'Thar coal power unlikely before January 2016'

[LahoreEstate]

ARTICLE (August 03 2009): Pakistan is unlikely to generate any power from Thar coal before 2016, Asad Umar, CEO of Engro Chemicals Limited told BR Research of Business Recorder. "We are fully committed and we are working on it today and I am telling you that 2016 January 1, is the earliest you can have electricity from Thar", said Umar, whose firm recently agreed to sign a joint venture with Sindh government for Thar mining block-II, with an equity ratio of 60:40 between the two partners.

The joint venture agreement is currently under negotiations, following which Engro will begin detailed studies to assess project viability. "Feasibility should be completed in the next 12 to 18 months - that is by the end of 2010" Asad said in an interview with BR Research at his residence. "Then one year for financial close and then four years off execution, which means the end of 2015".

In the following candid interview CEO of Engro Chemicals Pakistan Asad Umar dispels several myths about Thar, discusses project details including its financing and potential hiccups, while also shedding some light on Engro's core business: fertiliser.

The following are excerpts from the interview:

BR Research: There is a lot of talk about Thar coal. Some mention its high sulphur content where as others say Pakistan could be an energy giant if we utilised just half of the reserves. We need some clarity here?

Asad Umar: To start with there are different classifications of reserves based on the level of investigation that has been carried out. There are proven reserves, which you are absolutely sure of, and based on that you have estimated reserves and then there are inferred reserves, which are calculated by using probability tables based on the data you have. Obviously the degree of accuracy is strongest with the proven reserves and weakest with the inferred reserves.

Pakistan's inferred reserve is 185 billion tones of lignite coal which makes it more than the energy equivalent of Saudi oil reserves. However, you have to keep a couple of things in mind. One cannot make a direct comparison between oil and coal because oil travels very well and coal does not, therefore oil dominates the energy market.

So even if your reserves are bigger than Saudi Arabia's - doesn't mean that you are going to become Saudi Arabia of energy. And given that we don't have the best quality coal, we have lignite coal which is very high in moisture, it's not going to be a globally traded commodity. It's not that we will start exporting 10 million barrels of oil energy per day. But what it can do is provide a solution to your power generation problem.

The other misconception is that Thar coal is high in sulphur - but in fact it is moisture that is high. That makes it physically unstable as it can self ignite and is also expensive to transport because you will be carrying 45 to 50 percent water.

So it has to be dried up before it can be transported and this kind of detailed feasibility questions haven't been answered yet, whereas economic viability of the technology to reduce that moisture also still needs to be confirmed.

Then there are talks of other technologies, such as gasification or liquefaction of coal, which in turn can help produce petrochemicals and fertilisers. Although coal gasification and subsequent liquefaction is a proven technology, however considering the urgent need for power in Pakistan, the first step should be power generation.

Many cite that such and such technology is being used in South Africa or Central Asia since twenty years. But what people get confused is that there is a difference between being technologically viable and economically viable. For instance, oil sands is a roughly 30 to 40 years old technology but when oil is at 30 dollars a barrel, it is not economically viable to produce it.

BRR: If inferred reserves total 185 billion tons, what is the size of proven reserves?

AU: If there is quality work done then even if 185 billion are not there at least 125 billion tons can be found. And that is still much more coal than we need for many decades.

BRR: If there is so much potential then why wasn't it developed for the last many years?

AU: Early 90's was the first time anyone found out that there was any coal in Thar. In fact it was USAID which was going around looking for water in Thar and they came upon coal, following which there were several technical studies.

Still there are a lot of technical challenges which are not fully answered yet. We believe that at the end of the day the answer will be positive but there is no ground work done yet to start any project overnight. Extensive technical investigation needs to be done - relating to environmental issues, infrastructural issues and other technical and operational challenges.

So for eight to ten years to be taken to get something like this going is completely understandable. Why you are facing energy crises right now is because the previous government did not understand the lag time in developing large industrial infrastructure energy projects.

Even if you start reacting at the first sign of energy shortfall that means you are at least fours years too late and that too for more mature traditional projects such as thermal IPPs. So for something like Thar, a lag of 10 to 12 years is no big deal.

Where you can genuinely criticise the government is the last five years. Work should have started five years ago. When we had offers from Shenhua, we should have clearly put the foot on accelerator at that time and provided a much greater priority on Thar than we did. The appreciation of urgency of the problem was not felt.

BRR: You talked about Thar coal being high in moisture. Does the quality differ in block-II where you will be working on? How cost ineffective does it make?

