Developing Pakistan’s coal potential

Andrew Harrington, Oracle Coalfields, Pakistan, outlines the Thar coalfield's potential to provide much-needed power for Pakistan.

The energy sector in Pakistan suffers from critical undersupply. Some estimate the shortage of electricity capacity at up to 5000 MW. Some of the country’s poverty can be directly attributed to the very high cost of energy. The majority of its oil is imported and the domestic price of electricity is extremely high at US$ 0.22/kWh. Economic development is constrained by such high power prices and hurt by ongoing blackouts, while population growth means that per capita GDP is not improving.

The Government of Pakistan’s recent energy policy focus is to encourage the development of domestic energy resources. One of the initiatives is to speed up the development of the Thar coalfield, which offers the country an opportunity to build lower-cost, domestic generation capacity and enable it to produce electricity at half the cost of imported furnace oil. An additional incentive is that it would enable the country to reduce the current government expenditure and reduce the balance of payments deficit. Cheap domestic power is one of the key legs of fast GDP growth. GDP growth in Pakistan has the potential achieve China-like levels of 10%/year if it undertook an ongoing power plant construction drive like its northern neighbour.

Developing the Thar coalfield in Pakistan has been a long-held dream of both Pakistanis and foreign investors. The massive lignite resource in the southeast of the country could power an industrialisation drive similar to the lignite coalfields of western Germany or southeast Australia. The Geological Survey of Pakistan (GSP) estimates that the resource located beneath the sands of the Thar Desert, on the border with India, totals up to 175 billion t of coal. Though lignite has lower energy than traditional black coal, this volume of material still equates to a massive energy resource that would be able to power the country for centuries. On a back-of-envelope calculation, the energy in the Thar coalfield could power more than a hundred 1000 MW power plants for more than 250 years.

The coalfield was identified more than 20 years ago but the problems have been substantial in trying to exploit the energy resource. That Pakistan needs the energy in not in doubt: the total installed capacity in the country is only 22 GW, for a country of 185 million people, and is subject to regular and ongoing blackouts and brownouts. As a comparison, Brazil, by no means a rich country, has 100 GW of installed capacity to serve 200 million people. More than two-thirds of the electricity in Pakistan is fuelled by petroleum products and gas with almost nil produced from coal – the world’s cheapest fuel.

Thar momentum building

It now appears that the momentum to develop the Thar resource has reached several important milestones. On 17 January, Sindh’s provincial Environmental Protection Agency issued a No Objection Certificate for the environmental and social impact assessment of Oracle’s project on Block VI of the Thar coalfield. Commenting on the receipt of the certificate Shahrukh Khan, CEO of Oracle, said that Oracle was “delighted to announce this significant development. The issuance of the certificate represents another major milestone in the development of our Thar coalfield project.”

A second and related milestone occurred on 31 January when the current prime minister of Pakistan, Nawaz Sharif, and the country’s former president, Asif Zardari, attended a ground-breaking ceremony for the Thar coal power project being developed by Pakistani conglomerate Engro in joint venture with the Government of Sindh. The ceremony was also attended by Khan. This is the first of four projects that are in various stages of progress in the Thar coalfield. Of these, Oracle is likely to be the first project to be 100% sponsored by the private sector to get off the ground.

The Engro project is being developed on Block II of Thar with an initial mine capacity of 3.8 million tpa and power plant capacity of 660 MW, costing US$ 1.6 billion. Subsequent phases will see capacity grow to 6.5 million tpa to support a 1300 MW power plant and ultimately a 13.5 million tpa mine fuelling power generation capacity, of 2400 MW. Addressing the gathering on the occasion‚ the prime minister pledged to overcome the gas and power shortage shortly in the country. Sindh Province has already invested heavily on supporting infrastructure for the coalfield with new roads and a new airstrip.

The Oracle project

Oracle has similar aims. It has 529 million t in JORC resources at an average calorific value of 3182 kcal/kg, with 459 million t in the measured and indicated category. The company has teamed up with Chinese partners to develop and help fund its project on Block VI. According to reports prepared by SRK, Dargo Associates and Mott MacDonald last year, the company will build a 5 million tpa opencast coal mine and a 600 MW power station for US$ 1.5 billion. In Q4 of 2013, Oracle signed a joint development agreement (JDA) with the Chinese construction group CAMCE for the development of the coal mine and in November it entered into an memorandum of understanding (MOU) with SEPCO Electric Power Construction Corp. for the construction of the power plant.

Development

CAMCE is a subsidiary of the large Chinese state-owned company, SINOMACH (China National Machinery Industry Co.), and will be responsible for building the mine. SEPCO is the largest developer of conventional power plants in China. Over the past 12 years, it has built 23 projects with a total generating capacity of more than 26 GW. SEPCO intends to provide an EPC contract for the plant within the next three to six months.

Funding

The Chinese groups have introduced Oracle to Sinosure, the state-owned China Export & Credit Insurance Corp. with a view to underwriting the CAPEX of most of the power plant and part of the mine. The proposed funding plan would see two-thirds of the required CAPEX of US$ 1.5 billion come from debt finance sourced from China and the remainder in equity supplied by Oracle and SEPCO. Further, with the reduced stakes in the projects, Oracle’s funding requirement is decreased to a more manageable US$ 210 million.

Milestones and challenges

There are some major milestones expected for Oracle over the remainder of the year. These include:

• An EPC contract with CAMCE for the construction of the coal mine.
• An EPC contract with SEPCO for the development of the power plant.
• Finalisation of coal pricing and electricity tariff.
• Financing of coal mine in collaboration with SEPCO.
• Export credit and long-term debt finance terms are expected to be agreed via SEPCO with local and international banks.

The time is now

Oracle has been shaping the Thar project since 2008 and has already dealt with many potential areas of risk. In 2012, Oracle’s subsidiary, Sindh Carbon Energy Ltd, was awarded a 30 year mining lease for Block VI by the Directorate of Mines and Mineral Development in Sindh. This lease is renewable for a further 30 year period. In terms of construction and funding risk, with the appointment of two giant Chinese groups, following from western expert consultants like SRK, Dargo and Mott MacDonald, Oracle has a solid footing on which to develop that project. It has already developed a community plan for relocation and improved housing for any nearby villagers that will be resettled once construction begins.

One of the biggest risks is Pakistan itself, however. Part of the reason power prices are so high is that local and regional governments, state-owned enterprises and even domestic consumers often fail to pay their power bills. With the new shift to domestic energy exploitation and the obvious lack of alternatives for the government in securing GDP growth, the Thar coalfield projects are seen as of critical national significance. This means that the ultimate power purchasers will be obliged to provide very strong guarantees to the Chinese lenders.

Written by Andrew Harrington.  Edited by Jonathan Rowland

Read the article online at: https://www.worldcoal.com/special-reports/30042014/developing_pakistans_coal_potential_coal785/