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PROJECT INFORMATION DOCUMENT (PID)
APPRAISAL STAGE
Report No.: 64701
Project Name
Region
Country
Sector
Lending Instrument
Project ID
Borrower(s)
Implementing Agency
Environmental Screening Category
Date PID Prepared
Date of Appraisal Completion
Estimated Date of Board Approval
Decision
I.
Natural Gas Efficiency Project
South Asia
Pakistan
Oil and gas (100%)
Specific Investment Loan
P120589
Government of Pakistan
Ministry of Petroleum and Natural Resources
Pak Secretariat, Block A
Pakistan
Tel: (92-51) 921-1220 Fax: (92-51) 920-1770
[email protected]
Sui Southern Gas Company Limited (SSGC)
Sir Shah Suleman Road
Gulshan-e-Iqbal Block 14
Karachi 75300
Pakistan
Tel: (92-21) 9231602 Fax: (92-21) 9231620
[email protected]
[ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
September 9, 2011
February 14, 2011
December 15, 2011
Project authorized to proceed to negotiations upon
agreement of pending conditions and/or assessments
Country Context
1.
Pakistan has important strategic endowments and development potential. The country
is located at the crossroads of South Asia, Central Asia, China and the Middle East. This
places Pakistan at the fulcrum of a regional market with a vast population, large and diverse
resources, and an untapped potential for trade. But Pakistan faces long-term challenges to
realizing its growth potential. It requires a strong and stable tax base, and more efficient
public spending to expand fiscal space. Other measures required include creating adequate
employment opportunities; improving income distribution; and harnessing economic
competitiveness through trade, investment, improved business environment, and competition.
Today, Pakistan’s key economic challenges are the large fiscal deficit and energy shortages.
2.
Electricity and gas shortages plague households and industry alike. The energy sector
is experiencing deficits of energy as well as finances. Key contributors to the energy deficit
are: declining gas supply from domestic fields, slow expansion of low-cost power generation
capacity, inefficiency in power generation, high losses in electricity and gas distribution
networks, etc. And key contributors to the financial deficit are: high cost of imported furnace
oil (which is now a leading fuel for power generation), inadequate power tariff increases,
inadequate subsidy payments by the government, low collections from government entities,
sub-optimal commodity-based subsidies, etc. All these factors contribute to the circular debt
problem across the sector.
II.
Sectoral and Institutional Context
3.
Natural gas is a vital energy source for Pakistan. In FY2010, Pakistan consumed
about 1.3 trillion cubic feet (tcf) of gas, all domestically produced and representing about half
of primary energy consumption. Proven remaining reserves of conventional natural gas were
estimated at 27.6 tcf in FY10. Pakistan has a mature gas industry that has been operating
since the 1950s. Domestic gas exploration and production is undertaken by state-owned and
private firms (Pakistani as well as international). By international standards, and compared to
oil products, natural gas is inexpensive in Pakistan which leads to inefficient use.
4.
Natural gas is transmitted and distributed by two companies: Sui Southern Gas
Company Ltd. (SSGC, the sub-borrower in this Project) supplying Sindh and Balochistan;
and Sui Northern Gas Pipelines Ltd. (SNGPL) supplying Punjab and Khyber-Pakhtunkhwa.
Both are listed on the domestic stock exchanges but have significant government stakes.
5.
Pakistan’s main challenges in the gas sector are related to: scarcity of gas, suboptimal gas allocation, high levels of Unaccounted-For-Gas (UFG), and inefficient end-use.
6.
Scarcity of gas. The sector supply gap is forecasted to reach about 0.5 tcf in 2015 that
is set to increase to almost 2 tcf by 2025. Many large gas fields are in decline and low
wellhead prices have led to little upstream investment. But new customers have consistently
been added. The Government is planning to introduce LNG as well as pipeline import of gas.
Pakistan also has unconventional gas resources in ‘tight’ reservoirs and shale—both more
costly to extract. The Government is introducing financial incentives to exploration and
production companies to invest in both conventional and unconventional gas.
7.
Sub-optimal allocation of gas. Pakistan’s “Natural Gas Allocation and Management
Policy” of 2005 gives low priority to government-owned (PEPCO) power plants without firm
gas purchase agreements. For many years, major PEPCO plants have operated without
binding gas purchase agreements and have received less gas for power generation while
electricity demand has increased sharply. The plants have substituted gas with furnace oil.
8.
High levels of unaccounted-for gas (UFG). UFG is the difference between the total
volume of metered gas purchased by a gas utility and the volume of gas sold. In OECD
countries, UFG is typically 1-2 percent. In Pakistan, UFG was recorded at about 9% in FY10.
UFG is therefore a major contributor to the gas supply crisis. Most of the UFG is due to
dilapidated/deteriorating pipelines. Other sources are leaking joints in service connections;
gas theft (tampered meters, illegal connections), malfunctioning metering equipment, and gas
leakage due to higher than required pressure.
9.
The dollar equivalent of Pakistan’s UFG in FY10 was US$ 362 million in terms of
gas purchased. If the volume of lost gas could be channeled to power generation, the furnace
oil substitution value would be three times higher. The Oil and Gas Regulatory Agency
(OGRA) has punished both gas companies for excessive UFG by reducing their returns
dramatically (in FY09, SNGPL: US$ 58 million, SSGC: US$ 35 million).
10.
Inefficient end use of gas. The household gas appliance industry in Pakistan generally
produces low-efficiency appliances that do not meet Pakistan’s thermal efficiency standards.
Furthermore, residential gas consumers have limited incentive to shift to more efficient
appliances because of relatively low gas prices. Improvements are necessary in appliance
certification, energy efficiency labeling, and enforcement of standards.