AU: There is no significant difference. It's all lignite coal. It makes it less attractive than if it was low moisture.

BRR: Is there a technology to deal with this then?

AU: The technology is available but somebody needs to sit down and do the detailed working to assess whether it is economically fit or not. At this point, however, it seems the most viable option is to set up power generation facility at the mine mouth, without having the need to decrease moisture up to the level required for transportation. But whether we can extract and then sell it in tradable form or not is a big question mark still.

BRR: Apparently there is a lot of water required to mine coal and produce power. So given water dynamics in Pakistan, how do you plan to deal with it?

AU: That's one of the biggest questions of that feasibility. Where will that water come from? Whose share will it come out of? And how much will it be required? That's one of principal issues that will have to be settled in the study.

BRR: But what's your call on that?

AU: I don't know. If I had the answer then it wouldn't have been a part of feasibility. But what I do know is that first we need to technically establish what the choices and what are their pros and cons. And the technical choices have to be backed with both world class methodology and name, so everybody has confidence that the assessment is thorough and professional. Then the political decisions have to be made.

In my opinion there are two stakeholders in the water issue: one Sindh government because it will come out of its provincial quota and other is the local Thar population.

Sindh share in total water is roughly 40 percent and obviously what is required in Thar can't be more than 1 percent of Sindh's total water supply. So these are all economic choices that Sindh government will have to make; whether it wants to produce more sugarcane from that 1 percent water, or run more industries or produce coal power.

But what you don't need is to make a choice which takes water away from direct human consumption - that obviously would be a bad one. For example one solution I heard, that to produce 1800 mega watts for 25 years underground aquifers are good enough and my reaction to that was one; if only 1800 mega watts were to be produced through Thar then what's the point of all this hoo-ha. And second; if you consume all that water for power generation then how will the locals survive because Thar is already water scarce area.

BRR: When will Engro formally sign the joint venture agreement with Sindh government? Any hiccups so far?

AU: JV agreement is currently being negotiated. There is no issue in the agreement's normal clauses; Sindh government's approach is very productive in this regard. What's really taking our time is the clarity on what are the issues that need to be worked up front. We are in the process of finalising the details of what needs to be studied. What will be our responsibility and what's the role Sindh government and so forth.

BRR: Will there be a foreign partner on board?

AU: Equity partner no. But all technological aspects will be handled by foreigners. The project's EIA will be done by foreigners; its technical feasibility will be done by foreigners. We don't have such capability since no coal mine exists in Pakistan.

Most work on block II has been done by Sino coal, because Sino Coal was the one which conducted feasibility for Shenhua, which is an operator. In fact our CEO of Engro Power Generation just came back from a meeting with Sino Coal in China.

There will be other agencies that will be inducted later, such as owner's engineers will be appointed who will not do the work but will review the work done by Sino Coal as an independent party. Then we will have to hire an EIA specialist who is an expert on environmental studies.

BRR: How much will the project cost?

AU: There is no exact number. The only number which can be assessed with 'some' degree of accuracy is that the first project in our Block II, which will produce about 600 to 1000 mega watt of electricity, will roughly cost in the range of 2.5 - 3.5 billion dollars including cost of mining.

But once the set up has been put in place, marginal cost to produce electricity is much lower compared to traditional thermal projects.

BRR: How much coal will that first phase consume?

AU: Producing 600 to 1000 mega watts requires 4 to 6 million tons per annum of coal mining. But all of these things are subject to feasibility studies.

BRR: How will finances be arranged for the project?

AU: This cannot be done without the support of international multilateral agencies. International capital markets have been dry since the financial meltdown. Allied with that Pakistan's credit rating is down to subterranean level and they are not about to turn around soon as well. Then there security challenges etcetera.

So effectively speaking for large-scale capital flows private sector market, the capital market and banking market are not an option - which leaves you only with international multilateral agencies.

BRR: Have you made any headway in this regard?

AU: They (international multilateral agencies) have been taken into confidence right from the beginning.

BRR: You recently met local bankers at the central bank office regarding possible financing of the project. What's the update on that?

AU: That was not Thar specific. I had gone to Salim Raza (Governor State Bank of Pakistan) and I had made a presentation to him, which showed our infrastructural requirements particularly power generation and its funding requirements. The current lending situation of banks, you know, they are already heavily exposed to the power sector and they are very reluctant especially after the hitches in rental power project.

