Pakistan Clean Fuels ESM246 ~~~. ~ _ ~ ~ ~ ~ ~ ~ ~ ' ______J___ _~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~f ,.1- _us,= - ._ ' m --, -,;-'' t ';.' Energy Sector Management Assistance Programme L~AAA AD 6J,LY1 Ii Report 246/01 October 2001 JOINT UNDP / WORLD BANK ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) PURPOSE The Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) is a special global technical assistance program run as part of the World Bank's Energy, Mining and Telecommunications Department. ESMAP provides advice to governments on sustainable energy development. Established with the support of UNDP and bilateral official donors in 1983, it focuses on the role of energy in the development process with the objective of contributing to poverty alleviation, improving living conditions and preserving the environment in developing countries and transition economies. ESMAP centers its interventions on three priority areas: sector reform and restructuring; access to modern energy for the poorest; and promotion of sustainable energy practices. GOVERNANCE AND OPERATIONS ESMAP is governed by a Consultative Group (ESMAP CG) composed of representatives of the UNDP and World Bank, other donors, and development experts from regions benefiting from ESMAP's assistance. The ESMAP CG is chaired by a World Bank Vice President, and advised by a Technical Advisory Group (TAG) of four independent energy experts that reviews the Programme's strategic agenda, its work plan, and its achievements. ESMAP relies on a cadre of engineers, energy planners, and economists from the World Bank to conduct its activities under the guidance of the Manager of ESMAP, responsible for administering the Programme. FUNDING ESMAP is a cooperative effort supported over the years by the World Bank, the UNDP and other United Nations agencies, the European Union, the Organization of American States (OAS), the Latin American Energy Organization (OLADE), and public and private donors from countries including Australia, Belgium, Canada, Denmark, Germany, Finland, France, Iceland, Ireland, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Sweden, Switzerland, the United Kingdom, and the United States of America. FURTHER INFORMATION An up-to-date listing of completed ESMAP projects is appended to this report. For further information, a copy of the ESMAP Annual Report, or copies of project reports, contact: ESMAP c/o Energy and Water The World Bank 1818 H Street, NW Washington, DC 20433 U.S.A. Pakistan Clean Fuels October 2001 Joint UNDP/World Bank Energy Sector Management Assistance Programme (ESMAP) Copyright © 2001 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing October 2001 ESMAP Reports are published to communicate the results of the ESMAP's work to the development community with the least possible delay. The typescript of the paper therefore has not been prepared in accordance with the procedures appropriate to formal documents. Some sources cited in this paper may be informnal documents that are not readily available. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, or its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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In this way we can better understand our audience's needs and improve the quality of our knowledge products. Thank you. ESMAP Management" Contents Acknowledgments .......................................................... vii Abbreviations and Acronyms .......................................................... viii Units of Measure .......................................................... x Glossary of Terms .......................................................... xi Executive Summary .......................................................... 1 Clean-Fuels Workshops and Analysis .............................................................I Transport Fuel Tax Policy .............................................................5 1. Background .......................................................... 9 The Link Between Fuel, Transport, and the Environment ...................................................... 10 Lead ............................................................ 10 Particulate Matter ............................................................ 13 Other Pollutants ............................................................ 15 Fuel Quality ............................................................. 16 Fuel Quality Trend in Neighboring Countries and Implications for Pakistan .................. 19 Downstream Petroleum Sector in Pakistan ............................................................ 20 Workshop ............................................................ 21 Transport Fuel Tax Policy ............................................................ 22 Structure of the Report ............................................................ 23 2. The Downstream Petroleum Sector .......................................................... 25 Role of the Government ............................................................ 25 Product Pricing ............................................................ 26 Economic Supply Zones ............................................................ 29 Other Agencies ............................................................. 29 Refinery Configuration ............................................................ 30 Selection of Crude -Oil ............................................................ 30 Crude and Product Pipelines ............................................................ 31 Overall Demand and Supply ..................................................................................... ............. 32 Gasoline ................................ 32 Diesel ............................... 34 Fuel Oil .35........ ................................... 35 Fuel Quality . 35 Hii 3. Improving Fuel Quality ................................................................. 37 Underlying Assumptions .................................................................... 38 Phaseout of Lead in Gasoline ................................................................... 38 Proposals for 2000 ................................................................... 40 Proposals for 2003 .................................................................... 42 Proposals for 2005 ................................................................... 44 Diesel ................................................................... 47 Fuel Oil .51 Incremental Cost of Fuel Quality Improvement ................................................................... 54 Refined Product Pricing Basis .................................................................... 54 Economics for Gasoline ................................................................... 55 Incremental Cost of Diesel Sulfur Reduction ................................................................... 57 Economics of Fuel-Oil Sulfur Reduction ................................................................... 59 4. Building a National Consensus . ................................................................. 61 5. Fuel Tax Policy ................................................................. 65 Fuel Consumption by Vehicle Category .................................................................... 65 Incentives for Fuel Switching ..................................................................... 69 Impact on Prices and Household Expenditures ................................................................... 71 Balance of Payments and Tax Revenue ................................................................... 74 Impact on the Macroeconomy ................................................................... 76 Social Policies to Mitigate Adverse Impact .................................................................... 78 Conclusions and Recommendations .................................................................... 82 Annex 1. Incremental Cost Calculations ................................................................. 85 Annex 2. Inter-Fuel Pricing: Selected Results ........................................................ 93 Annex 3. Historical Overview of Social Safety Nets . ............................ 101 Bibliography ................................................................. 109 Tables Table E.1 October 1997 Workshop: Recommended Timetable for Tightening Fuel Specifications, Including 1999 Revisions ....................................................................2 Table E.2 Incremental Cost (1998 US$) ................................................................... 3 Table E.3 Gasoline Physical Properties in 2005 (percent by volume) ..........................................3 Table E.4 Changes in Macroeconomic Parameters for Fiscal 1999-2000 ....................................7 Table 1.1 Impact of a 10-p_g/m3 Change in the Ambient Concentration of Particulate Matter on Health .................................................................... 15 Table 1.2 Developing Countries That Have Banned Leaded Gasoline ....................................... 19 iv Table 1.3 October 1997 Workshop: Recommended Timetable for Tightening Fuel Specifications, Including 1999 Revisions ............................................. 21 Table 2.1 Retail Prices (Rs per Liter) ............................................................. 27 Table 2.2 Economic Supply Zones Post-PARCO startup ............................................................ 29 Table 2.3 Configurations and Capacities of Refineries in Pakistan (thousand barrels per day) .30 Table 2.4 Qualities of Low-Sulfur Crudes ............................................................. 