North-South Gas Pipeline – Russia Vs Suis

The Requirement Is Higher In North And The Supply Is Coming From South (Port). For That North-South Gas Pipeline Is Needed.

Pakistan domestic gas supply is declining and increasingly the dependence is moving towards imported RLNG. The Requirement Is Higher In North And The Supply Is Coming From South (Port). For That North-South Pipeline Is Needed. The existing pipeline transports RLNG from south to north can handle maximum of 1.2 billion cubic feet per day (BCFD). There is urgent need to build a new pipeline to cater for future imported demand. The ongoing debate is on how much volume should that be handling and who should build it –Sui companies or the Russians.

Sui companies have the capacity and history of building pipelines of 42-inch diameter which can handle 1.1-1.2 bcfd without compression. If the future need is more, the case could be of building higher diameter pipeline. For that Russian support is required. If 48-inch diameter is used, it can handle up to 1.5 bcfd and 56-inch diameter can handle 1.8 bcfd.

There are elements of higher cost in bigger pipes and then the question of whether these can be made in Pakistan or not. Then there are reservations on guarantees in throughput – ‘take or pay’, and some fear that if the demand is not enough, just like IPPs, pipeline capacity payment would create another circular debt due to capacity under-utilization. This article attempts to find merits and demerits of using 42-inch diameter or more.

The north south pipeline construction decision was on table in 2015 when PMLN was in power. At that time, 85 percent of equity was sought from Russians, and it was supposed to be ‘take or pay’ (guaranteed throughput). The handling charges were 81 cents per mmcfd which is almost double the amount Sui companies are charging on existing transport. That should not happen.

Now this government is considering a different structure. For that, the need is to understand the history of gas development infrastructure Cess (GIDC) and Supreme Court’s decision. Pakistan was collecting GIDC, and it was supposed to be used for gas infrastructure development. The government collected around Rs300 billion, and some amount is pending. The court decision is to either use this money for gas infrastructure or give it back. The amount was being used for budgetary support in PMLN time and theoretically government has that money, but in essence it is lost in the fiscal blackhole. Government must use this money or finance ministry must arrange for paying back. Hence it is in best government interest to use the theocratical money for laying north-south pipeline.

The Inter-governmental agreement (IGA) with Russia has that consideration too. The new plan is to have government ownership of 74 percent and 26 percent Russian ownership. This way, Russian share in return from pipeline is much less than what it was envisaged in 2015. Then there are considerations of not having throughput guarantees i.e., it will be ‘take and pay’. This makes sense. The second question is what diameter should be used, and that determines the need of Russians. Sui companies cannot handle anything over 42-inch with existing capabilities. If the requirement is of higher diameter, it should be based on demand. There are two ways to gauge demand.

One is to look at how much volumes existing two RLNG terminals and two new terminals (at planning stage) would handle. Both existing terminals (current handling around 1.2 bcfd in total) are pledging to increase by 0.2 bcfd each. The new terminals are committing at least 0.6 bcfd each. That makes total additional need of 1.6 bcfd. Then one existing terminal eventually wants to move on land and can enhance further 0.2 bcfd. The overall need by terminal commitment is around 1.7-1.8 bcfd at peak demand.

However, the other element is to see what actual demand would be by existing consumers (or by new consumers). The demand is extremely high at existing domestic prices. But the demand is low at imported RLNG prices. The new pipeline is to handle imported gas. There is a big question on such a high demand at higher prices. But none of existing terminals’ expansion or two new terminals would have any guaranteed returns and would be on ‘take and pay’. This contrasts with existing 1.2 bcfd ‘take or pay’ contract with existing two terminals. If the private sector is willing to assume risk of terminals and Russians (and government of Pakistan by using GIDC money) are to build pipeline on ‘take and pay’, then let them take risk and have higher capacity to come online. Otherwise, it is better to come up with assured requirement of 1.2 bcfd (enough by 42 inches dia).

There are costs and imported material elements in changing diameter of pipes. 42-inch pipeline to cost around $1.6 billion and to handle 1.2 bcfd and these pipes can be made in Pakistan. Steel is to be imported and value addition to be made here. 56-inch pipeline will cost around $2.2-2.3 billion and to handle 1.8 bcfd and pipes are to be imported and O&M must be handled by Russia. Value addition is almost nil in Pakistan and import both in volumes (of pipes) and other equipment would be too high. Then 56-inch pipeline expertise world over is only with Russia and that will be like putting too many eggs in Russian backset. It is best to not consider it.

If 42-inch pipeline is used with compression, it can handle up to 1.5 bcfd. But cost of 3,000 MW compression is too high. It is not viable. The midway solution is to consider 48-inch pipeline. It will cost a little under $2 billion with minor compression, and it can handle 1.5 bcfd. If two compression stations are to be installed (cost is much less than compression on 42 -inch pipeline), it can handle peaking demand of 1.8 bcfd. All Pakistan steel companies need to gear up and make pipes up to 48-inch. Some local companies are saying that they can do it. If that is the case, it might be better option, given that it would be ‘take and pay’.

The Other Consideration Should Be About The Quality And Longevity Of Pipeline And Not Stressing The Pipeline At Full Capacity (Almost) All The Time. Arguably, Russian Are The Best In Laying Gas Pipeline. The have done in Europe and Russia in places of harsh weather. If that happens in Pakistan, it should have domestically produced pipes and should be done by Sui companies under the supervision of Russians.

There is a case of technology spillover and development of skillset in Pakistan. Return structure could be in favour of Russia by giving them priority of returns. The amortization period is to be long (20-25 years) and the Russians should get priority in returns without ‘take or pay’. Since Pakistan money is of GIDC, there should not be any return on it. Plus, additional capacity will not let system to stress as on average the best practice to use 50-60 percent pipeline in shoulder months.

Then there are geopolitical interests to do business with Russia. There are considerations of defense ties that can be leveraged by economic ties. But the economic consideration should be the top priority. If it makes sense economically (that might be the case of 48-inch pipeline), why not leverage defense ties.

This news was originally published at B Recorder.