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Gulf-Times: Bhutto assassination ups risks in Pakistan energy investment

Published: Saturday, 29 December, 2007, 02:17 AM Doha Time 
By Jun Yang and Gurdeep Singh

SINGAPORE: Major Pakistan oil, gas and power projects are clearly at risk in the wake of former Prime Minister Benazir Bhutto’s assassination. Analysts warn prolonged instability could jeopardise the country’s ability to meet future energy needs.

Foreign companies such as Tullow Oil and Premier Oil are operating in Pakistan; Royal Dutch Shell and Total SA are reportedly among majors vying to invest in a multibillion dollar liquefied natural gas project in Karachi.

“We can expect immediate impact for energy projects such as the Trans-Afghanistan pipeline and the Iran-Pakistan-India natural gas pipeline, which could be shelved as the government struggles to maintain internal security,” said Chietigj Bajpaee, a research analyst at London-based consultancy Global Insight.

With electricity demand growing fast, Pakistan plans to construct more than 50 power plants in the next five years, more than half of which are likely to be dual fuel thermal power facilities which can use both natural gas and fuel oil as feedstock.

Key to investor sentiment towards such projects will be how long it takes Pakistan authorities to bring calm to the country. Violence flared in Karachi yesterday, with three set on fire, leading to Pakistan forces receiving authorisation to shoot at rioters.

“International investors are jolted – it will obviously affect their confidence,” said Azhar Iqbal Hussain, deputy managing director, Foundation Securities in Pakistan.

But he added: “Let’s not forget people have a short-term memory and people would like to move on.”

While it’s possible the Iran-Pakistan-India pipeline will be delayed in the aftermath of Bhutto’s assassination, Hussain said Pakistan’s growing energy needs will continue to attract investors.

In particular, Pakistan is short of natural gas and vital supply infrastructure. It’s estimated that the country will face a deficit of 500mn standard cubic feet a day of natural gas in 2007-2008, which is likely to grow to 2,100mn standard cubic feet per day by 2015.

Pakistan has significant coal reserves, but these are lightly explored and are likely to require large investment to bring to market.

The killing of Bhutto on Thursday shook global financial markets, boosting commodities prices as risk-averse investors sought safer markets.

Credit rating agency Standard & Poor’s said that if prolonged, political instability in Pakistan is bound to sour investor sentiment.

“Foreign direct investment and portfolio flows would likely decline, negatively affecting Pakistan’s external liquidity position,” S&P Analyst Agost Benard said.

Even before Bhutto’s killing, Pakistan faced challenges with the potential to deter investors, particularly in areas such as policy.

“Pakistan, like India, has taken several initiatives to increase investments in its energy markets and is making good progress,” said Sanjay Kaul, an adviser at Deloitte India. “But (for international investors) the main problem is continuation of government policy and efforts and how fast Pakistan can deepen its energy markets.”

Kaul added: “The assassination has put a question mark on Pakistan’s future. Investors would be watching whether Pakistan can overcome this crisis.”

He shared the view that the incident could hurt momentum for the long-delayed $7bn Iran-Pakistan-India natural gas pipeline project.

The three countries have been in talks since 1990 about building the 2,700km pipeline, but negotiations haven’t moved ahead much, in part due to disagreements about the price Tehran wants for the gas.

If built, the pipeline is expected to carry up to 150mn standard cubic meters of natural gas a day for 30 years.

“For India, political instability in Pakistan is a problem as far as the energy flow from the western Asian countries is concerned,” said Arvind Mahajan, executive director of KPMG Advisory, India.

Pakistan currently consumes all of its domestic natural gas production, which accounts for nearly half of its total energy use.

Analysts see some attractive investment opportunities that are relatively insulated from turmoil on the streets.

John Harris, director of global LNG at Cambridge Energy Research Associates, said Pakistan’s plan for a floating liquefied natural gas terminal is comparatively low risk because it’s offshore.

Pakistan officials said earlier this year that the country’s first floating LNG terminal was likely to be built by the end of 2008, with an annual capacity of 2.5mn tonnes.

The floating LNG terminal project is being developed in parallel to a separate onshore LNG facility at Karachi which aims to have a capacity of 500mn standard cubic feet a day.
“The obvious risk would be insurance premiums if the political risk is perceived to have increased,” Harris said. “But my gut reaction is that the implications won’t be that significant for LNG.”

However, Mahajan was less sanguine. “Projects such as the LNG terminals require huge investments. Those (investors) sitting on the fence may decide to hold back for some time,” he said. – Dow Jones Newswires

Gulf Times Newspaper, 2007 ©

http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=192520&version=1&template_id=48&parent_id=28

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