31 Table 2.5 Pakistan Gasoline Demand Forecasts by Region (thousand tons per year) ................ 33 Table 2.6 Pakistan Diesel Demand Forecasts by Region, 2000-2005 (thousand tons per year) 34 Table 2.7 Pakistan Fuel Oil Demand Forecasts, by Region (thousand tons per year) ................ 35 Table 2.8 Middle Distillate Production ............................................................. 36 Table 2.9 Fuel Oil Production ............................................................. 36 Table 3.1 Scenarios Studied ............................................................. 37 Table 3.2 Quality Parameters Used for Gasoline Blending Options ........................................... 38 Table 3.3 Leaded and Clear RON Requirements ............................................................. 39 Table 3.4 Refinery Gasoline Production in Pakistan, 1999 (Base Case) .40 Table 3.5 Refinery Gasoline Production, 2000 .41 Table 3.6 Physical Properties of Gasoline in 2000 .42 Table 3.7 Refinery Gasoline Production in 2003 .43 Table 3.8 Physical Properties of Gasoline in 2003 .44 Table 3.9 Refinery Gasoline Production in 2005, No Isomerization .45 Table 3.10 Physical Properties of Gasoline in 2005, No Isomerization . .46 Table 3.11 Refinery Gasoline Production in 2005 with Isomerization . .46 Table 3.12 Impact of Isomerization on Gasoline Physical Properties in 2005 . .47 Table 3.13 Specification Blending for Diesel, 2000 ..48 Table 3.14 Specification Blending for Diesel, 2003 ..49 Table 3.15 Specification Blending for Diesel, 2005 ..50 Table 3.16 Fuel Oil Pools, 2000 ..52 Table 3.17 Fuel Oil Pools, 2003 ..53 Table 3.18 Fuel Oil Pools, 2005 ..53 Table 3.19 Gasoline Quality Improvement: Free-Market Pricing . ............................................. 56 Table 3.20 Gasoline Quality Improvement: Cost to Pakistan Refineries . . 56 Table 3.21 Costs of Isomerization in 2005 ........................................................ 57 Table 3.22 Cost of Reducing Sulfur in Diesel Fuel .......................................... 58 Table 3.23 Cost of Reducing Sulfur in Fuel Oil ....................................................... 59 Table 4.1 Workshop Programs ....................................................... 61 Table 5.1 Motor Vehicle Population in Pakistan ('000) ....................................................... 66 Table 5.2 Results of Survey of 20 Refueling Stations in Karachi and Lahore ............................ 66 Table 5.3 Survey of 150 Vehicle Owners in Karachi, Lahore, and Peshawar ............................ 67 Table 5.4 Intra- and Inter-City Fuel Consumption ('000 metric tons) ........................................ 68 v Table 5.5 Price Adjustments undeT Different Scenarios ............................................................. 71 Table 5.6 Annual Household Private Transport Expenditures, by Income Quartile (rupees) .... 73 Table 5.7 Changes in Annual Household Expenditure in Scenario 1 ......................................... 73 Table 5.8 Changes in Annual Household Expenditure in Scenario 2 ......................................... 74 Table 5.9 Demand Elasticities for Gasoline and Diesel ............................................................. 75 Table 5.10 Consumption of Gasoline and Diesel in Two Scenarios and Impact on Balance of Payments and Tax Revenue in Fiscal 1999-2000 ................................................................. 75 Table 5.11 Changes in Macroeconomic Parameters for Fiscal 1999-2000 ................................ 77 Table 5.12 Evaluation of Social Safety Net Programs ................................................................ 80 Table 5.13 Impact of Changes in GST ................................................................... 82 Table A1.1 Gasoline Prices in Pakistan (1998 US$ per ton) ....................................................... 86 Table A1.2 Diesel Prices in Pakistan (1998 US$ per ton) ........................................................... 86 Table A1.3 Fuel Oil Prices in Pakistan (1998 US$ per ton) ........................................................ 86 Table A1.4 Gasoline Quality Improvement: Free-Market Pricing .............................................. 87 Table A1.5 Gasoline Quality Improvement: Cost to Pakistan Refineries ................................... 88 Table A 1.6 Cost of Installing Isomerization Units ................................................................... 89 Table A1.7 Impact of Isomerization in 2005 ................................................................... 89 Table A1.8 Infrastructure Investment Costs for Diesel Sulfur Reduction (1998 US$ million).90 Table A1.9 Cost of Diesel Sulfur Reduction ................................................................... 90 Table A 1.10 Capital Investment Required for Middle Distillate Hydrodesulfurization ... 91 Table Al.1 1 Cost of Fuel-Oil Sulfur Reduction, 1998 US$ million . . 91 Table Al.12 Flue Gas Desulfurization Economics ................................................................... 92 Table A2.1 Impact of Fuel Price Changes on Sectoral Price Levels (Percent) ............. ............. 93 Table A2.2 Annual Urban Household Expenditures, by Income Quartile and Sector (rupees). 95 Table A2.3 Annual Rural Household Expenditures by Income Quartile and Sector (rupees)... 97 Figures Figure 1.1 Evolution of U.S. Diesel Particulate Emissions ........................................................ 18 Figure 2.1 Regular Gasoline Price Breakdown for NRL/PRL .................................................... 28 Figure 2.2 High-Speed Diesel Price Breakdown for NRL/PRL .................................................. 28 Figure 2.3 Demand for Petroleum Products ........................................................ 32 Figure 2.4 Imports of Petroleum Products ........................................................ 33 Figure 3.5 Contribution to Sulfur Content of Overall Fuel Oil Pool, 2003 ................................ 52 vi Acknowledgments This report presents the results of a "Pakistan Clean Fuels" study undertaken by the Energy Sector Management Assistance Programme (ESMAP), a joint program of the United Nations Development Programme (UNDP) and the World Bank. The financial assistance of the Government of the United Kingdom through ESMAP is gratefully acknowledged. The study was conducted under the guidance of Mr. G.A. Sabri, Director General (Oil) of the Pakistan Ministry of Petroleum and Natural Resources (MPNR), and Mr. Asif Shuja Khan, Director General of the Pakistan Environment Protection Agency (PEPA). The refiners in Pakistan, fuel marketers, and the Hydrocarbon Development Institute of Pakistan (HDIP) contributed significantly to the analysis of clean fuels options carried out by Mike Webster, Phil Hunt, and Rizwan Sheikh of Chem Systems (U.K.) and presented in Chapters 2 and 3. Professor Paul Stevens of the Centre for Energy, Petroleum, and Mineral Law and Policy of the University of Dundee contributed to some of the discussions found in Chapter 2. Hafiz Pasha, Zafar Ismail, Ejaz Rasheed, Alisha Ghaus- Pasha, and Sajjad Akhtar of the Social Policy Development Centre (SPDC) undertook the study described in Chapter 5. Historical product prices and production and consumption figures in this report were taken from Pakistan Energy Yearbook 2000, published jointly by HDIP and MPNR. This report was prepared by Masarni Kojima of the Policy Division, Oil, Gas and Chemicals Departnent of the World Bank. The principal members of the ESMAP tearn were Masami Kojima (task leader) and Robert Bacon of the Policy Division, Oil, Gas and Chemicals Department. Other participants in this study from the World Bank included Rashid Aziz, Waqar Haider, Tjaarda Storm van Leeuwen, and Marc Heitner and of the South Asia Energy Unit; and Aziz Bouzaher of the South Asia Environment Unit. The comments of the reviewer, Kenneth Gwilliam of the Urban Development and Transport Department of the World Bank, and the editorial assistance provided by Chris Marquardt are gratefully acknowledged. vii Abbreviations and Acronyms AJK Azak, Jammu, and Kashmir AQIRP (U.S. Auto/Oil) Air Quality Improvement Research Program ARL Attock Refmery, Limited ASS Atta (wheat flour) Subsidy Scheme BOR Boards of Revenue CCR continuous catalyst regeneration CDC (U.S.) Centers for Disease Control and Prevention CIF cost, insurance, and freight CNG compressed natural gas CO carbon monoxide CONCAWE Conservation of Clean Air and Water in Europe DG Directorate General EOBI Employees Old Age Benefits Institution EPEFE European Programme on Emissions, Fuels and Engine Technologies ESMAP Energy Sector Management Assistance Programme EU European Union FBS Federal Bureau of Statistics FCC fluidized catalytic cracking FGD flue gas desulfurization FOB free on board GDP gross domestic product GST general sales tax HBFC House Building Finance Corporation HBL Habib Bank Limited HDIP Hydrocarbon Development Institute of Pakistan HIES Household Integrated Economic Survey HOBC high-octane blending components HSD high-speed diesel IFA Individual Financial Assistance IMF International Monetary Fund IQ intelligence quotient ISPM integrated social policy and macroeconomic (model) JICA Japan International Cooperation Agency LP linear progranmming LPG liquefied petroleum gas viii MPNR Ministry of Petroleum and Natural Resources MTBE methyl tertiary-butyl ether NGO nongovemmental organization NO2 nitrogen dioxide NO. oxides of nitrogen NRL National Refinery Limited NRSP National Rural Support Program NWFP Northwest Frontier Province OCAC Oil Company Advisory Committee OEM original equipment manufacturer OMV Offenfuir Mehr Verantwortung PARCO Pakistan Arab Refinery Company PBM Pakistan Bait-ul-Maal PEPA Pakistan Environment