Pakistan’s energy security via shale gas revolution
US natural gas prices have fallen below $2 per million BTU (approx 1000 cubic feet), about one-sixth of the price Pakistan has agreed to pay for Iranian gas. With over 50 trillion cubic feet of known shale gas reserves in Sindh alone, Pakistanis can also enjoy the benefits of cheap and abundant source of energy for decades via the shale gas revolution already sweeping America.
Increased production of gas from shale rock in the US has created a huge new supply, pushing down gas prices from $13/BTU (million British thermal units) four years ago to just $2/BTU today, even as the price of oil has more than doubled. By contrast, the Iran pipeline gas formula links the gas price to oil prices. It means that Pakistan will have to pay $12.30/BTU at oil price of $100/barrel, and a whopping $20/BTU for gas if oil returns to its 2008 peak of $150/barrel.
To encourage investment in developing domestic shale gas, Pakistan has approved a new exploration policy with improved incentives as compared with its 2009 policy.
In addition to the fact that the Iran gas is extremely expensive, the entire Iran-Pakistan gas pipeline project raises other serious issues as well.
Iran-Pakistan Pipeline Issues:
1. Chinese investors and contractors have pulled out of the project for fear of being hit by US sanctions on their banks and other companies.
2. Russia’s Gazrom is reportedly interested but only if it gets the deal at whatever price it decides to charge without any competitive bidding.
3. Pakistani companies and financial institutions are also under threat of US sanctions if they participate in the project.
4. If the pipeline does eventually get built, it will still be several years before gas starts to flow to Pakistan.
5. If Iran is still under US sanctions when the Iranian gas imports finally begin, Pakistan will have difficulty paying for the gas using international banking system. Iran has already been suspended by SWIFT, the Society for Worldwide Interbank Financial Telecommunication, which is the main mechanism used for international bank transactions.
6. The largest chunk of Pakistan’s trade deficit is accounted for by energy imports. Iranian gas bill will only worsen this deficit, contributing to yet another balance of payments crisis sending Pakistan back to IMF.
Advantages of Domestic Shale Gas Development:
1. Cheap domestic gas can start flowing from Pakistani shale in a couple of years if Pakistan can make a deal with US (and American pioneers of shale gas like George Mitchel’s Devon Energy) to invest and execute on an accelerated schedule in exchange for dropping Iran pipeline.
2. Pakistan will dramatically reduce its dependence on foreign sources and save a lot of foreign exchange spent on hydrocarbon imports.
3. Gas burns a lot cleaner than coal which is also a option given vast amounts of it in Thar desert. World Bank and other International financial institutions are more amenable to financing shale gas development than coal.
4. Abundant and cheap domestic gas supplies can help reduce electricity load-shedding which is caused mainly by under-utilization of installed generating capacity for lack of affordable fuel.
Shale gas revolution began a few years ago when an American named George P. Mitchell defied the skeptics and fought his opponents to extract natural gas from shale rock. The method he and his team used to release the trapped gas, called fracking, has paid off dramatically. In 2000, shale gas represented just 1 percent of American natural gas supplies. Today, it is over 30 percent and rising.
Among the potential downsides of shale gas development is the possibility of groundwater contamination reported in some places in the United States. Such risks can be minimized by following accepted practices to protect the aquifers which are found at levels well above the deep shale rock fractured for extracting natural gas.
Cheap and abundant energy is a pre-requisite for rapid economic growth in any country. Pakistan is no exception. The sooner Pakistanis recognize and resolve this crisis, the better it will be for the south Asian nation.