid of fuel surcharges.

At the very least, we can assume airlines view the current depressed oil market as temporary and would only consider cutting their fares if energy prices remain low for an extended period of time — a year in my opinion.

Overall, I remain cautiously optimistic that the current plunge in oil prices will eventually result in a drop in the cost of air travel. Any decline, however, will almost certainly be modest given the reduced competition in the industry.

Indeed, whether fares do fall over the coming quarters will provide compelling testimony as to whether the US Department of Justice was right to grant approval to all those mergers in the first place.


 

 

 

 

 

 
Is Oil Heading to Fair Price Era?
 
When asked by the Middle East Economic Survey (MEES), if oil markets would ever lift prices to $100 a barrel again, Saudi oil minister Ali al-Naimi responded “we may not.”

Not too long ago deemed a “fair” price by major producers, $100 a barrel crude apparently also helped bring a number of new, high cost resources online, generating to the detriment of the producers,” a glut-like scenario, many felt. And it was in this perspective that Opec officials have been hinting that their oft-repeated mantra of $100 a barrel crude as a “fair” price had been set aside, at least for the foreseeable future.

And producers are making things clear. While talking to MEES, without mincing words, minister Naimi reiterated, Opec will not cut production even if the price falls to $20 a barrel. “As a policy for Opec -- and I convinced Opec of this, even Mr al-Badri is now convinced -- it is not in the interest of producers to cut their production, whatever the price is.

“Whether it goes down to $20, $40, $50, $60, it is irrelevant,” he said.

And this was new, confirming in rather open terms that the traditional Opec strategy of keeping prices ‘fair’ by limiting oil output has been replaced with a new policy of defending the cartel’s market share -- and -- at all costs.

This represents a “fundamental change” in policy that is more far-reaching than any seen since the 1970s, Jamie Webster, oil analyst at IHS Energy was quoted as saying.

“We have entered a scary time for the oil market and for the next several years we are going to be dealing with a lot of volatility,” he said.

“Just about everything will be touched by this.”

And Mr Naimi was rather articulate in presenting his viewpoint, underlining if the kingdom (and the Opec) reduced output, “the price will go up and the Russians, the Brazilians, US shale oil producers will take my share.”

And he had a point to make. Efficient producers needed to be encouraged and not discouraged. “We want to tell the world that high efficiency producing countries are the ones that deserve market share,” he emphasised.

“Is it reasonable for a highly efficient producer to reduce output, while the producer of poor efficiency continues to produce?” Al-Naimi asked during the interview conducted with MEES.

Al-Naimi also added it was “unfair” for the world to expect Opec, with a market share of around 40 per cent, to reduce output. Others needed to be a part of the arrangement too, he underlined. “Let the most efficient producers produce.”

He also sought to rebut broader claims that Saudi Arabia has been using the oil price as a political tool. “The talk about conspiracy by Saudi Arabia for political motives is baseless and shows lack of understanding,” he said. “The [oil] policy of the kingdom is based on a strict economic basis.” Speaking at the conference, Suhail bin Mohammed al-Mazroui, the UAE energy minister, said one of the principal reasons for the price fall was “the irresponsible production of some producers from outside the Opec.”

He added that non-Opec countries and high-cost production should play a role in balancing the market.

Qatar energy minister Mohammed Al Sada also hit out at rising rates of crude production outside Opec, saying the oil market is over-supplied by 2m barrels a day.

“We are now in a provisional, correctional period,” Mr Al Sada told Bloomberg. “Markets have mechanisms that will bring stability.”

The altered Opec policy seems challenging the high-cost crude -- from the oil sands of Canada and US shale to deepwater Brazil and the Arctic. The game is on!


 

 

 

 

 

 
Hydro or Coal: Diverse Interests
 
John Gapper
Published about 6 hours ago
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The price of oil keeps on falling; the shale gas boom has reduced the price of natural gas in the US to a third of that in France; Germany has appealed to Sweden for its support in expanding two coal mines; and the EU’s effort to switch to clean energy is troubled. For companies wondering where to locate, the world has turned upside down.

Cheap energy is the new cheap labour. For two decades, the biggest driving force in industrial globalisation was the gap in the price of labour between the developed world and China. That induced many industries — textiles, electronics and others — to shift production from high-cost factories in the US and Europe to places where people would work for a fraction of the cost.

Now, as the wage arbitrage between the north and south narrows, the energy gap is widening. Wage rates adjusted for productivity in China have risen to more than half the level in the US, according to Boston Consulting Group. Meanwhile, energy prices have been falling and the Opec oil-producing countries have failed to halt the decline. Some fortunate countries, especially the US, are gaining from both of these trends at once.

Although cheap fuel theoretically helps every energy-dependent country, the gains are distributed unevenly. The big beneficiary, thanks to shale natural gas, is the US. Not only is it helped by companies bringing manufacturing home but it is also an oasis of cheap gas. That is luring energy-intensive industries such as chemicals, petrochemicals, aluminium and steel.

Europe must start by realising that the competitive advantage of cheap labour is giving way to that of cheap energy. Turning a blind eye to that fact will not work

Europe made the wrong bet. In the long run, making fossil fuels more expensive by subsidising renewables and charging for carbon emissions could bring the EU a steady supply of clean, cheap energy. At the moment, it is nullifying the benefits of lower energy prices and giving European companies an incentive to relocate.

“There are no energy-intensive investments taking place in Europe now,” says Dieter Helm, professor of energy policy at the University of Oxford. “Why would you locate a new investment in a place with both high labour costs and high energy costs, many of which are self-inflicted?”