Protection Agency PIMS Process Industries Modeling System PM particulate matter PMIo particles with an aerodynamic diameter less than 10 microns PM2.5 particles with an aerodynamic diameter less than 2.5 microns PRL Pakistan Refinery Limited PSO Pakistan State Oil RVP Reid vapor pressure SBP State Bank of Pakistan S02 sulfur dioxide SO, oxides of sulfur SPDC Social Policy and Development Centre TEL tetra-ethyl lead TSP total suspended particles UNDP United Nations Development Programme VKT vehicle kilometers traveled VOC volatile organic compound WHO World Health Organization ZOT Zulfiqarabad Oil Terminal ix Units of Measure bpsd barrels per stream day dl deciliter g/cc grams per cubic centimeter g/i grams per liter GW gigawatt kg kilogram kg/m3 kilograms per cubic meter km kilometer kmlh kilometers per hour kPa thousand pascals ktpa thousand (metric) tons per annum I liter MON motor octane number ppm parts per million psia pounds per square inch absolute RON research octane number RONC research octane number clear Rs Pakistani rupees T90 temperature at which 90 percent of the fuel evaporates ktpsd thousand [metric] tons per stream day tpa (metric) tons per annum vol% percent by volume wt% percent by weight wt ppm parts per million by weight pig/m3 mnicrograms per cubic meter pig/dl micrograms per deciliter ptm micron (one-thousandth of a millimeter) x Glossary of Terms API gravity An arbitrary gravity scale expressing the gravity or density of liquid petroleum products, expressed in terms of degrees API. The formula is °API = (141.5/specific gravity at 60-60 °F) -131.5. Aromatics Hydrocarbons that contain one or more benzene rings in their molecular structure. Aromatics have valuable anti-knock (high- octane) characteristics. Benzene An aromatic hydrocarbon with a single six-carbon ring and no alkyl branches. Benzene is a carcinogen. Blending octane The effective octane number of a gasoline component when it is number blended into gasoline. High blending octane materials behave as though they had octane numbers higher than shown by laboratory tests on the pure material. Blendstock A component combined with other materials to produce a finished refined product. Catalytic converter A device built into the exhaust system of an engine containing a catalyst that converts carbon monoxide (CO) to carbon dioxide, and unburned hydrocarbons to carbon dioxide and water. If only CO and unburned hydrocarbons are converted, the catalyst is called a two- way catalyst. A three-way catalyst converts, in addition, oxides of nitrogen (NO,) to nitrogen and water (or oxygen or carbon dioxide). Cetane number An empirical measure of a diesel fuel's ignition quality that indicates the readiness of the fuel to ignite spontaneously under the temperature and pressure conditions in the engine's combustion chamber. Adding cetane improvement additives can increase the cetane number. Clear octane The octane number of gasoline without octane-improving additives such as lead. Where RON rather than MON is being discussed (as in this report), this is also referred to as clear RON, or RONC. Cost, insurance, and A term used in foreign trade contracts where the exporter, in freight (CIF) addition to the free-on-board charges, pays the cost of the insurance and the freight; in other words, the price includes all charges up to the port of delivery. Covariate An explanatory variable on the right-hand side of a regression equation. xi Cut point A temperature limit of a cut, which in tum is the portion of crude oil boiling within certain temperature limits. Diluent Something that dilutes. MTBE, for example, contains no benzene, no sulfur, no aromatics, and no olefins. Adding MTBE thus "dilutes" all other components having benzene, sulfur, aromatics, and olefins. Elasticity Percent change in quantity caused by a I percent change in price. Fluidized catalytic A refinery process for converting heavy oils into lighter products, cracking (FCC) including gasoline. Flash point The lowest temperature (under certain conditions) at which a combustible liquid will give off sufficient vapor to form a flamrnable mixture with air. Denotes the volatility of the product. Fractionation The separation of crude oil into a number of components according to their boiling points. Free on board (FOB) The basis of an export contract in which the seller pays for sending the goods to the port of shipment and loading them on to the ship or aircraft. The seller also pays for the insurance up to this point. Heavy end The higher boiling point and density fraction of a petroleum fraction, as in the heavy end of diesel. Hydrocarbons Organic compounds composed of carbon and hydrogen. Hydroskimming Simple refineries with a reformer to increase octane of the gasoline fraction, but not other conversion process units. Hydrotreating A refinery process in which a stream is treated with hydrogen to reduce the amount of sulfur, nitrogen, and other heteroatoms, and to saturate double bonds (for example, in aromatics and diolefins). The terms hydrotreating, hydroprocessing, and hydrodesulfurization are used rather loosely in the industry. Hydrodesulfurization Removal of sulfur in a fuel in the presence of hydrogen. Input-Output Analysis A mathematical procedure that takes account of the interdependence among the economy's industries and determines the amount of output each industry must provide as inputs to the other industries in the economy. Isomerization A process for increasing the octane of light hydrocarbons by converting them from straight-chain hydrocarbons to branched hydrocarbons. Once-through isomerization refers to a process configuration where the products are not recycled (product recycling increases the octane further). xii Motor octane number The octane number of a fuel, determined when vehicles are operated (MON) at high speed or under highway driving conditions. Naphtha A petroleum fraction in the range of C5 (hydrocarbons with five carbon atoms) to 216f degrees Celsius. Naphthas are major constituents of gasoline and generally need processing to make suitable quality gasoline. Octane number A measure of resistance to self-ignition (knocking) of a gasoline when mixed with air in an engine cylinder. The higher the octane number, the higher the anti-knock quality of the gasoline. In the United States, the word octane, as used at filling stations, refers to an average of MON and RON; it is also called the anti-knock index. Because MON is usually lower than RON, averaging the two results in a lower number, typically by 4 or 5. For example, "87 octane" in the United States corresponds to 91 or 92 RON. Olefins A class of hydrocarbons that have one double-bond in their carbon structure. Oxygenates Any organic compounds containing oxygen. Specifically for the petroleum industry, oxygenates typically refer to alcohols and ethers used to boost octane or to reduce CO in engine exhausts. Ozone A colorless gas, it is an allotropic form of oxygen in which the molecule is 03. Polycyclic aromatics Aromatic compounds with more than one six-membered ring. (polycyclics) Polycyclics are carcinogens. The diesel fraction of FCC product is a source of polycyclics. Reformate A high-aromatic, high-octane product made in a reformer and used to blend motor gasoline or aviation gasoline. Reid vapor pressure A standardized measure of a fuel's volatility at a specified set of (RVP) conditions, with a higher value indicating a more volatile fuel. RVP is usually measured in psia (pounds per square inch absolute) or kPa (thousand pascals). Research octane The octane number of a fuel, determined when vehicles are operated number (RON) at low speed or under city driving conditions. Severity The intensity of the operating conditions of a process unit, indicated by the product's clear research octane number (RONC) in the case of reformers. Sour crude oil A crude oil containing high levels of sulfur. Slate A crude (or product) slate refers to the mix of crudes (or products) making up the total that a refinery processes (or produces). xiii Translog equation Equation in which the dependent variable is regressed against a product of logarithms of two or more independent variables. Tgo TemperatuTe at which 90 percent of fuel evaporates. xiv Executive Summary 1. The Pakistan Clean Fuels program was undertaken at the request of the Ministry of Petroleum and Natural Resources (MPNR) and the Ministry of Environment, Local Government, and Rural Development to examine the feasibility of the recommendations made at the Clean Fuels Workshop held in Islamabad in October 1997.1 More specifically, the workshop participants proposed a timetable for phasing lead out of gasoline, increasing the average gasoline octane, and reducing sulfur in diesel and fuel oil. Other recommendations included measures to reduce vehicular emissions and collect air quality data more systematically. 2. Pakistan remains one of the two countries in South Asia still using leaded gasoline widely, the other country being Sri Lanka. Given extensively documented epidemiological evidence concerning the adverse impact of lead on public health, particularly on the intellectual development of children, lead elimination is the highest priority for fuel quality improvement facing the Government of Pakistan. Another pollutant of concem is high ambient concentrations of fine particles. Reducing sulfur in fuels helps to lower particulate concentrations because sulfur contributes to the formation of secondary particulates. The workshop recommendations address these two concerns. 