2021 energy crisis brought high power prices, dwindling supplies

Unlike some other sectors of the economy, Pakistan’s energy sector painted a sorry picture in 2021 as global headwinds had a crippling impact on domestic markets.

The energy sector's main industries — oil, gas, and power — suffered major blows as the Delta variant slowed economic activity across the world, especially in the first half of the calendar year.

Then, as economies reawakened, oil and gas prices soared to historic highs due to supply chain pressures, dealing a blow to consumers but providing a big opportunity to company owners.

Speaking to Geo.tv, Arif Habib Limited's Head of Research Tahir Abbas noted that oil prices remained robust in the second half of the year as aggressive vaccination drives across the globe prompted the reopening of economies and commencement of international travel.

“With this, West Texas Intermediate (WTI), Brent, and Arab Light peaked at a three-year high of $84.65 per barrel, $86.40 per barrel, and $85.25 per barrel respectively in the fourth quarter of the calendar year (October-December),” he said.

It is pertinent to mention here that oil prices had been at a historic low in the previous year, especially during the second quarter of 2020 (April-June), following the outbreak of COVID-19 worldwide and resultant lockdowns. WTI, Brent, and Arab Light had plummeted to $37.63 per barrel, $19.33 per barrel, and $13.34 per barrel, respectively.

“With concerns over the latest variant, Omicron, the prices of WTI, Brent, and Arab Light have again declined to $66.18 per barrel, $69.67 per barrel, and $71.69 per barrel respectively in the first week of December 2021 (three-month low),” Abbas noted.

In 2021, oil prices remained robust amid aggressive vaccination drives across the globe along with the opening up of economies. — Tahir Abbas

In July 2021, the Organisation of Petroleum Exporting Countries and allies including Russia, known as OPEC+, agreed to increase production by 0.4 million barrels per day every month starting from August 2021 until April 2022, and 0.432 million barrels per day thereafter until pandemic-era production cuts are zeroed by September 2022.

“Despite global pressure from major economies such as US and UK in the fourth quarter of this year, OPEC+ decided to keep with the agreed plan. Furthermore, the US released 50 million barrels of oil from its Strategic Petroleum Reserves. In addition to this, Nuclear Deal with Iran came into consideration by the US,” the energy expert noted, commenting on the supply side situation.

In Pakistan, oil production during the year under review stood at 75,652 barrels of oil per day (bopd) against 74,297 bopd in CY20, up by 1.8% year-on-year, given “low base impact from 2020’s nationwide lockdown to contain the virus, for which major oil fields witnessed forced shutdown tagged with the unavailability of oil trucks", according to data released by Arif Habib.

Caught in the middle of the global rebound in oil demand and resultantly higher prices, the Pakistani government increased petrol prices sharply. 

Petroleum rates started rising starting January 1, and Motor Spirit (MS) were and High-Speed Diesel were up 33% and 28% respectively for the year by December 15.

“Hefty Pakistani rupee depreciation against the US dollar and surge in international oil prices led to a jump in the ex-refinery price of MS and HSD,” Abbas said.

The analyst predicted that, going forward, oil prices are expected to average around $72.8 per barrel in FY22 and $65 per barrel in FY23 and beyond.

“Key factors to watch out for oil prices include the unwinding of an oil production cut by OPEC resulting in excess supply in 2022; the threat of COVID-19 (Omicron) — as any spike in cases of the new variant may adversely impact economic activity, which could limit or reduce oil consumption, taking a toll on oil prices; the geo-political situation, including a nuclear deal between US and Iran tagged with the US-China trade war; and tensions between Russia and Ukraine, which could cause a rally in oil prices in 2022,” he said.

Power generation up by 10.5% during 11MCY21

According to data released by Arif Habib, power generation grew by 10.5% year-on-year to 127,744 Gigawatt hours (15,936 MW) during 11MCY21, compared to 115,568 GWh (14,374 MW) during the same period last year.

“The rise in a generation was due to higher generation from furnace oil (FO), nuclear, wind, coal, re-gasified Liquefied Natural Gas (RLNG) and solar,” a power expert told Geo.tv.

Data source: Arif Habib Limited
Data source: Arif Habib Limited

Generation mix during 11MCY21

Major contributors during 11MCY21 were hydel (share: 28.1%), coal (share: 19.7%), RLNG (share: 19.4%), nuclear (share: 11.0%), gas (share: 10.5%), FO (share: 7.0%), wind (share: 2.5%), solar (share: 0.53%) and bagasse (share: 0.47%).

During the first eleven months of 2021, the share of nuclear-based power generation increased to 11% of the total from 7.5% during the same period last year.

“This notable rise in the share of nuclear-based generation was witnessed due to the Karachi Nuclear Power Plant, KANUPP, adding 1,100 MW in the system. The plant began power generation from a new extension in March 2021.

The share of furnace oil-based generation during 11MCY21 was at 7% compared to 3.7% during the same period last year. The rise in the share of FO-based generation was attributed to a rise in overall demand of the country along with a 6% year-on-year decline from hydel-based generation.

Meanwhile, due to low power production from the Tarbela 4th extension plant, the share of hydel-based generation declined to 28.1% during the period under review from 33.1% during 11MCY20.

Date source: Arif Habib Limited
Date source: Arif Habib Limited

Fuel cost for power generation rises by 45%

During 11MCY21, fuel cost for power generation increased by 45% year-on-year to Rs6.30/KWh compared to Rs4.34/KWh during the same period last year.

The rise in fuel cost by 45% was attributed to a 53% year-on-year increase in the cost of generation from RLNG, which clocked in at Rs12.14/KWH due to a 46% year-on-year rise in RLNG prices to an average of Rs1,944/mmbtu ($11.93/mmbtu).

Moreover, coal-based cost of generation also went up by 33% year-on-year to an average of Rs8.56/KWh during 11MCY21 due to a 93% year-on-year rise in coal prices.

Meanwhile, FO-based cost of generation increased by 30% year-on-year to an average of Rs16.80KWh due to a rise in oil prices.

Gas-based cost of generation also increased by 19%.

Circular debt resolution

In 2021, the government signed revised agreements with independent power producers (IPPs) — under new terms and conditions — and also devised a payment mechanism earlier this year, under which the following was agreed with the IPPs:

First installment: 40% of outstanding amount (breakup: 33.3% cash, 33.3% SUKUK and 33.3% floating PIBs)

Second instalment: 60% of outstanding to be paid after six months (breakup: 33.3% cash, 33.3% SUKUK and 33.3% floating PIBs)

As agreed, the first (40%) and second (60%) instalments of Rs90 billion and Rs135 billion were disbursed to IPPs (1994 and pre-1994) in June 2021 and November 2021, respectively.