Plainly, it is a lot more expensive and harder to build a new aluminium- producing plant or chemical works in another country than to outsource textile or electronics manufacturing to an existing plant in China. These are long-cycle, capital-intensive industries that cannot move on a whim.

Energy also takes a lower share of production costs in most industries than wages or raw materials. The EEF, the UK manufacturing body, says that energy comprises 5pc or less of costs for 70pc of its members. Aluminium-smelting is the biggest fuel-guzzler, at 30pc of costs.

European countries have tried to shield energy-intensive industries from the costs of switching to renewables. Germany, whose Energiewende policy of obtaining 80pc of electricity from clean sources by 2050 is causing intense stresses, has capped renewables’ charges to heavy industry, despite EU pressure to limit subsidies.

But the pressures are intense and are unlikely to recede. Even if European countries change tack, no large economy can match the US in shale gas. Even when the US starts to export liquefied natural gas to Europe, it will retain a significant cost advantage.

The comparative significance of energy grows as that of wages lessens. The ‘onshoring’ of US manufacturing is assisted by rising wages elsewhere — between 2006 and 2011, Asian wages rose by 5.7pc per year, compared with 0.4pc in developed economies. Productivity has also risen: an advanced manufacturing plant often employs fewer than 200 people.

So companies are moving, often by picking the US when they make new investment decisions. BASF, the German chemicals company, is one example: it is allocating a quarter of its 20bn euros investment budget over five years to the US, and plans to build a $1.4bn propylene site on the Gulf Coast. Natural gas will provide not only the energy but also the chemical raw materials.

Even if a European company keeps a plant open, it can divert some of the production to the US. Voestalpine, the Austrian steel company, is building a 500m euros facility in Texas, at which it will make iron for two Austrian steel plants. It will use natural gas to power the blast furnaces in Texas rather than the coking coal it uses in Europe.

The temptation for Europe, caught in the middle of transition by unexpectedly low energy prices, is to dismiss such moves as marginal. Only aluminium smelters rely crucially on cheap energy; no company can close a Rhine steel plant for short-term gain; chemicals is a special case, and so forth.

This would be a mistake. In the long run, there are real risks for countries that impose high costs on themselves while their competitors enjoy low ones. If everyone from the US to China adopted the approach together, it would not matter. But in a world of cheap gas and coal, it does.

It is a hard challenge — the US is lucky to have large, accessible shale gas reserves. But Europe must start by realising that the competitive

advantage of cheap labour is giving way to that of cheap energy. Turning a blind eye to that fact will not work.

john.gapper@ft.com
Published in Dawn, Economic & Business, December 1st , 2014


 

 

 

 

 

 
Cheap Energy is the New Cheap Labor
 
John Gapper
Published about 6 hours ago
Comments
Email
Print


The price of oil keeps on falling; the shale gas boom has reduced the price of natural gas in the US to a third of that in France; Germany has appealed to Sweden for its support in expanding two coal mines; and the EU’s effort to switch to clean energy is troubled. For companies wondering where to locate, the world has turned upside down.

Cheap energy is the new cheap labour. For two decades, the biggest driving force in industrial globalisation was the gap in the price of labour between the developed world and China. That induced many industries — textiles, electronics and others — to shift production from high-cost factories in the US and Europe to places where people would work for a fraction of the cost.

Now, as the wage arbitrage between the north and south narrows, the energy gap is widening. Wage rates adjusted for productivity in China have risen to more than half the level in the US, according to Boston Consulting Group. Meanwhile, energy prices have been falling and the Opec oil-producing countries have failed to halt the decline. Some fortunate countries, especially the US, are gaining from both of these trends at once.

Although cheap fuel theoretically helps every energy-dependent country, the gains are distributed unevenly. The big beneficiary, thanks to shale natural gas, is the US. Not only is it helped by companies bringing manufacturing home but it is also an oasis of cheap gas. That is luring energy-intensive industries such as chemicals, petrochemicals, aluminium and steel.

Europe must start by realising that the competitive advantage of cheap labour is giving way to that of cheap energy. Turning a blind eye to that fact will not work

Europe made the wrong bet. In the long run, making fossil fuels more expensive by subsidising renewables and charging for carbon emissions could bring the EU a steady supply of clean, cheap energy. At the moment, it is nullifying the benefits of lower energy prices and giving European companies an incentive to relocate.

“There are no energy-intensive investments taking place in Europe now,” says Dieter Helm, professor of energy policy at the University of Oxford. “Why would you locate a new investment in a place with both high labour costs and high energy costs, many of which are self-inflicted?”

Plainly, it is a lot more expensive and harder to build a new aluminium- producing plant or chemical works in another country than to outsource textile or electronics manufacturing to an existing plant in China. These are long-cycle, capital-intensive industries that cannot move on a whim.

Energy also takes a lower share of production costs in most industries than wages or raw materials. The EEF, the UK manufacturing body, says that energy comprises 5pc or less of costs for 70pc of its members. Aluminium-smelting is the biggest fuel-guzzler, at 30pc of costs.

European countries have tried to shield energy-intensive industries from the costs of switching to renewables. Germany, whose Energiewende policy of obtaining 80pc of electricity from clean sources by 2050 is causing intense stresses, has capped renewables’ charges to heavy industry, despite EU pressure to limit subsidies.

But the pressures are intense and are unlikely to recede. Even if European countries change tack, no large economy can match the US in shale gas. Even when the US starts to export liquefied natural gas to Europe, it will retain a significant cost advantage.