3. This program also examined another aspect of particulate emissions. Diesel vehicles generally contribute much more to particulate emissions than gasoline vehicles. Historically, consumption of diesel by vehicles has exceeded that of gasoline in Pakistan several-fold, in part because of the governnent's inter-fuel pricing policy, which has set the price of diesel at about one-half that of gasoline. This has encouraged the conversion of light-duty vehicles, which might otherwise run on gasoline, to diesel. Narrowing the price difference between gasoline and diesel would discourage vehicle owners from converting light-duty vehicles to diesel in the future, and would even promote replacement of diesel vehicles with gasoline vehicles at the time of vehicle retirement. Clean-Fuels Workshops and Analysis 4. A "Clean Fuels Workshop" was held in Islamabad on 20-21 October 1997 to examine how to improve the quality of fuels in Pakistan. Sponsored by the Ministry of Environment, Local Government, and Rural Development, the Ministry of Petroleum and Natural Resources, and the World Bank, the workshop was attended by representatives from the Government of Pakistan, the downstream petroleum sector, universities, research institutions, and nongovernmental organizations (NGOs), and by specialists from This report was completed in May 2001 and reflects the situation in Pakistan up until that point. 2 Pakistan Clean Fuels other countries. The workshop participants recommended (1) tightened specifications for gasoline, diesel, and fuel oil, as well as (2) a timetable for implementing the new specifications, as shown in Table E. 1. The timetable was modified in 1999. Table E.1: October 1997 Workshop: Recommended Timetable for Tightening Fuel Specifications, Including 1999 Revisions Specifications Timetable Parameter Old New Proposed in 10/9 7 Revised in 1999 Gasoline lead, g/l 0.42 0.35 end-1998 2000 0.35 0.15 2003 2003 0.15 0.013 2005 2005 Gasoline research 80 87 Withdraw 80 RON by end 1998 2000 octane number (RON) and replace with 87 RON - 92 unleaded Introduce by end 1998 Post-PARCO startup Diesel sulfur, wt% 1.0 0.5 2000 2001 Fuel oil sulfur, wt/o 3.5 2.0 2000 2001 Notes: gll grams per liter; wtPo percent by weight; PARCO Pakistan Arab Refinery Company. - not applicable. 5. At the October 1997 workshop, it was decided that the Government of Pakistan and the World Bank would undertake a joint techno-economic analysis of clean- fuels options and the feasibility of the above timetable. The requirements of securing funding, as well as intemal developments in Pakistan, delayed the commencement of the study until mid-1999. 6. Industry-standard linear programming software was used to analyze the impact of the recommended specifications on the downstream petroleum sector. Additional steps to limit benzene and total aromatics in gasoline were also examined. The results are surnmarized in Table E.2. The gasoline quality improvement steps are the same as those indicated in Table E. 1. For diesel and fuel oil, the incremental cost given in each year is that required to reduce diesel sulfur to 0.5 percent by weight (on a per-liter basis) and the national average of fuel oil sulfur to 2 percent by weight. The last column shows the cost of installing isomerization units at three refineries to lower benzene and total aromatics in gasoline. A comparison of gasoline fuel quality with and without isomerization is given in Table E.3. Executive Sunmary 3 Table E.2: Incremental Cost (1998 US$) Parameter 2000 2003 2005 2005, low aromatics Annual cost for gasoline (US$ million) 1.8 -5.5 1.5 7.2 Cost per liter of gasoline (US cents) 0.1 -0.3 0.1 0.4 Annual cost for diesel (US$ million) 16.7 22.0 24.2 Cost per liter of diesel (US cents) 0.3 0.3 0.3 Annual cost for fuel oil (US$ million) 104 105 114 Note: - not applicable. Table E.3: Gasoline Physical Properties in 2005 (percent by volume) Parameter ARL NRL PRL Dhodak PARCO Benzene, without isomerization 4.6 4.2 4.3 3.6 4.0 Benzene, with isomerization 3.5 1.1 0.9 1.3 1.5 Total aromatics, without isomerization 41 38 39 32 32 Total aromatics, with isomerization 41 33 31 33 35 Notes: ARL Attock Refinery Limited; NRL National Refinery Limited; PRL Pakistan Refinery Limiited; PARCO Paldstan Arab Refinery Company; Dhodak is a condensate distillation unit located in Dhodak in the Punjab Province. 7. Two workshops were held in Islamabad at the end of March 2001 to discuss the findings of the study and reach a consensus on what concrete steps to take in the coming months. The target audience for the first workshop-hosted by the Ministry of Environment, Local Government, and Rural Development-was stakeholders in the environment sector. Attending were representatives from the Pakistan Enviromnent Protection Agency, other government agencies, NGOs, universities, research institutions, and one refinery. The second workshop was organized by MPNR, aiming specifically at reviewing the technical details of the study findings with the refiners and oil marketing companies. 8. At the first of these two recent workshops, the findings of the study were summarized as follows: * The cost of eliminating lead in gasoline is surprisingly low because the Pakistan Arab Refinery Company (PARCO) refinery, a new facility capable of producing high-octane blending components, has recently come on stream. The incremental cost to consumers would be on the order of 0.5 to 1 percent of the retail price, requiring little capital expenditure. * In the process of eliminating lead, it would be important to introduce limits on benzene and aromatics. Levels of 5 percent benzene and 40-45 percent total aromatics would be considered minimally acceptable by international standards, and Pakistan is in a position to impose these limits without additional capital expenditures. 4 Pakistan Clean Fuels The incremental cost of reducing sulfur in diesel from 1 percent to 0.5 percent, now considered minimally acceptable by international standards, is similarly low: about 1 percent of the retail price and requiring capital expenditures of about US$10 million (for storage tanks and other infrastructure requirements for blending domestically produced diesel with imported lower-sulfur [0.25 percent] diesel). * The cost to Pakistan of reducing sulfur in fuel oil, in contrast, would be substantial: more than US$100 million per annum as a result of importing lower-sulfur fuel oil. This argues for accelerating the switch from fuel oil to natural gas. 9. At the second workshop organized by MPNR, refiners and oil marketing company representatives supported the following two points highlighted during the presentation of the study findings. The incremental cost of eliminating lead in gasoline and reducing sulfur in diesel to 0.5 percent is surprisingly low, for the former because PARCO has already made much of the investment needed to eliminate lead, and for the latter because Pakistan relies heavily on imports. * It is important to introduce limits on benzene and total aromatics, and Pakistan can currently initiate 5 percent and 40-45 percent limits, respectively, without incurring any capital expenditures in the future at the time of complete lead elimination. This is important for preventing benzene from exceeding 5 percent if and when octane grades higher than the current 87 RON are introduced on a wide scale. 10. MPNR, the Ministry of Environment, Local Government, and Rural Development, and the industry expressed strong interest in accelerating the timetable for eliminating lead in gasoline. In particular, the relatively low incremental cost of doing so was seen as a unique opportunity for the Government of Pakistan to upgrade the quality of petroleum products. 11. The second workshop concluded by proposing the following action items: * The timetable for lead phaseout is to be accelerated, with the final date for lead elimination brought forward from the original date of 2005 to 2002 or 2003. One option is to supply unleaded gasoline to all areas except those served by Attock Refinery as soon as possible. * The government will issue revised gasoline specifications, limiting benzene to 5 percent and aromatics to 40-45 percent (precise level to be finalized). * Because of the contract with Kuwait Petroleum Corporation, which informed Pakistan that it cannot supply 0.5-percent-sulfur diesel until June 2002 (because of a fire at one of their refineries), Pakistan will switch to 0.5-percent-sulfur diesel in June 2002. The logistics of importing 0.25- Executive Summary 5 percent-sulfur diesel and blending with domestically produced diesel would need to be finalized. * Because the incremental cost of lowering sulfur in fuel oil is considerable, the government should accelerate switching from fuel oil to natural gas and consider supplying imported lower-sulfur fuel oil to fuel oil users located in or near densely populated areas. Transport Fuel Tax Policy 12. Following the refinery study, the second component of the Pakistan Clean Fuels program addressed how to stem the conversion of light-duty vehicles from gasoline to diesel, and in fact reverse the trend so that the majority of light-duty vehicles are gasoline-powered. 13. Once lead is phased out of gasoline, particulate emissions from diesel vehicles would be expected to be the most serious pollutant affecting public health in the transport sector. Diesel vehicles of the technology used in Pakistan emit much more fine particles than gasoline vehicles. Further, emerging evidence suggests that diesel particulate emissions are more harmful than those of gasoline vehicles. 14. Because the price of diesel has historically been about one-half that of gasoline, some owners of gasoline cars even convert their vehicles to run on diesel. Over 90 percent of diesel was used in the transport sector in the second half of the 1990s. While heavy-duty vehicles would be expected to continue to run on diesel irrespective of the inter-fuel price difference, encouraging light-duty vehicles used in urban centers to run on gasoline rather than diesel would confer significant health benefits. 