Salim and I had worked on a committee a year and half back which was set up by the SECP back when Razi-ur-Rehman was its chairman. It was called the Debt Capital Market Committee. And the idea was that across the globe debt capital markets are bigger than equity market, where as in Pakistan they don't exist. So we had gone through all the different impediments which are there and so forth and gave a proper formal report to the ministry of finance.

But I didn't want to wait till you are sitting with a project and then you realise that it is not possible because of absence of funds. So I said let's starting thinking about it today so that financing issues are worked out in parallel to other technical issues that we are working on.

Therefore we thought to revisit the idea. Salim said why I don't call in the presidents of big five banks; we had a meeting and we agreed to set up a task force, where there were representatives of all big five banks. State Bank was the co-ordinator, Engro was a representative there and we also had other power players, including Rousch & HUBCO.

Now the report has been finalised. It's with the State Bank co-ordinator right now. So he is supposed to issue the final report and then a meeting will be called in to try and come up with structural solutions as how to finance future investments in power generation in particular and infrastructure in general. The committee has also come up with several recommendations and then after discussion one of those or several of those can be adopted.

BRR: What's in the report?

AU: I don't know. I haven't seen the report.

BRR: Reportedly Shenhua had quit Thar because of tariff issue with NEPRA. What rates are you looking for?

AU: Tariff structure in Pakistan has two different parts; one is fixed charge which is CPP and the other is variable payments. The fuel part is normally variable and that's a pass through element based on market rate of fuel and agreed upon efficiency levels.

It will be the same thing here. Whatever the coal pricing mechanism is; when prices will rise tariff will increase and whenever they fall tariff will decrease. So there are no guarantees on mining side. The rest of CPP portion will be based on standard procedure just like any other amount.

BRR: How would coal be priced to calculate tariffs?

AU: I don't know. At this point there is no pricing mechanism for coal, we will have to develop it.

PPIB will have to agree, NEPRA will have to agree, and we will have to agree that the mechanism is transparent and reasonable.

BR: When will the project be completely finalised?

AU: Let me caution that you are in the area of unknown. Feasibility should be complete in the next 12 to 18 months that is by the end of 2010.

Then one year for financial close, which means end of 2011. Then 4 years of execution which means end of 2015. So January 1, 2016 is the earliest you can transmit power from Thar - and that is of course an ideal case scenario if nothing serious happens during this period. What if we are unable to finance the project due to some reason or any other political issue stems up, then who knows, things could get delayed.

BRR: If 2016 is the target for your first phase of 600-1000 megawatt - how much time it will take to add more power and utilise the remaining part of your block.

AU: Once the first one is done then you can literally time them, such that you can add 1000 mega watts at every 18 months because you can keep on adding turbines in a modular fashion and you keep on increasing annual coal mining operation. It can take care of all of Pakistan's incremental needs from that point onwards, but it's the first one which is most difficult.

BRR: Let's move toward your core business. Initially your urea plant expansion was due to come online somewhere in 2010. Is that still on?

AU: Yes. Summer of 2010

BRR: Has the cost of that project increased during this period, due to rupee's depreciation and higher interest rates?

AU: It originally amounted to $980 million. Then we added something to the scope of the project so that cost increased to $1 billion and then from a billion it went up by 50 million dollars. Now, it is 1050 million dollars and that is still unchanged.

BRR: Has there been a consequent change in financing arrangement?

AU: No. The financial close was complete about a year and half back. All the loans are now at least partially drawn.

BRR: How does the urea demand-supply situation look like ahead?

AU: You will go into a significant surplus situation starting middle of next year. You will have a lot of urea to export - something like a million tons of surplus urea. Because Fatima's half a million tons will come on stream, then our 1.3 million tons is coming on stream then and there are some de-bottlenecks in the pipeline. So there is almost 2 million tons of capacity which is being added, which will take us from 1 million of deficit to 1 million tons surplus.

BRR: How long will this situation be like?

AU: It should last at least 2 to 3 years something like 2014 - 15

BRR: This means you will start working on new urea plant in?

AU: We still have at least a year before we even start planning.

BRR: Any update on your planned venture with Algerian firm Ferphos for DAP plant?

AU: The Algerians had selected us as a partner after their prime minister held a meeting and decided that yes we will go ahead with Engro. We received confirmation. Then we had four months of silence.. So right now there is nothing going on and we are just waiting.

BRR: Do you plan to your list food business?

AU: Why should we. It might get listed - but at this point we don't have any definitive plans for it.

BRR: Any plans to run for elections?

AU: Not a chance. There are lots of good folks in politics - more than many people think.

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