The comparative significance of energy grows as that of wages lessens. The ‘onshoring’ of US manufacturing is assisted by rising wages elsewhere — between 2006 and 2011, Asian wages rose by 5.7pc per year, compared with 0.4pc in developed economies. Productivity has also risen: an advanced manufacturing plant often employs fewer than 200 people.

So companies are moving, often by picking the US when they make new investment decisions. BASF, the German chemicals company, is one example: it is allocating a quarter of its 20bn euros investment budget over five years to the US, and plans to build a $1.4bn propylene site on the Gulf Coast. Natural gas will provide not only the energy but also the chemical raw materials.

Even if a European company keeps a plant open, it can divert some of the production to the US. Voestalpine, the Austrian steel company, is building a 500m euros facility in Texas, at which it will make iron for two Austrian steel plants. It will use natural gas to power the blast furnaces in Texas rather than the coking coal it uses in Europe.

The temptation for Europe, caught in the middle of transition by unexpectedly low energy prices, is to dismiss such moves as marginal. Only aluminium smelters rely crucially on cheap energy; no company can close a Rhine steel plant for short-term gain; chemicals is a special case, and so forth.

This would be a mistake. In the long run, there are real risks for countries that impose high costs on themselves while their competitors enjoy low ones. If everyone from the US to China adopted the approach together, it would not matter. But in a world of cheap gas and coal, it does.

It is a hard challenge — the US is lucky to have large, accessible shale gas reserves. But Europe must start by realising that the competitive

advantage of cheap labour is giving way to that of cheap energy. Turning a blind eye to that fact will not work.

john.gapper@ft.com
Published in Dawn, Economic & Business, December 1st , 2014


 

 

 

 

 

 
The SAGA of OGDCL
 
Questions will be raised on the scrapping of the transaction that was meant to sell 10 per cent shares in the Oil and Gas Development Company (OGDCL). Blames will be pinned on the government, which in turn would point the finger at the opposition.

The earliest statement by the government that “improvement in the economy” was the reason for the scrapping is clearly eyewash.

Money, time and effort and much-hyped road shows abroad have all come to naught. The book builders burnt the midnight oil and waited till 1.00 in the morning of Saturday for prospective foreign investors.

Apparently, not many turned up and the Cabinet Committee on Privatisation (CCoP) had to announce ‘postponement’ of the transaction to another (unspecified) date after a videoconference with Finance Minister Ishaq Dar in Dubai.

Two factors are obvious that could have forced the government to put off the sale, excluding the hounding by the opposition and the oil producing giant’s employees union.

Firstly, a steep fall in the price of Brent Crude in the international market. On Sept 8 this year, when the CCoP first announced that it would sell 322m shares in the OGDCL accounting for 10pc of the stake with the government, the price of Brent was $98.08 a barrel.

Read: Govt okays Rs216/share floor price for OGDCL

By the morning of Saturday, Nov 8, it had plunged to $83.36 a barrel, a scary fall of $14.72, or 15pc, in two months.

“The Brent price which many international oil experts believe would get worse before it gets better has already eroded 30pc profitability of oil exploration and production companies as the exploration costs would run high,” says investment banker Mir Mohammad Ali Khan.

Secondly, a sharp drop in the stock price of the company. The Privatisation Commission of Pakistan (PC) had set the ‘floor price’ at Rs216 per share.

The share in OGDCL, which traded at Rs270 on Sept 8, fell by Rs45 (17pc) at the close of market on Friday.

PC chairman Mohammad Zubair was eyeing $815m as receipts from the transaction. Due to slump in oil prices and dilution in OGDCL stock value, the sale would have fetched just $750m, a loss of $65m, or Rs7 billion.

Several economists and analysts believe that the government was right in putting off the sale. Mohammad Sohail, CEO of brokerage Topline Securities, observed that a postponement, however painful, looks to be a correct decision, instead of selling lesser number of shares, and that too at lower prices.

Senator Saeed Ghani says he is relieved. “We oppose privatisation in all its forms, particularly of such corporate that earns huge revenue for the country,” he told Dawn.

Economist Muzammil Aslam, MD Emerging Economic Research, thought that putting oil and gas exploration and production companies on sale was wrong in the first place.

He pointed out that in case of earlier sale of shares in Pakistan Petroleum Limited (PPL), the subscription to the extent of 92pc had emanated from local investors and just 8pc from foreign institutions.

Yet, the question that would haunt us all is: Who was responsible for causing delay of two months that spoilt the show?


 

 

 

 

 

 
Gadani Power Project: Challenges
 
The Gadani power park is not likely to take off in the near future because of issues in potential investors’ due diligence.

The power park of 6,600MW cumulative capacity, based on imported coal, was launched on July 26, 2013 for execution on a fast-track basis. But the government has failed to achieve substantial progress on the project and also in attracting potential investors.

Chinese investors were initially willing to set up six plants in the power park after having signed various MOUs, though in a non-transparent manner, as the procedure for the proposed investment had been violated.

Later on, the government decided to invite expressions of interest (EOIs) through the Private Power and Infrastructure Board (PPIB) on the basis of international competitive bidding. However, only six EOIs were received. These are from China Gezhouba Group Co, China Machinery Engineering Corp, China Huadian Engineering Co, Harbin Electric International Co China, ANC Holding UAE (Arab National Construction) and Genting Power Malaysia.