15. One effective option, if it can be implemented successfully, is differentiated vehicle taxation, by which light-duty diesel vehicles are taxed considerably more than their gasoline equivalents so as to make the purchase of the former economically unattractive. However, discussions held with provincial tax officials indicated that such a tax scheme would not be feasible given the limitations of Pakistan's tax collection mechanism. Therefore, this study's scope was limited to examining the use of fuel tax policy to achieve the same objective. More specifically, this component investigated two scenarios for narrowing the price difference between gasoline and diesel to the level where the owners of light-duty vehicles would be indifferent to the choice of fuel. The two scenarios are as follows: * Scenario 1: A 10 percent decrease in the price of gasoline and a 67 percent increase in the price of diesel * Scenario 2: A 29 percent decrease in the price of gasoline and a 10 percent increase in the price of diesel. If light-duty diesel vehicles used in intra-city transport were hypothetically converted to gasoline as a result of the above price adjustments, this would represent diesel savings of approximately 250,000 metric tons. Even more important is preventing the future 6 Pakistan Clean Fuels conversion of gasoline vehicles currently driven in urban centers (all except gasoline used by two- and three-wheelers)--amounting to 700,000 metric tons-to diesel. 16. It is important to acknowledge the serious limitation of using only fuel tax policy to influence the choice of fuel, given the large price difference between gasoline and diesel that exists today. Diesel is used in freight transport, so that a marked rise in the price of diesel affects heavy-duty diesel vehicles for which the pricing scheme is not intended, resulting in economy-wide inflation. If the poor are to be affected disproportionately by the impact of the diesel price rise, such a measure will be regressive. General inflation would also affect the balance of payments by making export- oriented and import-substitution sectors less competitive. 17. At the same time, however, Pakistan is an importer of diesel-so if the consumption of diesel falls in response to a price increase, the petroleum-product import bill will be reduced. Further, government revenue will rise because of greater tax take from the sale of diesel, and this additional income can be used to mitigate some of the adverse effects of the diesel price increase. 18. Modeling was carried out to address the above questions by means of input-output analysis, using household survey data and the Integrated Social Policy and Macroeconomic model developed by the Social Policy and Development Center in Karachi. Scenario 1 was found to have a significant impact on the cost of living of households, amounting to an increase of 1.4 percent of income on average. The impact is higher for urban households (1.5 percent) than rural (1.3 percent). The impact is regressive, with the increase in household expenditure falling from 1.9 percent for the bottom income quartile to I percent for the top income quartile in rural areas, and from 1.9 percent to 1.2 percent for the corresponding income groups in urban areas. Therefore, if scenario 1 is adopted as a policy, it may be necessary to try to mitigate the impact on lower-income groups by means of safety net measures. In contrast, the impact on the cost of living was found to be generally negligible in scenario 2, with the increase expressed in percentage of income remaining below 0.1 percent. The top income quartile in rural areas and the top two income quartiles in urban areas actually benefit as a result of a large fall in the price of gasoline. 19. The government's tax revenue was found to increase by approximately Rs 45 billion2 in scenario 1, and to suffer a slight loss (Rs 3 billion) in scenario 2. The impacts on other economic parameters are shown in Table E.4. 2 A billion is 1,000 million. Executive Summary 7 Table E.4: Changes in Macroeconomic Parameters for Fiscal 1999-2000 Macroeconomic variable Unit Scenario I Scenario 2 Gross domestic product (GDP) growth rate %, absolute -0.26 -0.02 Unemployment rate %, absolute 0.27 -0.03 Rate of inflation %, absolute 1.43 -0.08 Current account deficit % of GDP -0.47 0.07 Budget deficit % of GDP -1.03 0.1 Rate of depreciation of nominal exchange rate %, absolute 1.43 -0.03 Ratio of tax to gross domestic product %, absolute 1.29 -0.08 Incidence of poverty % of population 1 -0.05 20. Scenario 1 has major economy-wide consequences. It generates substantial additional revenues (thereby reducing the budget deficit) and reduces imports significantly (thereby improving the balance of payments) but at the cost of somewhat lower growth (due primarily to contraction of the road transport sector), significantly higher short-run inflation, and slightly higher unemployment. The impact on the cost of living is regressive, with the poor being the most severely affected. The poor are conservatively estimated to increase by almost 1.5 million. 21. Scenario 2 benefits the richer car-users considerably, and encourages rather than discourages the use of private cars in urban areas. As such, it is not a desirable policy option. It does have more limited macroeconomic implications than scenario 1, achieving the same desired inter-fuel price difference but causing much smaller dislocation to the economy. There are some minor revenue losses and a small worsening in the balance of payments, but it marginally affects the poorer sections of society while conferring some benefits to car owners. 22. The sharp diesel price hike contemplated in scenario 1 is likely to meet stiff resistance, especially because heavy-duty vehicles (which account for bulk of diesel consumption) will have no option but to bear the higher input costs and raise transport tariffs. This highlights the limitation of not incorporating differentiated vehicle tax in the analysis. It is proposed that the government match such a move with a countervailing relief in the form of a large reduction in the standard general sales tax (GST) rate. A one- third reduction in the GST rate is estimated to lower the average burden of the tax by 1.4 percent of income in urban areas and 1 percent in rural areas. This intervention is estimated to compensate for the negative impact stemming from fuel price changes by over 92 percent in urban areas and by over 77 percent in rural areas. 23. Such a counter-measure may or may not succeed. Its success will depend essentially on the perceived burden of GST and the extent to which the fall in the rate of GST is accompanied by a corresponding fall in the prices of the essential goods and services. On balance, the political feasibility of raising the diesel price sharply is considered low. If a differentiated vehicle tax scheme must be ruled out, scenario 2 may 8 Pakistan Clean Fuels be a less disruptive strategy than scenario 1, but it may also have serious adverse effects on the transport sector. 24. The above findings suggest that fuel tax policy alone is a poor instrument for inducing a shift from diesel- to gasoline-powered vehicles. Although scenario 2 may have negligible economy-wide consequences, the transport sector in Pakistan is plagued by urban congestion and inadequate provision for road maintenance. A move that will certainly encourage greater urban private car use will further exacerbate the transport sector's problems, even if there are environmental gains to be made. These observations highlight the importance of coordinating policies across environment, transport, and energy sectors, and of using a number of policy instruments rather than just one to address environmental and transport problems. 1 Background 1.1 Deteriorating urban air quality is one of the most serious environmental problems facing Pakistan today.3 Poor air quality threatens human health and causes other forms of enviromnental damage. Among the greatest contributors to air pollution are vehicle emissions, including highly damaging emissions of lead and fine particulate matter. As incomes grow, so too do the numbers and use of motor vehicles, potentially worsening pollution. 1.2 Airbome fine particles and lead are the pollutants receiving the most attention from policymakers in Pakistan because of their serious adverse effects on public health. A recent investigation into the quality of air in three cities-Lahore, Rawalpindi, and Islamabad-found high concentrations of PM,0 (particles smaller than 10 microns, or 10 gtm), lead and oxides of nitrogen (NOJ). Air quality was monitored continuously for 16 to 18 hours at 10 locations, all located on major roads. Of these, an average of close to 900 micrograms of PMIo per cubic meter (Qg/m3) was recorded at eight locations, and the remaining two locations recorded an average of about 500 4g/m3, both of which are exceptionally high levels by any standards. Airborne lead varied between 0.7 and 10 jig/n3, again very high (JICA 2000). 1.3 Sources of PMIo include large industrial sources such as power plants, small industrial sources and commercial establishments, houses, refuse burning, and vehicles. Among vehicles, diesel vehicles and two-stroke engine gasoline vehicles are the two largest sources. As for lead, the combustion of leaded gasoline in vehicles is a significant source, but other sources such as smelters and battery manufacturing and recycling facilities can also be important. While this report focuses on the combustion of oil products, especially in vehicles, it is important to bear in mind that an effective urban air quality management strategy needs to address all major sources of emissions, including such often neglected but important sources as biomass, refuse buming, and resuspension of road dust (road dust thrown into the air). 