Severe Gas Shortages To Persevere
BMI View : We expect gas shortages in Pakistan to continue in the s hort-to-medium term, with consumption capped by struggling production and an absence of import infrastructure. Exploration efforts and the ongoing lice nsing round could yield some upside risk to our forecast, but current discoveries remain limited in terms of gas and will most likely not suffice to upturn Pakistan's long-term gas production decline. We expect that c urrent efforts by the government in both LNG and pipeline projects could provide some relief for gas consumption, but not before 2015 at the earliest.
|Consumption Capped By Struggling Production|
|Pakistan Gas Production, Consumption and Proven Reserves (bcm), 2000-2012|
Historically large gas reserves and significant production have led officials to promote gas consumption rather than oil consumption in order to ease the financial burden associated with exporting crude. Gas demand has therefore soared over the past decade, with production and consumption having risen from 21.93bcm in 2001, to a peak of 39.63 in 2009.
However, the country's gas production has reached a plateau stage since 2009. With slowing production, demand growth and a lack of import infrastructures, Pakistan has been increasingly experiencing gas shortages, particularly in the North of the country. We believe that given the current investments and ongoing projects, this situation is likely to continue and possibly worsen over the near-to-medium term.
Limited Production Upside From Domestic Exploration
With excessive tapping of existing reserves and a lack of significant large discoveries in the past years, production in Pakistan is withering. The country's two main gas fields, the Sui and Qadirpur fields which currently produce a quarter of Pakistan's gas are maturing and are expected to become depleted by the end of the decade.
The government has therefore attempted to boost new exploration in the country through a revamp of licensing regulations and the offering of 58 onshore blocks in an ongoing licensing round. The new incentives seem to have proven an attractive prospect for potential investors, as 50 of the 58 blocks in the 2012-2013 licensing round have been bid on, wi th a total of 60 bids received. These provide upside risks to our reserves and production forecasts. Current exploration efforts have also yielded some gas discoveries, such as the recent Sukhpur discovery by Eni in May 2013 and a discovery in the Mehar block by OMV in August 2013 .
However, we note that these discoveries remain limited when compared to Pakistan's overall consumption figure, and will most likely not suffice to upturn Pakistan's l ong-term gas production decline or to meet the country's increasing gas demand. We see proven gas reserves fall from their 2009 peak of 890bcm , to about 390bcm by 2022. We expect gas output to peak at 40.1bc m in 2015 with several small discoveries coming online. However, we see production fall ing thereafter should no significant discoveries be made. Total g as output s could fall to 36.6bcm by 2022, when production from the Sui and Qadirpur fields becomes largely depleted.
|Struggling Production Set For Long-Term Decline|
|Natural Gas Production (LHS) and Proven Reserves (RHS), bcm, 2010-2022|
Crucial Import Infrastructures Provide No Short-Term Relief
In addition to limited upside to domestic gas production, we see gas consumption remaining constrained in the short-to-medium term due to the country's lack of import infrastructures. Current efforts by the government in both LNG and pipeline projects could enable gas imports, but not before 2015 at the very earliest:
Liquefied Natural Gas (LNG): Pakistan is supporting the development of LNG infrastructure as part of its attempt to put an end to energy shortages. Two fast-track projects, which will retrofit liquid petroleum gas (LPG) terminals to enable a combined regasification of around 8bcm a year, could come online by early 2015 and 2016 respectively. We expect first LNG to be imported into Pakistan in 2015 at the earliest. For 2015, we expect LNG imports of 0.4bcm in order to minimise the current gas shortages in the country.However, much downside risk exists to the completion of the LNG terminals, as around a dozen attempts to import LNG have been made in the past seven years, all of which have failed. In addition, while Pakistani officials were reported to have restarted negotiations for LNG supplies from Qatar in July, no supply deal has yet been agreed to at the time of writing.
Pipelines:Iran-Pakistan Pipeline: In March 2013, the Iranian and Pakistani governments reached final agreements in developing the remaining part of the IP pipeline despite reiteration of US sanctions. At the time of writing, Iran has already built 900km of the pipeline on its side of the border. While there is downside risk to its completion due to political and economic pressures, we believe that the pipeline will most likely go forward and could see first flows by 2015. Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline: We nonetheless anticipate that the majority of the imported volumes will likely come through the TAPI pipeline, which could be completed by the end of our forecast period, providing it garners sufficient support. The main reason behind our belief that this route is more likely to prevail than LNG imports is the fact that most shortages occurred in the Northern part of the country and transporting large amounts of re-gasified LNG through the country's pipeline network would require a huge improvement programme, unlikely in light of the country's limited finances.
In view of current projects, it is very unlikely that Pakistan will see gas imports before 2015 . Gas shortages are therefore increasingly likely in the short-to-medium term as production will fail to meet demand, and import infrastructure remains inexistent.
In the medium-to-longer term, c onsumption could gain some breathing room as LNG infrastructure and the IP pipeline come onstream. From 38.76bcm in 2013, we believe economic expansion and population growth will push consumption to 46.55bcm in 2022. This number will still be limited by a lack of sufficient gas imports. Nonetheless, these numbers imply that Pakistan's net gas imports will grow from nil in 2012 to 9.9bcm in 2022.
|Import Infrastructures Provide Breathing Room For Consumption From 2015 Onwards|
|Pakistan Natural Gas Production and Consumption (bcm), 2008-2022|
Unconventional Upside Risks ?
There is nonetheless some potential upside towards the end of the forecast period: significant exploration is set to be carried out from 2014 onwards (following from the 2012-2013 licensing round). In addition, state-owned Pakistan Petroleum Limited (PPL)'s deepwater exploration will reportedly begin in 2014.
In addition, the country's main upside risk could come from its unconventional resources. Shale gas exploration is a very large upside risk to our forecast. The EIA now estimates that nearly 3 trillion cubic metres (tcm) could be found in Pakistani shales. If these resources are proven to be commercially viable in the coming years, it could change Pakistan's energy market. However, exploration for shale gas will prove challenging as the geology of the country's shale is still unknown and could be too complicated to offer commercially viable access to extensive resources. In the summer of 2013, a joint study between Eni and PPL on Pakistan's shale prospects calculated the cost needed to drill and produce shale gas. US$14/mnBTU was the price proposed to the Pakistani government, which is much higher than the current domestic sales price, postponing any prospective developments at the time of writing.Import Infrastructures Provide Breathing Room For Consumption From 2015 Onwards