1st floor, Federation House, Block V, Kehkashan, Clifton, Karachi - 75600Telephone: (92-21) 35378701-2 Fax: (92-21) 35378704

Email: info@pip.org.pk Website: www.pip.org.pk

2012-13 to 2027-28

• Consumershavingassuredsupplyofenergyfor“livelihood”and“qualityoflife”.

• Energyproviderssellingandbeingpaidforenergyatcompetitive&sustainablemarket-based price with out pricing controls.

• Governmentundertakingplanningforenergysupplyonalong-termbasis.

The Key to a manageable Energy Future with Access For More necessitates

• EnergyPricing-thatallowssustainableflowofenergytoallsectorsoftheeconomy

and promotes energy conservation.

• EnergyEfficiency-thatenableseachenergymoleculetobeusedmostproductivelyin a competitive market.

• EnergyIntegrity-thatprovidesenergygovernanceandfairincentivestoeffectadynamic competitive market.

23

(Mill

ion

TO

Es)

20.89

5.76

1.79

25.08

31.3

12.8

6.40

59.7

72.1 75.37

78.99 82.57

86.31 90.23

94.34 98.64

103.15 107.87

112.83 118.02

123.46

129.17

135.16

141.43

0.0

25.0

50.0

75.0

100.0

125.0

150.0

2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 2026-27 2027-28

Gas Imports Coal Imports Oil Imports

Renewables Nuclear Hydel

Coal Oil/LPG Tight Gas

Indeginous Gas Local Supply

Indigenous Gas Supply

Oil (Crude/Products) Imports

Natural Gas imports

Coal imports

Imports 50.5

Local Supply 90.93

Hydel

Tight Gas

Coal Oil/LPG

34.50

Implementation of the “Blueprints” will ensure sustainable energy to Pakistan

Blueprint Scenario results in reduction of demand & supply gap because of reducing T&D losses to 18% and improving conversion efficiency of power generation to 35%

24

Energy Blue Prints

Pakistan Energy Outlook document identifies a set of Energy “Blueprints” which, if implemented, could allow Pakistan to thrive and grow with energy availability becoming the engine for the social and economic development of the country and facilitating GDP growth .

As with all reform processes, the “Blueprints” will require significant political will to execute and it is necessary that there be a national consensus to ensure continuity & improvement of policies over the next decade.

Blueprint # 1 – Market pricing of Natural Gas

Blueprint # 2 – Restructuring of the Natural Gas Sector

Blueprint # 3 – Dynamic Exploration & Production (E&P)

Blueprint#4–Fast-trackingLiquefiedNaturalGas(LNG)Imports&PipeLineGas

Blueprint # 5 – Rationalization of the Power Tariff

Blueprint # 6 – Transforming the Power Sector

Blueprint # 7 – Growing Power Generation Capacity

Blueprint # 8 – Oil Sector: Introduction of Future Fuels

Blueprint # 9 – Indigenous Coal Utilization as a Game Changer for Pakistan

Blueprint # 10 – Effective Governance of the Energy Sector

25

Blueprint # 1Market pricing of Natural Gas

Issues

• The government-controlled natural gas pricing in Pakistan is significantly lower than pricing ofalternate fuels leading to a high gas demand & low gas supply situation.

• Amechanismofpricingslabsfordifferentgasconsumptionlevelshascreateddemanddistortionand has encouraged unethical practices resulting in increasing UFG.

Recommendations

• Naturalgaspricingbemadecompatiblewithpricingofreplacementfuels(LPG,Fueloil,LNG,Pipelinegas) and subsidy, if any, be extended through a transparent mechanism.

• Pricingfornewnaturalgassupplies,bothdomesticandimports,bede-regulated.• Pricingslabsbeabolished,withasinglenaturalgaspriceforallsectors.• GasallocationbeprioritizedtotheefficientsectorandinvestmentgrowthstrategyofGovernment.• LPGimportsbeencouragedwithpricedistortionremovedtoallowdeliveredpriceandnotFOBprice

linked to Saudi Aramco CP. • Usageofpipedgastotheconsumersbediscouragedandbottledgasbeencouraged.

Status 2013

• LNGwillbeweightaveragedforpowersectorperECCdecisionin2012.• SubstituteNaturalGasandLPGimportshaveyettostart.