Interestingly, only Harbin Electric and Genting are involved in the core business of coal-power generation, and all others are either hydropower construction companies or engaged in trading, real estate and contracting. Excluding one, all other companies had earlier signed MOUs.

The project, envisaged to be developed primarily with Chinese technical and financial assistance, was included in the Pak-China economic corridor programme. According to recent reports, however, China has excluded it from the list of corridor projects.

A Qatari investor and royal family enterprise, Al-Mirqab Capital, had also signed an MOU, along with the Sinohydro Corporation of China as their technical partner, for the construction of two 660MW projects at the park. Interestingly, they decided to set up the project at Bin Qasim under a ‘short-term capacity addition initiative’ of the power policy, which allows investors to use any location, fuel and technology.

The PPIB has issued a letter of interest (LOI) to the joint venture, whereas Sinohydro, a hydropower construction company, has no experience of building coal-based power plants.

A detailed site selection study has not been conducted. Some of the Chinese companies have doubts about the sustainability of the projects, having concluded that Gadani might not be a suitable site for the proposed projects as there is no infrastructure development in the area.

Taking cue from the Qatar-China joint venture, the other investors are also considering Karachi as a viable site. Gadani does not have the capacity to transmit electricity from the south to load-centres in the north through the national grid, and policy arrangements for dispersal of power are still uncertain and unclear.

The first two power plants of 660MW each were to be established at the power park by the government from its own resources to instil confidence and security among prospective investors, who were to construct the remaining eight units of 660MW each. Equity was to be provided by the government, while the rest of the funding was to be arranged as foreign loan.

Accordingly, in September 2013, Genco Holding Co Ltd/Genco-IV initiated the appointment of consultants for preparation of the feasibility report, environmental study and bidding documents etc.

The consultants were also to select advanced technology on the least-cost basis. However, the government — within a few months of the power park’s launch — dropped the proposed public sector investment and decided that all 10 units will be developed by private investors.

Based on a feasibility study conducted by the Japan International Cooperation Agency (Jica), Genco was also supposed to develop two 660MW projects on Lakhra coal, but this project was also shelved in February.

On the other hand, the government was keen to seek an exemption from PPRA rules to exempt Chinese investors from procurement procedures and international competition. Indicative costs of IPP projects are in the range of $1.5m-1.74m per megawatt. This is agreeable to the government, whereas current international prices are not more than $1m/MW for supercritical boiler technology.

In March, the master plan for the entire park arrangement, costing over $570m, was launched. The Pakistan Power Park Management Co is to develop, maintain and operate common infrastructure facilities, including a jetty for handling 20m tonnes of imported coal, arrangement for 8,000 cusec water supply, waste water disposal, ash handling and disposal, cooling tower, switchyard, residential facilities and inter-connectivity with the transmission system.

The government’s policy, however, remains inconsistent, as it has been talking to Dubai and Qatari investors for construction of the jetty, while the transmission infrastructure is also being offered to the private sector for development.

In April, Germany’s Lahmeyer International was appointed as the consultant for the preparation of the master plan, along with Nespak and the UK’s Royal Haskoning-DHV, without any competitive bidding.

Despite the gross irregularities pointed out by the Central Development Working Party, the master plan was approved by the Executive Committee of the National Economic Council on July 18. The prequalification of contractors for construction of the dedicated coal terminal and allied infrastructure was issued the next day. However, there has been no further progress.

Sadly, the Pakistan Power Park Management Co is being managed by bureaucrats on an ad-hoc basis after the removal of N.A. Zuberi (PPIB’s managing director) as its chief executive; Zuberi had established the company on a fast-track basis.

The project’s feasibility and PC-I have been prepared and field investigations, soil, geo-tech and other surveys have been conducted. The levelling and grading of the land demarcated for two units is said to be completed.

Ironically, the required 5,000 acres of land has not been acquired yet.


 

 

 

 

 

 
Crude Response: Saudi Arabia Strikes Back
 
The Saudi decision to increase discounts on deliveries to US refiners needs to be seen in this perspective. It was basically to protect its competitiveness amid an erosion of its US market share by rival exporters such as Canada and Iraq.

In August, US crude imports from Saudi Arabia slipped below 900,000 barrels per day. With the exception of a brief period in 2009 and early 2010, Saudi exports to the United States has fallen to the lowest level since 1988. US imports from Saudi Arabia in August were just 70pc of the average level for the past ten years which has been around 1.3 million bpd.

Saudi oil, which is priced at a differential to a US sour crude marker, had become too expensive compared to alternatives available to US refiners. Market dictates forced Saudi Aramco to react, cutting the differentials for US refiners by between 45 and 50 cents (depending on grade), while it raised differentials for refiners in Europe and Asia.

Commentators interpreted the US price cuts as a signal of Riyadh initiating a deliberate price-war targeting US shale producers. An otherwise very technical and commercially driven adjustment mechanism was misinterpreted by most pundits. “We see a clear lack of understanding of an OSP’s purpose,” says Morgan Stanley analyst Adam Longson. Ironically the same had happened when Aramco had announced a reduction in Saudi OSPs to Asia last month.

That too had sparked a chatter all around. A day after the Saudi decision, White House spokesman Josh Earnest said that the US was monitoring the global oil supply and demand situation. However, he remained non-committal on the possibility of Washington opting to replenish the Strategic Petroleum Reserve (SPR).

Phil Flynn of FOXBusiness however, reported that hinting at the possibility of the US increasing the SPR intake, was obviously a thinly veiled message to Saudi Arabia. It was an attempt by the White House to underline they were not happy with the price discounts and to remind there were steps the US could contemplate. And Flynn then says that not only the US government could go on a buying spree to fill up the SPR, so as to shore market prices, it may also levy a tax on Saudi oil.