11.
Against this backdrop, the Government has requested World Bank support to address
the UFG problem. The Government believes Bank support is suitable because: (a) the gas
companies have over the last decade been unable to solve the problem on their own; (b)
significant financial resources are necessary; (c) the UFG problem is increasingly intolerable
in view of the growing gas and power shortages; (d) a UFG reduction project would give
significant results over the medium term (3-5 years). The Project is also seen as a catalyst for
organizational improvement in capacities and accountability.
III.
Project Development Objective & Project Benefits
12.
The development objective of the Project is to enhance the supply of natural gas in
Pakistan by reducing the physical and commercial losses of gas in the pipeline system.
13.
Project beneficiaries will be mainly consumers of natural gas in Sindh and
Balochistan, who would have more gas available; see less UFG cost in their tariff; and
adequate gas pressure. The benefits to Pakistan would be more gas potentially available for
power generation and lower greenhouse gas emissions (natural gas is nearly all methane,
CH4). The key benefit to SSGC would be an improved bottom line.
IV.
Project Description
14.
The Project has three components (estimated World Bank financing in parentheses):
15.
Component 1: UFG Reduction (US$ 190 million). Four sub-components:
16.
Segmentation and pressure management (US$ 18 million) are at the core of the
Project. This entails ring-fencing segments of the network by installing bulk meters at inlet
points. Input-output gas measurements (the difference is UFG) will be complemented by
pressure testing and leakage surveys to rank segments for rehabilitation work and theft
control. About 400 bulk meters will be procured. In conjunction, automatic pressure
management and monitoring systems will be procured to match pressure levels to demand.
17.
Pipeline rehabilitation (US$ 117 million) will involve replacement of 5,750 km of
irreparable leaking pipes and rectification of 18,700 km of less damaged ones. The Project
will finance pipelines of varying types and diameters, mostly polyethylene (PE) pipes, but in
special cases steel pipes. Operational equipment will also be procured.
18.
Cathodic protection (CP) (US$ 20 million). CP reduces the rate of corrosion from
underground steel pipes, thus arresting the increase in leakages. This subcomponent will
finance the installation of recoating material for 450 km of pipes, installation of power
sources, battery back-up systems, magnesium anodes, and remote CP monitoring systems.
19.
Advanced metering systems (US$ 35 million) will replace inaccurate, tamper-prone
meters and install surveillance equipment to monitor gas theft. About 270 turbine meters for
large industrial customers, 12,500 ultrasonic meters for commercial customers, data
acquisition/monitoring systems, and provers (for testing meter accuracy) will be procured.
20.
Component 2: Appliance Efficiency Pilot Project (US$ 5 million). This subcomponent will finance the deployment of high-efficiency gas appliances and/or the
retrofitting of components in consumers’ existing appliances to enhance thermal efficiency.
21.
Component 3: Technical Assistance (US$ 5 million). This sub-component will
finance technical audits, training of trainers for SSGC’s Gas Training Institute, the Owner’s
Engineer, the Lender’s Engineer, support for the consumer appliance efficiency pilot project
and customer satisfaction surveys of project-related service improvements.
V.
Financing
Source
Amount (US$ million)
IBRD
100
IDA
100
Borrower/Recipient
Total
VI.
72
272
Implementation
22.
The Project will be implemented by SSGC in its distribution areas in Sindh and
Balochistan over a period of five (5) years. SSGC management has set up a Project
Management Office (PMO) led by a Project Manager at the Senior General Manager level.
The PMO will be responsible for overall project implementation/reporting working with
dedicated personnel in relevant departments. The SSGC Board’s UFG oversight committee
will also monitor progress.
23.
The activities planned for the pipeline rehabilitation sub-component are a
continuation of SSGC’s on-going work. The Project represents a 3-4 times scale-up of the
pipeline replacement activity for which SSGC plans to draw on existing resources. Works
involving trenching, re-filling, and road restoration will be outsourced to contractors.
24.
SSGC’s Health, Safety, Environment (HSE) Department will carry out environmental
and social impact work in compliance with Pakistan and Bank safeguards. The Project will
finance a Lender’s Engineer for results monitoring. Risks related to corporate-level
governance, fraud, and corruption will be monitored through Bank oversight of all Bankfinanced procurements. The Project will utilize standard Bank funds flow arrangements.
VII.
Safeguard Policies (including public consultation)
Safeguard Policies Triggered by the Project
Environmental Assessment (OP/BP 4.01)
Natural Habitats (OP/BP 4.04)
Pest Management (OP 4.09)
Physical Cultural Resources (OP/BP 4.11)
Involuntary Resettlement (OP/BP 4.12)
Indigenous Peoples (OP/BP 4.10)
Forests (OP/BP 4.36)
Safety of Dams (OP/BP 4.37)
Projects in Disputed Areas (OP/BP 7.60)*
Projects on International Waterways (OP/BP 7.50)
VIII.
Yes
No
X
X
X
X
X
X
X
X
X
X
Contact point at World Bank and Borrower
World Bank
Contact:
Title:
Tel:
Email:
Bjorn Hamso
Sr. Energy Economist
(202) 458-1065
[email protected]
Borrower/Client/Recipient
Islamic Republic of Pakistan,
Government of Pakistan
Economic Affairs Division,
Islamabad
Implementing Agency
Sui Southern Gas Company Limited, Karachi, Sindh
Contact:
Mr. Syed Hassan Nawab
Title:
Dy. Managing Director
Tel:
(92)-21-99021000
Email:
[email protected]
IX.
For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-4500
Fax: (202) 522-1500
Web: http://www.worldbank.org/infoshop
*
By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties' claims on the disputed areas