Blueprint # 2Restructuring of the Natural Gas Sector

Issues

• The state-controlled natural gas sector is being used for political leverage, resulting in over-commitment of gas supply leading to natural gas shortages.

• IncreasingnaturalgastheftisreachingalarmingproportionswithUFGincreasing12%.• State-controlledentitiesSuiNorthernGasPipelinesLtd.(SNGPL)andSuiSouthernGasCompanyLtd.

(SSGCL)continuetohavegeographicalmonopoliesinthenorthernandsouthernpartsofPakistanrespectivelyforthepurchase,transmission,distributionandsales/marketingofnaturalgas.

26

Recommendations

• Provinces need to resolve anomalies due to 18th Amendment and Pakistan needs to provide acompetitive gas market with de-regulated prices and open-access to the gas distribution grids for gas supplier(s) and producers(s).

• The existing gas utilities be unbundled and a single state-controlled natural gas transmissioncompany be created for transmitting gas on an open-access basis with responsibility of payment to gassupplier(s)/producer(s).

• Naturalgasdistribution&marketingbeprivatizedtoprovincebasedcompaniestoprovideimprovedbusiness discipline and customer management.

• Naturalgastheftbedeclareda“non-bailableoffence”withahighpenalty.* ISGSberesponsibleforimportedgas–LNG,IPI,TAPI. Status 2013

• ThirdPartyAccessRule2012notified.• Naturalgastheftdeclaredanon-bailableoffense.• The licensesofSSGC/SNGPLgrantingthemmonopolyexpired in2012butPolicytodevelopnew

utilities pending.

Blueprint # 3Dynamic Exploration & Production (E&P) Issues

• GaspriceincentivesfortheE&PsectorinPakistanarenotattractiveenoughformajornewinvestmentsto be undertaken for onshore & offshore exploration.

• Securityissues&uncertaintyincontinuityofE&Ppoliciesbysuccessivegovernmentsarebarrierstomajor E&P investments.

Recommendations

• Distortionsinpoliciesdueto18thAmendmentneedimmediatecorrection.• E&PSectorimportpercentageoftheiryearlyproductionandsellbyweightaveraging.• E&P sector be progressively de-regulated and be allowed to sell new natural gas discoveries at

market-based pricing of compatible fuels and under 2012 Policy are now able to sell 10% natural gas directly to industry. They need to be able to sell to consumers as well later via open access to the gas transmission & distribution grids.

• Shale&TightgasandShaleoilexplorationistobeencouragedandfacilitatedunderthePolicybeingformulated.

• E&P,OMCandotherorganizationsparticipate inexplorationandproductionprojectsoverseas tosecure a stable supply of oil and gas for Pakistan.

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Blueprint # 4Fast-trackingGasImportsviaLiquefiedNaturalGas(LNG)andPipeline Gas

Issues

• Pakistan’s current credit rating of below investment grade is not conducive for long-term LNGcontractsbyPublicPrivateSector,inwhichLNGsuppliersrequirepaymentassurance.

• PakistandoesnotpossessLNGimportinfrastructure.• GeopoliticalsituationandsecurityisdelayingTAPI&IPI.

Status • ECCapproved1000mmcfdofLNGimportswithsovereignguaranteeandMultilateralDevelopment

Institution support to mitigate credit risk including provision of off take guarantee by SSGC.• GDSenforcedtoraisefundsforpipelineandLNGprojectsbutstayedbycourts.• LNGutilizationinpowersectorapprovedbyECC,ifonlyimportedbySSGC.

Recommendations

• Merchant LNG import terminal(s) be set-up by the private-sector, under capacity-utilizationguarantees by the government for an initial period of 10 years, to enable early short and long term LNGimportsbyISGCandBuyersofLNG.TheimportterminalsbeopenaccesstocreateacompetitivemarketforLNGimports.

• Power,CNG,Industrial&TextileSectorsimportpercentageoftheirrequirementonspotandshortterm basis, initially.

• GwadarbedesignatedforLNGlandterminal(s)andPortQasimforFloatingTerminal(s).GoPdeveloplandterminal(s)andtheprivatesectorfloatingterminals.

