VZCZCXRO4964
RR RUEHLH RUEHPW
DE RUEHIL #3647/01 3241537
ZNY CCCCC ZZH
R 191537Z NOV 08
FM AMEMBASSY ISLAMABAD
TO RUEHC/SECSTATE WASHDC 0257
INFO RUEATRS/DEPT OF TREASURY WASHDC
RHEBAAA/DEPT OF ENERGY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUMICEA/USCENTCOM INTEL CEN MACDILL AFB FL
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/SECDEF WASHINGTON DC
RUEHKP/AMCONSUL KARACHI 0644
RUEHLH/AMCONSUL LAHORE 6376
RUEHPW/AMCONSUL PESHAWAR 5229
RUEHNE/AMEMBASSY NEW DELHI 4054
RUEHBUL/AMEMBASSY KABUL 9430

C O N F I D E N T I A L SECTION 01 OF 03 ISLAMABAD 003647 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  DECL: 11/19/08 
TAGS: ECON ETRD EAID EFIN ENGY EPET ELTN PK IN
SUBJECT: ENERGY UPDATE: STRATEGIC GAS RESERVE SHORTAGES, TARIFFS 
INCREASED, PRICES REDUCED AND IPI QUESTIONABLE 
 
Classified by: Ambassador for reasons 1.4 (b) and (d) 
 
REF: ISLAMABAD 3264 
 
¶1. (C) Summary:  Pakistan's strategic oil reserves have fallen to low 
levels due to Pakistan's credit rating and inability to use letters 
of credit to purchase crude oil.  Sources in the GOP report that Iran 
is attempting to substantively change the Iran-Pakistan-India gas 
pipeline project.  Iran wants to determine the gas price before the 
pipeline is operational rather than engage in a fixed contractual 
price and Iran also wants the right to reduce the supply to Pakistan 
if the GOP reduces the supply to India.  The Government of Pakistan 
(GOP) announced new reductions in retail fuel prices as a result of 
lower international oil market prices.  In addition, the GOP opened 
the financial bidding for two thermal plants expected to generate 
approximately 301 MW of electricity.  Electricity tariffs will be 
increased by 13 percent.  However, officials at the Ministry of Water 
and Power and their Minister differ in their projections of the 
subsidy cost for electricity but have provided that an increase of 
only 13 percent leaves the GOP with a subsidy, based on current world 
market prices for furnace oil, at PKR 88 billion (USD 1.11 billion). 
End Summary. 
 
---------------------- 
STRATEGIC RESERVES LOW 
---------------------- 
 
¶2. (C) Ministry of Petroleum and Natural Resources Deputy Director 
Jabar (protect source) confirmed to EconOff on November 19 that due 
to Pakistan's deteriorating credit rating, which was reduced to CCC 
by S&P on November 14, the government is facing difficulties buying 
crude oil.  According to Jabar, Pakistan is facing severe problems 
clearing letters of credit, and the crude reserves are "significantly 
less than" the 10-day reserve requirement.  The GOP reduced the 
reserve requirement from 21 to 10 days in October in order to boost 
foreign exchange reserves (reftel). 
 
¶3. (C) EconCounselor spoke with Haroun Khawaja, CEO of AES Pakistan 
who confirmed that they are concerned about their ability to continue 
purchasing from Pakistan State Oil due to the drop in strategic 
reserves. Khawaja stated that no letters of credit for private 
Pakistani banks are being accepted due to the overall credit rating 
and all orders for crude oil on the international market must be paid 
for in advance. 
 
¶4. (C) The Embassy representative for the Defense Energy Support 
Center Middle East is checking with suppliers to determine the level 
of individual stocks in order to determine what impact these low 
levels will have on ISAF refueling in Afghanistan.  Approximately 95 
percent of the cars in Pakistan use compressed natural gas, however 
low reserve levels will impact transit of goods, industrial 
manufacturing as well as the fuel used for generators across the 
country. 
 
