ENERGY UPDATE: STRATEGIC GAS RESERVE SHORTAGES, TARIFFS

C O N F I D E N T I A L SECTION 01 OF 03 ISLAMABAD 003647 SENSITIVE SIPDIS E.O. 12958: DECL: 11/19/08 TAGS: ECON ETRD EAID EFIN ENGY EPET ELTN PK IN SUBJECT: ENERGY UPDATE: STRATEGIC GAS RESERVE SHORTAGES, TARIFFS INCREASED, PRICES REDUCED AND IPI QUESTIONABLE Classified by: Ambassador for reasons 1.4 (b) and (d) REF: ISLAMABAD 3264 ¶1. (C) Summary: Pakistan's strategic oil reserves have fallen to low levels due to Pakistan's credit rating and inability to use letters of credit to purchase crude oil. Sources in the GOP report that Iran is attempting to substantively change the Iran-Pakistan-India gas pipeline project. Iran wants to determine the gas price before the pipeline is operational rather than engage in a fixed contractual price and Iran also wants the right to reduce the supply to Pakistan if the GOP reduces the supply to India. The Government of Pakistan (GOP) announced new reductions in retail fuel prices as a result of lower international oil market prices. In addition, the GOP opened the financial bidding for two thermal plants expected to generate approximately 301 MW of electricity. Electricity tariffs will be increased by 13 percent. However, officials at the Ministry of Water and Power and their Minister differ in their projections of the subsidy cost for electricity but have provided that an increase of only 13 percent leaves the GOP with a subsidy, based on current world market prices for furnace oil, at PKR 88 billion (USD 1.11 billion). End Summary. -------------- STRATEGIC RESERVES LOW -------------- ¶2. (C) Ministry of Petroleum and Natural Resources Deputy Director Jabar (protect source) confirmed to EconOff on November 19 that due to Pakistan's deteriorating credit rating, which was reduced to CCC by S&P on November 14, the government is facing difficulties buying crude oil. According to Jabar, Pakistan is facing severe problems clearing letters of credit, and the crude reserves are "significantly less than" the 10-day reserve requirement. The GOP reduced the reserve requirement from 21 to 10 days in October in order to boost foreign exchange reserves (reftel). ¶3. (C) EconCounselor spoke with Haroun Khawaja, CEO of AES Pakistan who confirmed that they are concerned about their ability to continue purchasing from Pakistan State Oil due to the drop in strategic reserves. Khawaja stated that no letters of credit for private Pakistani banks are being accepted due to the overall credit rating and all orders for crude oil on the international market must be paid for in advance. 
 ¶4. (C) The Embassy representative for the Defense Energy Support Center Middle East is checking with suppliers to determine the level of individual stocks in order to determine what impact these low levels will have on ISAF refueling in Afghanistan. Approximately 95 percent of the cars in Pakistan use compressed natural gas, however low reserve levels will impact transit of goods, industrial manufacturing as well as the fuel used for generators across the country. - - - - - - - - - - - - - - - - - - - IPI GAS PROJECT BACK ON DRAWING BOARD - - - - - - - - - - - - - - - - - - - ¶5. (SBU) Tamoor Asmat Osman, Joint Secretary of the Ministry of Petroleum confirmed to EconOff on November 17, that Iran has backed out of the Gas Sales Purchase Agreement and has made new proposals. Tehran wants Islamabad to allow an additional review before the IPI project becomes operational. Under the Iranian proposal, Iran would be authorized to re-open the price formula before the operational start date of the project. This would trigger uncertainty for Pakistan in the prices of the imported piped gas. Iran wants to move the price formula closer to spot market prices, rather than fix a long-term contractual price. However, the GOP believes that any uncertainty in the gas price will make the IPI project economically unviable. ¶6. (SBU) Osman said that Iran also wants the right to reduce gas supplies to Pakistan to allay Indian concerns over Pakistan's ability to reduce any future gas flows to India. India has reportedly expressed concerns over Pakistan's ability to do so unilaterally. Osman further said that "both changes are significant in nature and tantamount to going back to the drawing board." - - - - - - - - - - - - - - ELECTRICITY TARIFF INCREASE ISLAMABAD 00003647 002 OF 003 - - - - - - - - - - - - - - ¶7. (SBU) With a rising fiscal deficit, the GOP decided on September 9 to raise the electricity tariff by an unprecedented 31 percent to pass on a portion of the subsidy burden to consumers. At that time, Minister of Water and Power Raja Parvez Ashraf maintained that the GOP wants to pass PKR 120 billion (USD 1.47 billion) to consumers. Ashraf also stated that the step was necessary in order to reduce the electricity subsidy from PKR 185 billion (USD 2.27 billion) to PKR 65 billion (USD 0.79 billion) annually. When the September electricity bills, with a 31 percent increase, were delivered in October, protests and riots occurred in cities across Pakistan. Fearing a major law and order situation, on October 23 the government announced a reversal of the September 9 increase and constituted a committee to revisit the tariff rise issue. ¶8. (SBU) On November 14 Federal Minister for Water and Power Raja Parvaiz Ashraf announced that, after extensive deliberations and consultations, the committee recommended an electricity rate increase of 13 percent. Zarar Aslam, Additional Secretary, Ministry of Water and Power, told EconOff on November 19 that the GOP would be paying PKR 88 billion (USD 1.11 billion) in fiscal year 2007-2008. Going into detail, he said that the Government had originally budgeted PKR 65 billion (USD 820.43 million) for