• Private andPublic sector LNG imports andPipelineGas importpricingbeatnodisadvantage topricing by the public sector.

• Transparentprocesstobeadoptedtoexecuteprojectastoensureparticipationbyreputableandqualified developers.

Imported Gas Price at Brent of US$ 100 per barrel

Gas

Quantity Bscfd

Total

Investment US$

69% or 11.9% of Brent $11.90 1 .3-1.6 12b-14b

78% or 13.45% of Brent $13.45 0 .75-1.0 7 .5b

83.5% or 14.4% of Brent

89.9% or 14.9% of Brent+0.6 91.0% or 15.2% of Brent+0.5

$14.43 $15.5 $15.7

0.75 0.50 0.50

0.2b 0.2b 0.2b

TAPI

IPI

LNG ETPL O er* QGas O er** GDF Suez O er India*** TBA $16

$21 0.20 0.20

0.1b 0.1b

The pipeline gas prices are at the border of Pakistan and LNG DES is at Port Qasim *** Express Tribune, June 18 2013

28

Blueprint # 5 Rationalization of the Power TariffIssues

• Asinglenationalpowertariffdoesnotrecognizethedisparitiesinpowercostsindifferentregionsofthe country and promotes inefficiencies.

• Pricing slabs for different levels of power consumption are leading to market distortions andencouraging unethical practices with increasing T&D losses.

• RegulatorydeterminationsarenotenforcedbyGovernmentandarerestrictedbythecourts.

• Thegovernment-controlledpowertariffdoesnotreflectthecostofpowergenerationandsubsidiesare causing crippling “circular debt” and resulting in residential power tariff being one of the lowest in the region.

AnequalizedNationalPowerTariffistherootcauseofpowersector problems

Power Subsidies(PKR/Kwh

29

Low Tari�, High Losses &Under-Recovery

Pressure against Tari� Increase

Lack of Liquidity for Sector

Increase of Demand / Supply Gap

Creation of Receivables

Requirement of GOP Subsidy

Increase inLoad

Shedding

Insu�cientNew PowerGeneration

Lack ofNew

Investors

CircularDebt

Problem

The Energy Sector Challenge

30

Recommendations

• Power tariffbe raised to reflect realcostandencourage investment in thesectorby reductionofcircular debt.

• Thesinglenationalpowertariffbedisbandedandde-centralizedtothemultiplepowerdistribution&marketingcompanies(DISCOs)toreflectthetruepowercostsindifferentpartsofthecountry.

• Equitabledistributionofelectricityduringloadsheddingbyinstallingamonitoringsystematallgridstation outgoing feeders.

• The power tariff for each distribution company be de-regulated, with no pricing slabs and nogovernment subsidy.

• Acompetitivepowermarketbecreatedthroughopenaccesstothedistributiongridsforallpowersuppliers.

• Distortiondueto18thAmendmentberesolvedbytheProvinces.• Nethydelprofitsbetimelypaid.• Despatchbeensuredonbasisofefficiencyandcostofgenerationby followingstrictly themerit

order.

Pakistan’s residential power tariff is one of the lowest in the region

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Blueprint # 6Transforming the Power SectorIssues

• The government-controlled power sector has become heavily politicized, with the governmentunable to improve its poor performance.

• Consumers,bothgovernment&private,areabletoresorttopowertheft&non-paymentwithoutfear of repercussions.

• Multipleproblems,particularlyagovernment-controlledtariffandhighsystemlosses,havemadethe power sector unattractive for new investment.

Recommendations

• High-voltage power transmission to continue being a government responsibility via the state-controlled NTDC, with open-access for all power suppliers.

• Allpowerdistribution&marketingcompanies(DISCOs)beprivatizedunderPrivatePublicPartnershipand province basis and allowed to operate in a competitive power market with open-access for third-party power suppliers with mandate to improve efficiency and reduce losses within 5 years.

• Integratedgenerationanddistributionorganizationbeencouraged.• Powertheftbedeclareda“non-bailableoffence”withahighpenalty.

Blueprint # 7Growing Power Generation CapacityIssues

• Pakistan’spowergenerationcapacityof20,000MW(dependable16,000–18,000MWincluding4,600hydel) will require to be at least doubled in the next 15 years.