3 This report was comnpleted in May 2001 and reflects the situation in Pakistan up until that point. 9 10 Pakistan Clean Fuels 1.4 This chapter provides background information to place in context the studies undertaken in the Pakistan Clean Fuels program. It begins by giving an overview of major pollutants with serious health effects. This is followed by a discussion on the role of fuel quality and its effects on emissions, especially from vehicles. Special emphasis is placed on lead in gasoline and sulfur in fuels, two of the focal points of the Pakistan Clean Fuels program. The chapter then describes the downstream petroleum sector in Pakistan, the quality of domestically refined fuels, and the role of inter-fuel pricing. It closes by outlining the rest of the report. The Link Between Fuel, Transport, and the Environment 1.5 Fuel quality and vehicle emissions are closely linked, and they in turn affect the level of air pollution. In developing a strategy for urban air quality management, it is important first to understand which pollutants are affecting public health the most in a given city. This in turn depends on the toxicity and the ambient concentrations of each pollutant. The next step is to identify sources that are making significant contributions to the pollutants of concern, and formulate plans for controlling these sources. Because transport is typically one of the major contributors to urban air pollution, reducing vehicle emissions is generally an important part of a strategy for managing urban air quality. One of the available options for reducing emissions in the transport sector is fuel quality improvement. Improving the quality of gasoline by eliminating lead is a particularly effective measure for reducing the exposure of the general public to airborne lead. 1.6 The pollutants of special concern in Pakistan are lead and fine particulate matter. Transport contributes to high ambient levels of both pollutants. Vehicles emit lead as a result of the combustion of leaded gasoline. Fine particles are emitted directly from vehicles, and in addition are formed as a result of secondary formation4 from NO, and oxides of sulfur (SO,). Both gasoline- and diesel-fueled vehicles emit NO,. In the case of gasoline, NO, emissions can be reduced by means of three-way catalytic converters, but catalysts cannot be used if gasoline is leaded because lead permanently deactivates the catalyst. The amount of SO,, emitted is directly proportional to the amount of sulfur in the fuel and is reduced by treating the fuel itself. Lead 1.7 Lead is one of the highest-risk pollutants still widely used in gasoline in Pakistan as a historically inexpensive octane5 enhancer. The combustion of leaded gasoline contributes to the majority of airborne lead in many cities where leaded gasoline 4 See paragraph 1.25. 5 Octane is a measure of resistance to self-ignition (knocking) of a gasoline when rnixed with air in an engine cylinder. The higher the octane number, the higher the anti-knock quality of the gasoline. In the UTnited States, octane refers to an average of MON and RON; because MON is usually lower than RON, averaging the two results in a lower number, typically by 4 or 5. For example, -87 octane" in the United States corresponds to 91 or 92 RON. Background 1 1 is still used. Anthropogenic sources of lead include not only lead in gasoline, but also the following: * Lead in drinking water, because of the historical use of lead in pipes for water distribution * Lead-based paint * Stationary sources such as smelters and lead-battery recycling and manufacturing facilities * Activities such as mining * Tobacco * Food * Lead-soldered beverage and food cans * Dust and soil * Traditional cosmetics and medicines * Lead-glazed ceramics. 1.8 The toxicity of lead has been known for centuries. At levels exceeding 70 micrograms (.g) per deciliter (dl) of blood for children and 100 pLg/dl for adults, lead can cause paralysis, seizures, coma, and death. What have come to light only in the last two decades, however, are the adverse health effects of lead even at levels previously considered safe. As a result of new research findings, health organizations such as the U.S. Centers for Disease Control and Prevention (CDC) have steadily revised their guidelines for lead. Today, environmental intervention is recommended for blood lead levels above 10 F.g/dl (WHO 1995a). 1.9 It should be noted that airborne lead settles on dust, falls on vegetation, and may contaminate drinking water. Therefore, airborne lead cannot be delinked from lead found in food and water. For nonsmoking adults, major sources of lead are food, water, and airborne lead, if the level of the latter is high. For children, in addition to food, water, and air, dust and soil constitute a significant exposure pathway. Any program to combat the adverse health effects of lead should attempt to estimate all significant sources of lead exposure so that effective steps can be taken to reduce exposure. Whatever additional sources of lead emissions may exist, eliminating lead in gasoline is important. Unlike other pollutants, such as hydrocarbons, lead does not degrade and continues to accumulate in the environment unless the continuing emissions of lead, including those from gasoline, are stopped. 1.10 An excellent overview of the health effects of lead can be found in a 1995 World Health Organization (WHO) publication Environmental Health Criteria 165: Inorganic Lead (WHO 1995b).6 Most of the lead absorbed by the body is found in the 6 Unless indicated otherwise, all the infornation presented in this section on the health effects of lead is taken from this WHO publication. 12 Pakistan Clean Fuels bones, and some is found in blood. Moreover, bone is a major storage site of lead, and serves as an endogenous source of lead even after exposure to environmental lead has ceased. During pregnancy (Silbergeld 1991) and in old age, lead from the bones is released into the blood. 1.11 The absorption of lead from environmental sources is not a linear function of the amount of lead intake. It depends on the chemical and physical state of the lead, and on factors such as the age, nutritional condition, and physiological status of the individual. For example, there is evidence that more lead is absorbed when dietary calcium intake is low or if there is iron deficiency. The amount of lead absorbed by the body increases significantly when the stomach is empty. The rate of absorption is also higher for children than for adults. That is to say, poor, malnourished children are even more susceptible to lead poisoning than others. 1.12 The largest body of observational studies on the health effects of lead concerns its impact on the intellectual development, typically measured in terms of intelligence quotient (IQ), and behavioral problems of children. There has been much public health interest in this issue because of mounting evidence that continual exposure of children to even low levels of lead could have a negative impact on their intelligence. A systematic review of 26 epidemiological studies can be found in Pocock and others (1994). The published studies can be divided into two broad categories: prospective and cross- sectional. Prospective studies collect data from the same group of children over a number of years, so as to identify whether there is a specific period in a child's intellectual development when exposure to lead is particularly damaging. Cross-sectional studies attempt to correlate the "body burden" of lead with children's intelligence, both being measured at the same time. If environmental exposure to lead before commencement of the study significantly affected the child's IQ, cross-sectional studies would not be in a position to identify the causal link unless the level of environmental exposure to lead has been constant. 1.13 Because a large number of factors affect IQ, a multiple-regression analysis with a large number of independent variables, of which lead is one, needs to be conducted in order to isolate the effect of lead. Increasing the sample size will increase markedly the statistical significance of the results. The small sample size of any given study, coupled with the complexity of identifying all the relevant covariates (factors affecting IQ, or independent variables on the right-hand side of the equation), make it impossible to draw definitive conclusions from any single study; a synthesis of a number of studies is needed to overcome these impediments. 1.14 These limitations not withstanding, the studies that have been conducted strongly support an inverse association between the body burden of lead and children's IQs. A reasonable rule of thumb appears to be that increasing the level of blood lead from 10 ,ug/dl to 20 jtg/dl causes an average decrement of about 1-2 IQ points. 1.15 A follow-up study by Bellinger and others (1992) found that there was an age of critical exposure. IQ was strongly and statistically negatively associated with the level of lead in blood measured at two years of age. This was also supported by a study Background 13 conducted in the lead-smelting community of Port Pirie in Australia (Baghurst and others 1992). The evidence from other prospective studies, however, is conflicting. 