Later in the day, the Wall Street Journal too reported that BP was going to export ultra-light crude without the permission of the US government in a move that not only began breaking down the US export ban, but was also termed by many as a direct challenge to Opec and other producers.

The Wall Street Journal reported that BHP Billiton had cut a deal to sell about $50 million of ultralight oil from Texas to foreign buyers without formal government approval. The Journal says that this may “be only the first of many such moves as energy companies seek new markets and higher prices for the surge of crude now pumped in the US”.

If the US government remains silent and uses as a loophole the high quality of oil as not fitting the definition of crude oil it will open up the floodgates and unleash US shale oil into the world. And indeed pundits also failed to take into account that with a growing public budget, the Kingdom could not take the bait and drive oil prices — its bread and butter — down. This would be painful, none argues here too.


 

 

 

 

 

 
Big plans come from big players and the Pakistani government has some ‘Aalishan’ designs on India — literally speaking. The Trade Development Authority of Pakistan’s (TDAP) ‘Aalishan Pakistan’ — hitherto known as ‘Lifestyle’ — exhibit is scheduled to take place from September 11-14 at Delhi’s Pragati Maidan. Two exhibit halls have been rented and to quote TDAP Secretary Rabiya Javeri, “We’re going to take India by storm.


The product range for the exhibit offers a bit of everything Pakistani, from the more practical engineering and agricultural goods to handicrafts, art, precious stones, leather, textile, jewellery and dashes of Pakistani fashion.

Mainstream ready-to-wear bigwigs like Gul Ahmed, Kayseria and Khaadi are setting up store-like installations within one exhibit hall — the Khaadi ‘stall’, in fact, is going to be a miniaturised version of one of the brand’s recently opened stores in the UK. A luxurious ‘Couture lounge’, resplendent with chandeliers and couches, has been dedicated to designer wear by Sana Safinaz, Misha Lakhani, Wardha Saleem and Adnan Pardesi among others.

TDAP is the best vehicle with which trade activities between Pakistan and India can get rolling

The other hall is set up a la the winding alleys of Lahore’s Anarkali Bazaar, along with smaller stalls. Also on the agenda are meetings with Indian importers and a food court representing local Pakistani restaurants. Dotted around the venue will be installations by the Citizens Archive of Pakistan displaying correspondences between Indian and Pakistani children, an element of their ‘Exchange for change’ programme.

“In our exhibition in 2012 in India, I realised what a fantastic market this was for us,” observes Rabiya. “We share the same heritage but India’s extremely enthusiastic about our particular aesthetics and craftsmanship. I remember Indian polki jewellery selling extremely well at the ‘Made in India’ show in Lahore earlier this year. Similarly, I can see our intricate marori work in gold being a huge hit with the Indians.”

Rabiya’s brother, the acclaimed Tapu Javeri, is one of the jewellers, among many, tapping into the Indian market at the exhibit. “In general, trade between Pakistan and India gets restrained due to duties and other restrictions while exhibits like these provide local entrepreneurs with a platform.

There are at least 600 Pakistani traders, belonging to different fields, planning to fly to India for ‘Aalishan Pakistan’,” she estimates.

This is a considerable number given that the TDAP will not be paying for travel or hotel expenses. “It’s going to be expensive but we’re hoping it’s worth it,” says designer Safinaz Munir. “The Sana Safinaz brand is primarily bringing its lawn and prêt because we are aware that there’s already a huge demand for it in India. We’re going to try to consolidate our market further.”

A few weeks prior to the exhibit, the TDAP seems to have things under control. The blueprints for the representative TDAP stall at the exhibit have been designed by the students of the Pakistan Institute of Fashion Design (PIFD). Digitally printed cushion covers also designed by the PIFD student body are ready to be distributed as gifts to Indian liaisons. Plans are already underway for a fashion show to take place one night before the exhibit begins — to ‘create hype’ — featuring textile brands Bareeze, ChenOne, Kayseria and Lala Textiles as well as designers Shamaeel Ansari, Faiza Samee, Sania Maskatiya and assorted member of the Fashion Pakistan Council. Limited passes will be available for purchase while the rest are intended to be distributed within the Pakistani high commission and the businessmen that form the Federation of Indian Chambers of Commerce and Industry (FICCI).

Additionally, the head of the Lalit Hotel chain and senior vice-president of FICCI, Jyotsna Suri, has arranged an art show at the Lalit Hotel, displaying the work of young Pakistani artists. “FICCI and TDAP are both interested in furthering trade and both bodies try to facilitate each other however they can,” says Rabiya.

It would be ideal of course if TDAP could establish permanent retail avenues for Pakistani products within India but it will take time — and more peace talks — for that particular ambition to be fulfilled. For now, one only hopes that ‘Aalishan Pakistan’ lives up to its grandiose name.

While private ticketed events focusing on fashion and other aspects of retail are now quite common, the TDAP — with its contacts, budget and wherewithal to overcome trade restrictions — is possibly the best vehicle with which foreign trade can actually move forward. The upcoming exhibit endeavors to open a trade window into India; let the business trickle in and one day, hopefully, it will flow.


 

 

 

 

 

 
RIYADH: Is nationalisation of energy assets out of fashion, finally?.
Monopoly of Mexico’s state-owned Petroleós Mexicanos’ (Pemex) on the energy riches of the country has come to an end. On Aug 11, Mexican President Enrique Peña Nieto signed a bill into law ending the 76-year state control over the country’s vast oil and gas resources.