• Thermalpowerplants(~5,000MW)havelowconversionefficienciesandareexpensivetomaintainand operate.

• Theprivate-sectorpowerplantsaremoreefficientbutareunder-utilizedduetofuelavailability.• Circular debt problems causing cash flow problems and resulting in non availability of fuel for

generation.

Recommendations

• Allnewthermalpowergenerationbebasedongas,nuclearandcoalandbeintheprivatesector,andthe state-owned thermal power plants be privatized as Private Public Partnership.

• Thethermalpowerplantstooperateinacompetitivemarketanddespatchedpermeritorder.Theybe mandated to use multiple fuels and import 25% of their fuel requirement directly.

• Largehydel andnuclearpowergeneration to remain a state responsibility and their tariffs tobeadjusted to provide funds for building new capacity.

• Solar andWind energy induction into the network be ensuredwith policy to facilitate sale andpurchase of power by consumers be encouraged.

• GENCOSbeprivatisedwithmandatetoimproveefficiencyby50%within4years.• Liquidfuelplantsbeusedforpeakloadmanagementonly.• Powerpolicybereviewedtoenablereductionintariffbyoptimizingfinancingcostanddiscountrate

percentage.

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Blueprint # 8 Oil Sector: Introduction of Future Fuels

Issues

• Regulated pricing&margins of oil products are a significant disincentive for the introduction ofinternational quality future fuels in Pakistan.

• Localrefineriesdonothavethecapabilitytoproducefuturefuelsandrequireincentivesforupgradingtheir refining assets & processes.

Recommendations

• Pricing&marginsofthemaintransportfuelsbede-regulatedandtheregulatoryauthoritybetaskedwith ensuring fair competition.

• Minimum specifications for fuel quality in Pakistan be progressively aligned with internationalspecifications.

• Capability of local refineries be enhanced through time-bound fiscal support to enable them toproduce better-quality fuels:a. Refineries to be exempted from turnover tax, as refineries profitability has no relationship to the

huge turnover due to high volume and prices of petroleum products.b. Naphthabelocallyusedforpowergenerationand/orpetrochemicalindustryc. Consistent GoP policies are must to ensure and sustain investments in the refinery sector.

Blueprint # 9 Indigenous Coal Utilization as a Game Changer for Pakistan

Challenges

• Coalmining iscapital intensiveandrequiresveryspecial incentivestoattractthe investmentandwere approved by ECC for Thar only.

• Thar coalwill require to be utilized at the“mine-mouth” andwill entail significant infrastructuredevelopment at Thar.

• Othercoalfieldsdevelopmentbesupported.

Recommendations

• A“CountryCoalDevelopmentMaster-plan”beformulated,settingouttheroad-mapfortheuseofindigenous coal and imported coal for power generation and gasification.

• Governmenttourgentlyallocatefundsforkeyinfrastructuredevelopmentatcoal-fieldsandinitiatea strategic dialogue for development of coal reserves with international financing agencies.

• Localfuelbased2400MWplantsbeinitiatedtoincreaselocalcoaldevelopment.

33

Blueprint # 10Effective Governance of the Energy Sector

Issues

• HeavygovernmentcontroloftheenergysectorinPakistanhasnotallowedmarketsupply&demandforces to operate, leading to severe energy supply problems.

• The often conflicting objectives of the petroleum and power ministries and now provinces arecontributing to the on-going issues in the energy sector.

• Therolesoftheregulatoryauthorities(OGRA,CCP&NEPRA)ofensuringcompetitivenessinade-regulated energy market, have not been achieved.

• Mostgasmarketsintheworldarebetweenthetwoextremesasdescribedbelowthatdividestheworld gas markets into four groupings and Pakistan is following combination of 3 and 4.

Recommendations

• AllenergysectorfunctionsofthegovernmentbeconsolidatedunderasingleMinistryofEnergytofacilitate energy sector investments and is expected to be implemented.

• A single Energy Regulatory Authority be created to manage the proposed de-regulation of theenergy market in Pakistan.

• Energyconservationbeenforcedwithencouragementofefficientconvertorofenergymandated.• Regulatorydeterminationsrelatedtotariffadjustmentsofgasandelectricitybenotchallengeable

by courts.