- - - - - - - - - - - - - - - - - - - 
IPI GAS PROJECT BACK ON DRAWING BOARD 
- - - - - - - - - - - - - - - - - - - 
 
¶5. (SBU) Tamoor Asmat Osman, Joint Secretary of the Ministry of 
Petroleum confirmed to EconOff on November 17, that Iran has backed 
out of the Gas Sales Purchase Agreement and has made new proposals. 
Tehran wants Islamabad to allow an additional review before the IPI 
project becomes operational.  Under the Iranian proposal, Iran would 
be authorized to re-open the price formula before the operational 
start date of the project.  This would trigger uncertainty for 
Pakistan in the prices of the imported piped gas.  Iran wants to move 
the price formula closer to spot market prices, rather than fix a 
long-term contractual price.  However, the GOP believes that any 
uncertainty in the gas price will make the IPI project economically 
unviable. 
 
¶6. (SBU) Osman said that Iran also wants the right to reduce gas 
supplies to Pakistan to allay Indian concerns over Pakistan's ability 
to reduce any future gas flows to India.  India has reportedly 
expressed concerns over Pakistan's ability to do so unilaterally. 
Osman further said that "both changes are significant in nature and 
tantamount to going back to the drawing board." 
 
- - - - - - - - - - - - - - 
ELECTRICITY TARIFF INCREASE 
 
ISLAMABAD 00003647  002 OF 003 
 
 
- - - - - - - - - - - - - - 
 
¶7. (SBU) With a rising fiscal deficit, the GOP decided on September 9 
to raise the electricity tariff by an unprecedented 31 percent to 
pass on a portion of the subsidy burden to consumers.  At that time, 
Minister of Water and Power Raja Parvez Ashraf maintained that the 
GOP wants to pass PKR 120 billion (USD 1.47 billion) to consumers. 
Ashraf also stated that the step was necessary in order to reduce the 
electricity subsidy from PKR 185 billion (USD 2.27 billion) to PKR 65 
billion (USD 0.79 billion) annually.  When the September electricity 
bills, with a 31 percent increase, were delivered in October, 
protests and riots occurred in cities across Pakistan.  Fearing a 
major law and order situation, on October 23 the government announced 
a reversal of the September 9 increase and constituted a committee to 
revisit the tariff rise issue. 
 
¶8. (SBU) On November 14 Federal Minister for Water and Power Raja 
Parvaiz Ashraf announced that, after extensive deliberations and 
consultations, the committee recommended an electricity rate increase 
of 13 percent.  Zarar Aslam, Additional Secretary, Ministry of Water 
and Power, told EconOff on November 19 that the GOP would be paying 
PKR 88 billion (USD 1.11 billion) in fiscal year 2007-2008.  Going 
into detail, he said that the Government had originally budgeted PKR 
65 billion (USD 820.43 million) for electricity subsidies but that 
they had had to revise the expenditure upwards.  Aslam said that the 
Government would pay PKR 65 billion (USD 820.43 million) to the Water 
and Power Development Authority (WAPDA) and PKR 12 billion (USD 
151.46 million) to the Karachi Electricity Supply Corporation (KESC) 
in tariff subsidies and another PKR 11 billion (USD 138.84 million) 
in agricultural tube well subsidies. 
 
¶9. (SBU) Aslam further said that the GOP has already paid PKR 35 
billion (USD 44.77 million) in the first twelve weeks of FY 2008-09 
for electricity subsidies and has committed to eliminate electricity 
subsidies altogether by the end of the current fiscal year.  The GOP 
budgeted PKR 140 billion (USD 1.77 billion) for fuel subsidies and 
PKR 65 billion (USD 820.43 million) for electricity subsidies in FY 
2008-09. 
 
¶10. (SBU) Waqar Asgar Rana, Section Officer at the Ministry of Water 
and Power, told EconOff on November 18 that the GOP hopes to save at 
least half of the total subsidy expense in the current fiscal year 
through the continuing decrease of international furnace oil prices. 
Pakistan generates about 30 percent of its electricity from furnace 
oil with the other 70 percent split between hydropower and domestic 
natural gas.  Pakistan's independent power producers rely exclusively 
on furnace oil for their power generation, and with the vast majority 
of furnace oil imported from Kuwait, the GOP is still seeking a 
concessional agreement with Kuwait. 
 
¶11. (U) The GOP has also reintroduced a sliding scale system of 
pricing for domestic customers in which the unit cost of electricity 
rises with the rate of consumption, ranging from PKR 1.40 (1.76 
cents) per unit to a maximum of PKR 10 (12.6 cents) per unit.  A 
residential customer using 750 units, for instance, would pay PKR 
3.23 (4 cents) per unit for the first 50 units, PKR 3.23 (4 cents) 
per unit for the next 50 units, PKR 4.90 (6.2 cents) per unit for the 
next 300 units, PKR 7.97 (10 cents) per unit for the next 400 units 
and PKR 10 (12.6 cents) for all units over 700.  The GOP argues that 
people who can afford to use more electricity should pay more as 
their consumption rises. 
 