electricity subsidies but that they had had to revise the expenditure upwards. Aslam said that the Government would pay PKR 65 billion (USD 820.43 million) to the Water and Power Development Authority (WAPDA) and PKR 12 billion (USD 151.46 million) to the Karachi Electricity Supply Corporation (KESC) in tariff subsidies and another PKR 11 billion (USD 138.84 million) in agricultural tube well subsidies. ¶9. (SBU) Aslam further said that the GOP has already paid PKR 35 billion (USD 44.77 million) in the first twelve weeks of FY 2008-09 for electricity subsidies and has committed to eliminate electricity subsidies altogether by the end of the current fiscal year. The GOP budgeted PKR 140 billion (USD 1.77 billion) for fuel subsidies and PKR 65 billion (USD 820.43 million) for electricity subsidies in FY 2008-09. ¶10. (SBU) Waqar Asgar Rana, Section Officer at the Ministry of Water and Power, told EconOff on November 18 that the GOP hopes to save at least half of the total subsidy expense in the current fiscal year through the continuing decrease of international furnace oil prices. Pakistan generates about 30 percent of its electricity from furnace oil with the other 70 percent split between hydropower and domestic natural gas. Pakistan's independent power producers rely exclusively on furnace oil for their power generation, and with the vast majority of furnace oil imported from Kuwait, the GOP is still seeking a concessional agreement with Kuwait. ¶11. (U) The GOP has also reintroduced a sliding scale system of pricing for domestic customers in which the unit cost of electricity rises with the rate of consumption, ranging from PKR 1.40 (1.76 cents) per unit to a maximum of PKR 10 (12.6 cents) per unit. A residential customer using 750 units, for instance, would pay PKR 3.23 (4 cents) per unit for the first 50 units, PKR 3.23 (4 cents) per unit for the next 50 units, PKR 4.90 (6.2 cents) per unit for the next 300 units, PKR 7.97 (10 cents) per unit for the next 400 units and PKR 10 (12.6 cents) for all units over 700. The GOP argues that people who can afford to use more electricity should pay more as their consumption rises. - - - - - - - - - - - FUEL PRICE ADJUSTMENTS - - - - - - - - - - - ¶12. (SBU) On November 15 the GOP announced a reduction of retail fuel prices ranging from 5 to 19 percent. The impetus behind this move was the drop in international oil prices from July's record high of USD 147 a barrel to USD 50 a barrel. Following a regularly scheduled bi-weekly review, the Oil and Gas Regulatory Authority (OGRA) issued a notification to reduce prices effective November 16. The GOP is hoping that the cut in diesel and gasoline prices will reduce inflation, which is hovering around 25 percent. ¶13. (SBU) According to the OGRA notification, the government reduced the price of petroleum by 15 percent or PKR 10 (13 cents) per liter to PKR 66.66 (83 cents) per liter, or the equivalent of USD 3.07 per gallon; kerosene oil by 8.08 percent or PKR 5 (6 cents) per liter to PKR 56.87 (71 cents) per liter; high speed diesel by 4.6 percent or ISLAMABAD 00003647 003 OF 003 PKR 3 (4 cents) per liter to PKR 61.14 (76 cents) per liter; light diesel oil by 13.20 percent or PKR 7 (9 cents) per liter to PKR 53 (66 cents) per liter; and high octane blending component by 18.50 percent or PKR 15 (19 cents) per liter to PKR 81.08 (USD 1.01) per liter. ¶14. (SBU) The government collects a significant amount of revenue from petroleum products in the form of two taxes: the Petroleum Development Levy and the General Sales Tax. The Petroleum Development Levy on a liter of petroleum after the price reduction is PKR 28.27 (35 cents),kerosene oil PKR 5.94 (7 cents),HOBC PKR 37.63 (47 cents),and diesel PKR 9.23 (12 cents). The general sales tax on a liter of petroleum after the price reduction is PKR 9.19 (11 cents),kerosene oil 7.84 (10 cents),high octane blending component PKR 11.18 (14 cents),and diesel PKR 7.31 (9 cents). ¶15. (SBU) The oil marketing companies (OMCs) also announced a reduction in furnace oil prices by 31 percent or PKR 8,799 (USD 110) per ton to PKR 28,026 (USD 350) per ton due to the declining trend in world oil prices. All leading oil marketing companies including Pakistan State Oil and Shell Pakistan have announced cuts in furnace oil prices. The GOP expects that this reduction in furnace oil prices, used in thermal power generation, will reduce the cost of electricity generation and in turn decrease inflation. - - - - - - - - - - - - - - NEW RENTAL POWER PROJECTS - - - - - - - - - - - - - - ¶16. (SBU) On November 17 the Private Power and Infrastructure Board (PPIB) opened the financial bidding for two fast track thermal power plants with a cumulative capacity of 301.4 MW. Sami Rafi Saddique, Director of Administration at PPIB, told EconOff that Gulf Rental Power (80.5 MW) and Independent Power Private Limited (220.9 MW) have proposed a five-year rate of 16.37 cents per kwh and 18.88 cents per kwh, respectively. An evaluation committee comprised of experts from PPIB, National Electric Power Regulatory Authority, WAPDA and the Ministry of Finance will evaluate the financial proposals, and successful bidders will be informed in a week. ¶17. (SBU) The GOP is seeking rental power projects to address the significant blackouts which plague the entire country. Pakistan is now experiencing a shortfall of approximately 6000 MW. While the locations for these rental units have not yet been determined, local power officials have indicated to post that any agreement will include provisions to pay upfront fees for power generation. The average domestic rate is significantly lower than the proposed rate for the rental units, making these projects the most expensive energy in Pakistan. PATTERSON