1.16 Unless the level of blood lead is extremely high, the impact of lead on a given individual's IQ may not be noticeable. It is, however, a serious public health concem for the community as a whole, because exposure to lead shifts the IQ distribution curve of the entire population, reducing average intelligence. It is difficult to estimate the economic costs of loss in IQ, but they are doubtless substantial. Costs incurred include additional remedial education, health care, and loss in productivity. 1.17 While the effect of lead on children's IQ is probably the most significant health impact of using leaded gasoline, there are others: * Qualitative evidence indicates that lead may adversely affect the reproductive process in men and women, including increased frequency of miscarriages, although the results are conflicting below blood lead levels of 30 ,ug/dl. * Renal (kidney) function impairment has been correlated with blood lead levels above 35 1Lg/dl. * The effect of lead on the cardiovascular system has been studied extensively. There appears to be a weak but positive association between lead in blood and blood pressure. 1.18 Finally, it should be noted that many, if not most, of the studies examining the health impact of lead have been undertaken in the United States, Australia, and Britain, where living conditions differ from those in Pakistan. Any deleterious effects of lead exposure, even at low levels, may be exacerbated when additional factors such as calcium or iron deficiency are present. Studies examining and quantifying the covariate effects of lead in combination with these factors are likely to underscore the importance of further lead reduction, and would be helpful in guiding policymakers. Particulate Matter 1.19 Small particles remain in suspension for hours or days, are liable to travel considerable distances from the source, and enter the respiratory tract and reach the deeper parts of the lungs. PM1o represents the size range of particles likely to pass the nose and mouth. PM2.5 (particles smaller than 2.5 p.m) represents more closely the size range of particles able to reach the deeper parts of the respiratory tract. 1.20 A series of extensive studies, conducted mainly in the United States, has demonstrated clearer associations between particulate concentrations and small changes in a wide range of health indicators-mortality, hospital admissions, emergency room visits, time off school or work, respiratory symptoms, exacerbations of asthma, and changes in lung function-than with other pollutants. Of the various health indicators, the measurement of mortality is the most certain, having been particularly well studied with more consistent results than those regarding the other indicators. Although the composition of PM1o can vary widely from area to area and with time, the size of the 14 Pakistan Clean Fuels estimated effects does not vary greatly with location. The WHO estimates that high ambient concentrations of particulate matter are responsible for about half-a-million premature deaths worldwide every year. 1.21 In terms of health impact, PMIo is much more serious than total suspended particles (TSP), which include particulate matter of all sizes. Coarse, wind-blown particles, for example, are believed not to have a significant effect upon health. In the United States, federal TSP standards were superseded by PMIO standards in 1987, and there are now additional standards for PM2.5. In the case of vehicles, the majority of the particles emitted fall in the sub-micron range and, furthermore, are emitted near ground level where people live and work. Therefore, vehicular particulate emissions are especially harmful to public health. Particles found in vehicle exhaust consist of a carbonaceous core, adsorbed hydrocarbons from engine oil and fuel, adsorbed sulfates and nitrates, water, and inorganic materials such as those produced by internal engine abrasion. 1.22 Recent studies have indicated that the number of particles to which the individual is exposed could be more important than their mass. Whereas air quality standards for particulate matter are currently based on mass throughout the world, a growing number of countries will introduce standards based on number rather than weight in the medium term. Measures that reduce the mass of particles emitted do not necessarily reduce the number of fine particles. For example, a recent study showed that at highway speeds the numbers of particles emitted were similar among the three gasoline- and four diesel-vehicle types tested and remained unaffected by the quality of the fuels (Automotive Environment Analyst 1998), although at lower speeds the number of particles in diesel emissions was considerably greater. 1.23 Traffic is a large contributor to fine particulate emissions. On a mass basis, diesel vehicles emit much more fine particulate matter than gasoline vehicles in general. In terms of the number of particles, the difference between light-duty gasoline and light- duty diesel vehicle emissions in one study was found to vary from a factor of over 2,000 at 50 kilometers per hour (km/h) to 3 at 120 km/h. Although the number of particles in gasoline exhaust is up to three orders of magnitude smaller than that in diesel exhaust, the health impact may not be correspondingly smaller: in terms of size, a higher proportion of gasoline particulate emissions may be of smaller size (less than I .tm) than diesel emissions (CONCAWE 1998). At the same time, there is a growing view that diesel exhaust poses a serious cancer risk, suggesting that diesel particulate emissions may be especially harmful to public health. 1.24 A significant vehicular source of fine particles in South Asia is two- and three-wheelers run by two-stroke engines. Because they are less expensive than other vehicles, two- and three-wheelers account for nearly one-half of all vehicles in Pakistan. Until recently new two-stroke engines emitted as much as an order of magnitude more particulate matter than four-stroke engines of similar size. When vehicle age, maintenance, lubricant, and fuel quality are taken into account, two-stroke engines in Pakistan probably emit particulate matter at an even higher factor. Two-stroke engines typically have a lower fuel efficiency than four-stroke engines, with as much as 15-40 Background 15 percent of the fuel-air mixture escaping the engine's combustion chamber unburned. These "scavenging losses" contain a high level of unburned gasoline and lubricant, which increases emissions of hydrocarbons and organic lead (which is even more damaging to health than the inorganic lead produced when gasoline lead additives combust). Some of the incompletely burned lubricant and heavier portions of gasoline are emitted as small oil droplets, which in turn increase visible smoke and particulate emissions. 1.25 All combustion and metallurgical processes and many other industrial operations lead to the emission of particles into the atmosphere. The particles emitted directly from a source are termed primary. Particles formed within the atmosphere, mostly from the chemical oxidation of atmospheric gases, are termed secondary. NO, and SO. contribute to secondary particulate formation. The largest individual contributor to primary particles is incomplete combustion of fossil fuels and biomass. As a rough generalization, particles generated from combustion and condensation of vapors are mostly in the PM2.5 fraction (that is, 2.5 microns or smaller), while particles from mechanical breakup of solids and liquids are larger. Poor fuel quality, inefficient combustion processes, and poor vehicle and equipment maintenance all contribute to particulate emissions. 1.26 The WHO no longer has guidelines for PM,( or PM2.5 on the grounds that a threshold for the onset of health effects could not be detected. Instead, the WHO recommends that the figures given in Table 1.1 be used to determine acceptable risk. The figures represent the percentage increase in health indicators as a result of a 10-jig'm3 increase in the ambient concentration of PM1o and PM2.5. For example, an increase in the ambient PM2.5 concentration of 10 .g/rm3 increases the mortality of the exposed population by 1.5 percent. Table 1.1: Impact of a 1 O-pg/m3 Change in the Ambient Concentration of Particulate Matter on Health % Change Health Endpoint PM10 PM2.5 Daily mortality 0.70 ± 0.12 1.5 ± 0.4 Hospital admissions 0.84 ± 0.33 5 Bronchodilator use 0.34 ± 0.13 No value given Symptom exacerbation 0.35 + 0.16 No value given Cough 0.45 ± 0.23 No value given Peak expiratory flow 0.013 i 0.004 No value given Source: WHO (2000) Other Pollutants 1.27 Carbon monoxide (CO) is a colorless, odorless gas that inhibits the capacity of blood to carry oxygen to organs and tissues. High levels of CO can cause 16 Pakistan Clean Fuels people with chronic heart disease to experience chest pain. Very high levels of CO can impair vision, manual dexterity, and learning ability, and can cause death. 1.28 CO is a product of the incomplete combustion of fossil fuels. In most cities gasoline-fueled vehicles account for most CO emissions. The level of CO emissions can be reduced by incorporating oxygenates in gasoline for old vehicles and by using oxidation catalysts. 1.29 Sulfur dioxide (SO2), one of the oxides of sulfur, reduces lung function in asthmatics and exacerbates respiratory problems in sensitive individuals. Sulfur oxides are formed when fossil fuels containing sulfur are burned. These oxides contribute to acid rain and to the formation of secondary particles. The amount of sulfur emitted is directly proportional to the amount of sulfur in the fuel. It can be reduced by treating the fuel, for example, through hydrotreating, or by installing sulfur removal devices at the point of emission, such as flue gas desulfurization units at power plants. Nitrogen dioxide (NO2), one of the oxides of nitrogen, causes changes in lung function in asthmatics. Nitrogen oxides are formed during combustion as nitrogen in the air reacts with oxygen at high temperature. Like sulfur oxides, these oxides contribute to both acid rain and secondary particulate formation. Nitrogen oxides are also precursors of ground-level ozone. 