The new law introduces profit- and production-sharing contracts for foreign companies, as well as licences that allow companies to be paid with the oil and gas that’s extracted in mining projects.

As per details, Pemex would be allowed to keep 83 per cent of the country’s proven and probable reserves, including current oil fields and discoveries awaiting development. However, Pemex will only be permitted to keep about a fifth of prospective resources, including the as-yet undiscovered deposits. Pemex had initially requested for 31pc of prospective resources.

Upon the passage of the bill, Nieto underlined optimism. “With this reform we can extract deepwater oil and more effectively use our great shale deposit to obtain gas that allows us to generate electricity at a lower cost. The country will reduce its dependency on foreign supplies and will guarantee its energy security.”

However, sections of the Mexican society appear uneasy. Left-wing legislators have been strongly criticising the privatisation bill during debates. “This is not an energy reform, this is a clear dispossession of the country’s oil,” underlined Dolores Padierna, a senator of the leftist Party of the Democratic Revolution (PRD), the third largest party in Mexico’s Congress.

Mexico has an estimated 60 billion untapped, onshore and deep-water barrels of crude oil. The most promising part of fields to be explored and most appealing to major US oil majors, are the deep waters of the Gulf of Mexico. Bidders will be vying for the estimated 27bn barrels of deepwater oil reserves in the Gulf of Mexico. The Mexican side of the maritime border is largely unexplored and has no oil in production, a striking contrast to the level of activity in US waters.

Oil majors preferred to remain tight-lipped during the entire process, so as to avoid accusations of interference in a politically sensitive issue. Reports now say, Pemex was planning to partner with Exxon Mobil, Chevron, Shell, BP and Brazil’s Petrobas for deepwater drilling.

The areas up for grabs reportedly include a broad mix, from deep waters to mature fields and nonconventional reserves such as shale gas. The Ministry of Energy in Mexico has estimated a $100bn in investment is needed over the next 10 years to develop Mexican shale resources.

The prolific Eagle Ford shale formation in Texas extends south across the border into Mexico’s Burgos Basin and accounts for two-thirds of Mexico’s shale gas resources. Mexican recoverable shale gas resources are reported to be touching 600 trillion cubic feet mark — the 6th largest in the world. Mexico is also estimated to have 13bn barrels of recoverable shale oil resources.

The policy shift could produce a bonanza of cheap oil and gas in the Americas. “Profound” change could be coming to Mexican oil production, says the US Energy Information Administration. The country’s oil and natural gas production could rise by as much as 75pc compared to EIA’s assessment last year.

The EIA’s International Energy Outlook last year predicted Mexican oil production to decline from three million barrels per day in 2010 to 1.8m in 2025. However, with the new law, the 2014 report, expected to be released this fall, says production will stabilise at about 2.9m barrels per day through 2020, then rise to a high of 3.7m.

If the model succeeds, it may herald a change in the overall direction in many other resource rich areas too. Yet, the gap between the proverbial lips and the cup is still to be covered. Eyes remain glued on Mexico.


 

 

 

 

 

 
A MAJOR factor contributing to the widening electricity demand-supply gap has been the delay in the completion of various hydropower projects undertaken by the Water and Power Development Authority. The current political turmoil will also have its share in future delays.
These sustainable development projects, of a cumulative installed capacity of 1,236MW, if completed timely, could directly address the prevalent energy crisis and also result in reducing the average generation cost of the energy mix. The projects have suffered inordinate delays of three to seven years, primarily due to poor planning, ineffective monitoring, lack of transparency, absence of political will, uncertain law and order situation, financial constraints etc..

A typical example is that of the ongoing Neelum-Jhelum hydroelectric project of 969MW, which, on completion, would generate 5.15bn units of electricity annually, but remains much behind schedule.

Though the strategic project was conceived decades ago for fast-track implementation, the construction contract was awarded only in July 2007. It was to achieve commercial operations within five years, but the completion date was revised a number of times due to changes in design, amended scope of supply, an after-thought procurement of tunnel-boring machines, financial constraints and other factors. This has limited the physical progress to about 63pc so far. Project is now scheduled for commissioning in November 2017.

Poor planning, ineffective monitoring, lack of transparency, absence of political will, uncertain law and order situation and financial constraints are responsible for the delayed power projects

Generation of the first unit of 242MW is planned for December 2015, but is not likely to be achieved due to the slow pace of work.

Ironically, the contract for the laying of a 500-kV transmission line for the dispersal of power generated from the project has not yet been finally awarded. The Economic Coordination Committee of the Cabinet approved financing of Rs17bn for the purpose only two weeks back (on August 15), adding to the delay and cost overrun.

It is apathetic that the consumers have paid over Rs31bn, and continue to doing so towards half of local equity in the project, since the government imposed a surcharge of 10 paisas per unit in the power tariff. The project’s cost seems to be uncontrollable for the managers, as it has escalated from Rs84bn to Rs 275bn. This, again, is not final, and projected to rise further, given the conditions.

Similarly, the Golen Gol project of 106MW was scheduled for commissioning in 2009, but has been delayed. Though civil works has been in progress for some time, the contract for electro-mechanical (E&M) works was re-awarded this January due to controversy regarding bidders and legal issues. If things move according to the revised plan, it will be completed in 2017, with a 25pc cost escalation so far. On completion, the project would generate 436m units of energy annually.