- - - - - - - - - - - 
FUEL PRICE ADJUSTMENTS 
- - - - - - - - - - - 
 
¶12. (SBU) On November 15 the GOP announced a reduction of retail fuel 
prices ranging from 5 to 19 percent.  The impetus behind this move 
was the drop in international oil prices from July's record high of 
USD 147 a barrel to USD 50 a barrel.  Following a regularly scheduled 
bi-weekly review, the Oil and Gas Regulatory Authority (OGRA) issued 
a notification to reduce prices effective November 16.  The GOP is 
hoping that the cut in diesel and gasoline prices will reduce 
inflation, which is hovering around 25 percent. 
 
¶13. (SBU) According to the OGRA notification, the government reduced 
the price of petroleum by 15 percent or PKR 10 (13 cents) per liter 
to PKR 66.66 (83 cents) per liter, or the equivalent of USD 3.07 per 
gallon;  kerosene oil by 8.08 percent or PKR 5 (6 cents) per liter to 
PKR 56.87 (71 cents) per liter; high speed diesel by 4.6 percent or 
 
ISLAMABAD 00003647  003 OF 003 
 
 
PKR 3 (4 cents) per liter to PKR 61.14 (76 cents) per liter; light 
diesel oil by 13.20 percent or PKR 7 (9 cents) per liter to PKR 53 
(66 cents) per liter; and high octane blending component by 18.50 
percent or PKR 15 (19 cents) per liter to PKR 81.08 (USD 1.01) per 
liter. 
 
¶14. (SBU) The government collects a significant amount of revenue 
from petroleum products in the form of two taxes: the Petroleum 
Development Levy and the General Sales Tax.  The Petroleum 
Development Levy on a liter of petroleum after the price reduction is 
PKR 28.27 (35 cents), kerosene oil PKR 5.94 (7 cents), HOBC PKR 37.63 
(47 cents), and diesel PKR 9.23 (12 cents).  The general sales tax on 
a liter of petroleum after the price reduction is PKR 9.19 (11 
cents), kerosene oil 7.84 (10 cents), high octane blending component 
PKR 11.18 (14 cents), and diesel PKR 7.31 (9 cents). 
 
¶15. (SBU) The oil marketing companies (OMCs) also announced a 
reduction in furnace oil prices by 31 percent or PKR 8,799 (USD 110) 
per ton to PKR 28,026 (USD 350) per ton due to the declining trend in 
world oil prices.  All leading oil marketing companies including 
Pakistan State Oil and Shell Pakistan have announced cuts in furnace 
oil prices.  The GOP expects that this reduction in furnace oil 
prices, used in thermal power generation, will reduce the cost of 
electricity generation and in turn decrease inflation. 
 
- - - - - - - - - - - - - - 
NEW RENTAL POWER PROJECTS 
- - - - - - - - - - - - - - 
 
¶16. (SBU) On November 17 the Private Power and Infrastructure Board 
(PPIB) opened the financial bidding for two fast track thermal power 
plants with a cumulative capacity of 301.4 MW.  Sami Rafi Saddique, 
Director of Administration at PPIB, told EconOff that Gulf Rental 
Power (80.5 MW) and Independent Power Private Limited (220.9 MW) have 
proposed a five-year rate of 16.37 cents per kwh and 18.88 cents per 
kwh, respectively.  An evaluation committee comprised of experts from 
PPIB, National Electric Power Regulatory Authority, WAPDA and the 
Ministry of Finance will evaluate the financial proposals, and 
successful bidders will be informed in a week. 
 
¶17. (SBU) The GOP is seeking rental power projects to address the 
significant blackouts which plague the entire country.  Pakistan is 
now experiencing a shortfall of approximately 6000 MW.  While the 
locations for these rental units have not yet been determined, local 
power officials have indicated to post that any agreement will 
include provisions to pay upfront fees for power generation.  The 
average domestic rate is significantly lower than the proposed rate 
for the rental units, making these projects the most expensive energy 
in Pakistan. 
 
PATTERSON