WHEN fraudulent and corrupt practices in the top oil marketing company deprive consumers of value for their money, it is a matter of serious concern.

Fossil fuels are amongst Pakistan’s major imports. The import bill surged by 26 per cent to $15.25bn during fiscal year 2011-12, against $12.08bn in the fiscal year 2010-11. The total import of petroleum products was 12.37 million tons, mostly residual furnace oil (RFO) which constitutes 53 per cent of the total import and is primarily used to generate electricity.

Internationally, agreements for importing petroleum incorporate price adjustment according to the quantity of impurities such as sulphur, basic sediment and water in crude, diesel and heavy oils. The price increases or decreases according to the specifications at the purchaser’s port at the time of landing.

The poor quality of RFO is one of the fundamental causes of the energy crisis in Pakistan. Some 34.5 per cent of the electricity produced is through this RFO, while substandard RFO also impacts the electrical output of the power plant in which it is used as fuel. Electricity generated using this oil costs an average of Rs19 per unit, the highest cost in the total energy mix.

Water-content value plays a pivotal role in not only changing the overall cost but also has severe implications on the functioning and processing of thermal power plants. The permissible limit for water-content in fuel oil is 0.5 per cent. This is high enough to be considered a major contaminant in fuel oil. The situation is aggravated if the water has salt impurities.

The presence of water in fuel oil can also lead to microbial growth. The microbes feeding on heavy oil can turn the fuel oil slim, which further results in the fouling of filters, separators and strainers, thus exacerbating the process of corrosion and increasing the operational and maintenance cost of the power plant.

This increased water and ash content, coupled with high specific gravity, technically decreases almost by 10 per cent the calorific value of the RFO, which results in high consumption of RFO per unit of electricity generated.

Pakistan imported 6.6 million tons (seven billion litres) of RFO in FY 2011 at the rate of Rs78,000 per ton. The Technical Audit Study of GENCOs Power Plants, undertaken jointly by Hagler Bailly Pakistan and Advanced Engineering Associates International, Islamabad, highlighted the poor quality of fuel being used there.

Samples taken from the storage tanks of three power plants were far from actual specifications. In one plant, the water content was found to be eight per cent.

If the price of water present in RFO is quantified, that means that out of seven billion litres of RFO, 551 million litres were water which was paid for at the rate of Rs76 per litre — or Rs42bn. Even the presence of one per cent of water in RFO can cost the nation Rs5.2bn.

The story of how this came about is one of corruption and ineptitude.

Pakistan’s largest oil marketing company, Pakistan State Oil (PSO), signed an unsolicited $5bn contract with an oil-trading company for five years. The contract was awarded without open bidding, violating the rules of the Public Procurement Rules Authority (PPRA).

Transparency International wrote a strongly worded letter to the prime minister of Pakistan levelling allegations that have since been reconfirmed by the Securities and Exchange Commission of Pakistan and the PPRA. However, so far, the ministry has turned a deaf ear, despite the fact that the award of an oil supply contract to a small trading company without competitive bidding poses a serious security and strategic risk to Pakistan’s economy.

The contract clauses meant to monitor the quality and quantity of oil are severely compromised and price adjuster clauses for impurities have not been incorporated; further, the clause about measuring quality and quantity is also vague. In view of the impurities, a water-content adjustor clause should have been inserted in the agreement but was deliberately missed out.

For instance, the Guddu power plant consumes nearly 0.26kg/Kwh (kilowatt-hour), which is very high when compared to efficient independent power producers operating in the country; the latter consume just 0.13kg/Kwh. This increased cost of generation, which cannot fully be passed on to the consumer, is recovered through the subsidies granted by the government of Pakistan, further draining the national exchequer.

The presence in oil of water worth Rs42bn and the increased operation and maintenance cost incurred by thermal power plants coupled with massive subsidies in the power sector are the most vivid indicators of malfeasance and the lack of transparency within Pakistan’s institutional framework in this regard.

It is imperative that real-time monitoring devices be used to check the specifications of oil and appropriate amendments be made in the agreement to address concerns regarding price adjustment in order to reduce the burden on the exchequer and ensure fuel security. The minister and secretary of the relevant ministry should have vetted the flawed agreement and incorporated monitoring mechanisms. But the question is, who will now work towards improving the system?

The writer is an adviser to the Sustainable Development Policy Institute.

ahabasi@gmail.com