The Keyal Khwar hydropower project of 122MW has already been delayed by seven years, as the contract for civil works was given in January this year, while the tender for E&M works was opened recently. Gomal Zam Dam, having a 17MW powerhouse, has recently been completed after eight years, after construction started in 2006. But the main reason for the long delay was the poor security situation in the area.

It is ironic that even the process of land acquisition for the Diamer-Basha Dam of 4,500MW has still not been finalised, whereas its ground-breaking ceremony was held in January 2006. Reportedly, the project would now achieve commercial operation in 2037.

The turnkey contract for rehabilitation of Jabban (19.6 MW) — the oldest hydropower station, commissioned in 1938 and which ceased operations in 2006 due to a fire accident — was given in February 2010 with a 21-month completion period. However, physical work began in May 2011.

The rehabilitated and upgraded 22MW powerhouse has not been connected to the national grid as yet, resulting in an annual loss of 122m units of electricity. The first of the four generating units was put on a trial run on June 26, 2013, and the project was to be commissioned by last September.

The status of small projects is equally unsatisfactory. Wapda has planned to construct a series of small and mini hydropower stations in regions that are not connected to the national grid. In the first phase, 12 small dams with a total installed capacity of over 43MW were to be constructed in all four provinces during 2005 and 2006 at a cost of Rs 30bn, to be completed in three years.

Sadly, only one project — Darawat Dam in Sindh — is nearing completion, while a number of others have run into snags even before take-off. All these projects are now rescheduled for implementation in 2015.

Hydropower projects that suffered long delays in the recent past include Jinnah, Duber Khwar, Allai Khwar, Khan Khwar and Satpara, with a cumulative installed capacity of 428MW. The Jinnah project of 96MW in Mianwali district was planned for construction in 2006, with a completion deadline of four years, but it was commissioned in September 2013.

The contracts for Duber Khwar (130MW), Allai Khwar (121MW) and Khan Khwar (72MW) — all located in Kohistan, KP — were awarded in June 2003, but their commissioning was delayed by four years. Obviously, the long delays caused exorbitant rises in the project costs.

Nonetheless, it is worth mentioning that, utilising a total power generation capacity of 6,480MW, Wapda provided a record plus 31bn units of electricity to the national grid during 2013-14, and that too at a very low average rate of Rs 1.50 per unit.


 

 

 

 

 

 
PAKISTAN’S energy crisis and its viable solutions have been extensively debated in the recent past. Two factors that must be kept in mind when discussing any solution are affordability (cost and pricing) and availability (net thermal efficiency/usage) of fuel and electricity. There are no quick fixes to this problem, but some options exist to accelerate the resolution of the issues.
Given the size of the deficit in the power sector, alternate energy solutions can be supplemental at best. The mainstream fuel requirements will continue to come from coal, natural gas and hydro, as possibly the most viable options for large-scale baseline power generation.

However, in the short- to medium-term, contrary to the popular belief about coal, it is natural gas that is the most viable fuel to address the large power deficit in the quickest possible way, at the most affordable cost. Here is why I believe natural gas remains the preferred option over coal.

The data provided in this essay is from internal industry documents that take a detailed look at the pricing and gestation periods of various fuel and power projects. The studies themselves cannot be cited, but here is what the data suggests.

In the short- to medium-term, contrary to the popular belief about coal, it is natural gas that is the most viable fuel to address the large power deficit in the quickest possible way at the most affordable cost

The typical lead time for setting up coal-based power plants is 4-5 years and building medium-sized dams is 7-10 years, whilst a gas-based power project could be converted into 9-12 months, or even earlier, on an already producing field. The conversion of existing residual fuel oil (RFO) based power plants to coal is perhaps the fastest solution with a 15-18-month gestation period, but it has a glass ceiling of 3000-3500MW.

On the other hand, given the estimated over 66 trillion cubic feet of explored and unexplored gas reserves in Pakistan, the availability of natural gas for power can easily address the current deficit. With better allocation of the existing resources and improved exploration and production (E&P) activities, natural gas can actually emerge as the most superior option for meeting baseline power generation requirements in the immediate future.

E&P activities have been lacklustre in the last few years largely due to security concerns in the oil and gas rich territories, as well as unattractive well-head prices. Additional domestic gas production is surely a way to reduce the deficit and the cost of power generation. The (indicative) supply curve for domestic gas in Pakistan shows that 85pc of domestic gas costs the country less than $5/mmbtu.

On the other hand, the cost of RFO and LNG is about three times this level. The weighted average cost of gas (WACOG) for domestic gas is in the range of $3.2/mmbtu, which is why Pakistan is able to have such low retail prices of gas. The WACOG level indicates how low domestic gas prices are in Pakistan, where not all of the gas potential has been realised as yet. Therefore, it is critical that Pakistan gives higher priority to further domestic gas production.

The Petroleum Policy 2012 offers prices which are considered adequate by many in the E&P industry, and also allow E&P companies to apply for conversion of their existing fields to the 2012 policy prices. This can bring fresh investment to the upstream gas sector, and, if guided carefully, more gas can be brought into the system in the coming 12 to 36 months.

Even if further domestic gas comes in at the $6/mmbtu offered under the 2012 policy, it will be much cheaper than any imported fuel, which is actually $20/mmbtu. This would mean that the power to the eventual consumers will be available at an estimated cost of $0.08/Rs8 per KwH, which is more than half the current tariff level.

Hence, this becomes the most viable solution to the problem, both in terms of affordability and availability, in the shortest possible time. This may require the laying of distribution infrastructure for connectivity of these power plants to the grid, which could be achieved within 24-36 months and must be pursued simultaneously.

Stated above is a solution to address the immediate power shortages for which the estimated timeline is 1-3 years. For the medium-term (4-6 years), coal, particularly locally mined, would be the best fuel option. The long term (seven years and beyond) solution lies in hydropower projects. To achieve a proper fuel mix, alternate fuels — to the extent of say one quarter of the total — is an absolute essential from the long-term energy


 

 

 

 

 

 
INDIA’S coal mining industry, which has been racked by scandals in recent years that have led to an acute shortage of the commodity, could see the light at the end of the tunnel and undergo a major transformation after the Supreme Court delivers an important verdict this week.
The apex court last week dec¬lared the allocation of nearly 200 coal blocks to different companies since 1993 as illegal.

The court ruled that all the 216 coal block allocations made since 1993 were illegal and done with ‘an ad-hoc and casual approach, without application of mind.’ Many of the blocks were awarded to favoured business groups with links to politicians. This week it will decide the face of these coal blocks — whether they would be cancelled, or whether there would be stiff new rules imposed on the sale of the commodity.

The Comptroller and Auditor General of India had in 2012 accused the government of allocating coal blocks to companies — instead of auctioning them — resulting in a loss of Rs1.76trn to the exchequer. While 70 coal blocks had been allocated between 1993 and 2005, most of the remaining had been handed over to firms, either owned by politicians, or those with close links to ministers and other leaders, between 2005 and 2010.

The national auditor claimed that such arbitrary allocations had resulted in windfall gains for the companies, but depriving the exchequer of huge sums. The Central Bureau of Investigation was also directed to launch a probe into the ‘coalgate’ scam, and the apex court began monitoring the probe after allegations surfaced that the United Progressive Alliance was trying to influence the probe agency.

The saga of the under-performance and corruption in the Indian coal mining sector can be traced back to 1973 when the then government decided to nationalise the industry. State-owned mining behemoth Coal India Ltd was the sole miner. Over the decades, it failed to invest in new technologies, resulting in an acute shortage of coal.

The country’s power and steel sectors are dependent on the commodity for their survival, but Coal India was unable to meet the growing demands of the two crucial industries. Even after the launch of the reforms programme in 1991, the Indian government failed to bring about changes in the coal mining sector by opening it up for private investments.

In 1992, it came out with a policy of allocating mines to power companies and steel producers, who would have to use the coal for captive consumption. But this was done in an arbitrary fashion, instead of being auctioned to the highest bidders. Besides state-owned power producers, coal was allocated to many private firms with strong links to politicians.

After the ‘coaltgate’ scam surfaced, the government took back about 80 coal blocks and the bank guarantees of 42 companies was forfeited. In the process, the coal shortage got exacerbated and the country’s power and steel production suffered a great deal.

India today has a power generation capacity of 250,000MW, but because of the shortage of coal, nearly 35,000MW is not being produced, according to the Central Electricity Authority (CEA).

THE Indian government, in a bid to push power generation, had a few years ago initiated a policy of encouraging private companies to put up ‘ultra-mega power plants’ of 4,000MW capacities. The power producers were also allotted coal blocks. Many leading power producers bid for the projects, quoting low tariffs, as they were assured of coal supplies.

However, after the allocation of coal blocks were cancelled, they were given permission to import coal from Indonesia and other countries. With demand from Indian power producers soaring, Indonesia also hiked tariff on export of coal, leading to a crisis on the power front. The independent power producers who had promoted UMPP projects complained that it was not viable to produce electricity at such low tariffs, especially when the cost of coal was high.

Two leading producers, Tata Power and Adani Power — who had installed UMPPs — sought and obtained a hike in power tariffs from the Appellate Tribunal for Electricity. However, the decision was challenged and last week the Supreme Court ruled that the two firms cannot seek higher tariff as they had won the contracts on tariff-based competitive bidding.

The two companies are now facing a crisis, both on the liquidity and coal fronts and have been forced to cut down on their power generation. The result: the western power grid, which serves the industrialised states of Gujarat, Maharashtra and Haryana and the minerals-rich states of Madhya Pradesh and Chhattisgarh is facing a massive power shortage.

Shortage in coal supplies has led to a 7,000MW power shortfall in the region. The overall power shortage has gone up to more than 40,000MW in India, nearly a sixth of the country’s total power generation capacity. The new BJP-led government, however, believes that the Supreme Court verdict in the coal blocks allocation case will do a world of good for the sector. “The fact that this has brought to finality and closure a dispute that has been going on for many years is a big plus for the Indian economy,” said Piyush Goyal, the minister for power and coal. “The economy can now move forward rapidly rather being cast with the shadow of uncertainty.”

Industry body, the Federation of Indian Chambers of Commerce and Industry (FICCI) has, however, urged the Supreme Court to consider the implications of any decision — relating to cancellation of the allocations of coal blocks — on the economy.

“This judgement has once again brought to the fore concerns about the country’s policy regime and has the potential to disrupt restoration of investors’ trust,” said Sidharth Birla, president, FICCI. “We reasonably expect that any extreme step (such as possible en-masse cancellation of allocations) shall not compromise legitimate business and investors who participated in good faith in processes laid out over an extended period by the governments of the day.”

According to him, the fate of productive assets, estimated at Rs2.86trn, are at stake. “We urge the fullest consideration of multiple levels of serious economic implications to the nation, including loss of employment, replacing domestic loss of production with imports and compromising energy security,” added Birla.