1.30 Power plants and diesel- and gasoline-fueled vehicles emit nitrogen oxides. The amount of NO, formed can be reduced by controlling the peak combustion temperature (for example, by recirculating exhaust gas in vehicles); reducing the amount of oxygen available during combustion; or converting NO, to oxygen-containing inorganic compounds and nitrogen (for example, by installing three-way catalytic converters). 1.31 Ozone causes photochemical smog and has been associated with transient effects on the human respiratory system, particularly the decline in pulmonary function during light to heavy exercise. Gasoline-fueled vehicles are a significant source of volatile organic compounds, which along with NO, are precursors of ozone. Ozone abatement is complicated by nonlinear interactions among ozone precursors-the amount of ozone formed is not directly proportional to the ambient concentrations of volatile organic compounds and NO, but is a complex function of a number of factors that include the ratio of these two precursors. It is therefore important to collect relevant data and understand the chemistry of ozone formation before selecting mitigation measures. 1.32 Another concern is airborne toxics, of which only limited data on ambient concentrations are available. Toxic emissions from vehicles include benzene, polycyclic aromatics (aromatics with more than one six-membered ring), 1,3-butadiene, and aldehydes. 1,3-butadiene is a potent carcinogen. Benzene, another carcinogen, is increasingly targeted for reduction in gasoline. Fuel Quality 1.33 There are complex interactions between fuels, vehicle technology, test driving cycles, and reference fuels with regard to their relative influences on vehicle emissions. A given vehicle will show different emission levels depending on the test- Background 17 driving cycle. Therefore, it is important to bear in mind that changing fuel specifications will not necessarily affect all vehicles in the same way. 1.34 A number of fuel parameters affect vehicle emissions. For gasoline, they include volatility, distillation temperature profile, and the amount of lead, sulfur, benzene, total aromatics,7 olefins, and oxygen-containing compounds commonly referred to as oxygenates. For diesel, they include the distillation temperature profile, density, cetane, and the amount of sulfur and aromatic-particularly polycyclic aromatic-compounds. 1.35 Lead is one pollutant whose removal from gasoline will have an immediate impact on emissions from all vehicles. As noted previously, in Pakistan, where there are a large number of two-stroke engine two- and three-wheelers, some of the lead is emitted uncombusted. Because the resulting emissions of organic lead are even more damaging to public health than the inorganic lead that is formed when gasoline lead additives combust, the need to phase out lead in gasoline becomes all the more urgent. Lead also acts as a permanent poison for catalytic converters, which are by far the most effective means of reducing emissions of CO, hydrocarbons, and NO,. As long as gasoline is leaded, there is no way of taking advantage of this exhaust control technology, which is now widely used in a large number of countries. 1.36 Experience elsewhere has demonstrated that gasoline lead elimination should be carried out within the broader context of an integrated approach to air pollution management. This is because gasoline components that are added to compensate for the octane shortfall after lead removal can have harmful effects of their own. Concerns include increased emissions of carcinogens such as benzene (from higher-severity reformer operation). 1.37 Sulfur in gasoline acts as a (temporary) poison for catalytic converters. Vehicle manufacturers recommend that the level of sulfur in gasoline be kept below 500 parts per million by weight (wt ppm), and preferably below 100 wt ppm. The impact of reducing sulfur on the performance of catalytic converters is non-linear, with emissions decreasing more rapidly below 100-150 wt ppm. 1.38 Benzene is emitted from gasoline as a result of evaporation8 and as unconverted benzene from the exhaust pipe. Alkyl-aromatics (all aromatics other than benzene) also dealkylate during combustion and a fraction is emitted as benzene. Benzene in gasoline contributes much more to the overall benzene emissions than non-benzene aromatics: it takes roughly an order of magnitude more alkyl aromatics than benzene itself in gasoline to result in the same amount of benzene emissions from the tailpipe, and only benzene itself can contribute to evaporative emissions. 7 Total aromatics refers to all aromatics, as opposed to specific aromnatic compounds such as benzene or xylenes. s There are three sources of evaporation: during refaeling, as the engine cools after being shut off, and in response to the rising temperature during the day. 18 Pakistan Clean Fuels 1.39 Aromatics with two or more alkyl groups are photochemically reactive and contribute to ozone formation. Therefore, the photochemical reactivity of aromatics and their decomposition to benzene are the two primary environmental concems leading to limits on the amount of aromatics in gasoline. Ozone does not appear to be a problem in cities in Pakistan. In the United States, for vehicles equipped with catalytic converters, the U.S. Auto/Oil Air Quality Improvement Research Program (AQIRP) found that decreasing total aromatics from 45 percent to 20 percent had no significant impact on ozone formation (Auto/Oil AQIRP 1997). For vehicles not equipped with catalytic converters, increasing aromatics in gasoline increases NO, emissions-which, as described earlier, are a precursor for both ozone and secondary fine particulate formation. Another component of gasoline with a related concern is olefins. Olefins are photochemically reactive and are ozone precursors. In addition, at elevated levels olefins increase the emissions of NO,. 1.40 Oxygenates such as ethers and alcohols have high blending octane numbers and facilitate combustion in vehicles not equipped with oxygen sensors. They also dilute gasoline, thereby decreasing the amount of undesirable gasoline components such as benzene and total aromatics. Oxygenates are more miscible with water than gasoline, however, and contamination with ground and drinking water with methyl tertiary butyl ether (MTBE), the most extensively used oxygenate, is a growing concem in the United States. 1.41 Sulfur in diesel was reduced to 500 wt ppm in 1993 in the United States and 1996 in the European Union (EU) to control particulate emissions. This limit was mandated only after significant progress was made in vehicle technology to reduce carbonaceous contributions to exhaust particulate emissions, so that the sulfate component of particulate emissions became important. This is illustrated in Figure 1.1. If the sulfate contribution to total particulate emissions is small, reducing sulfur in diesel significantly would not be effective in lowering overall particulate emissions. Figure 1.1: Evolution of U.S. Diesel Particulate Emissions o 0.6 4! 0.5 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 30.4 I carbon soot & oL organics * 0.3- IN sulfate o 0.2 - 0.1 _ - _ __ 1988- 1991- 1994- 1994- E 0.25% 0.25% 0.25% 0.05% o) sulfur sulfur sulfur sulfur 1.42 The European auto/oil program (the European Programme on Emissions, Fuels and Engine Technologies, or EPEFE) examined the impact of varying polycyclic Background 19 aromatics on vehicular emissions and found that decreasing polycylic aromatics from 8 percent to 1 percent decreased both particulate and NO, emissions from light-duty and heavy-duty diesel vehicles. The impact of reducing aromatics on vehicular emissions is less clear. A cooperative program between Esso and Statoil found, for example, that reducing total aromatics from 32 percent to 10 percent had no marked effect on particulate emissions (Betts and others 1992). Fuel Quality Trend in Neighboring Countries and Implications for Pakistan 1.43 Because of growing concern about the health impact of lead emissions, a number of countries, including developing countries, have moved to ban the use of lead in gasoline. Examples of developing countries that have banned the sale of leaded gasoline are given in Table 1.2. In South Asia, Bangladesh and India have already moved to ban the use of lead in gasoline. Table 1.2: Developing Countries That Have Banned Leaded Gasoline Country Phaseout Year Argentina 1996 Bangladesh 1999 Bolivia 1995 Brazil 1991 China 2000 Colombia 1990 Costa Rica 1996 Dominican Republic 1998 El Salvador 1996 Georgia 2000 Guatemala 1991 Haiti 1998 Honduras 1996 Hungary 1999 India 2000 Jamaica 2000 Mexico 1997 Nicaragua 1996 Philippines 2000 Saudi Arabia 2000 Slovakia 1995 Thailand 1995 1.44 In the process of phasing lead out of gasoline, it is important not to allow high-octane blending components that have adverse health impacts of their own to rise 20 Pakistan Clean Fuels too high in concentration in order to compensate for the octane shortfall. These components include olefins and benzene. Because the refineries in Pakistan do not have fluidized catalytic cracking (FCC) units, the levels of olefins and sulfur in gasoline are very low. This is because FCC naphtha-which is what FCC units produce-is the most important source of olefins and sulfur in gasoline. 1.45 The principal source of octane from domestically produced gasoline in Pakistan is reformate, which is rich in aromatics. There is a danger that relying too heavily on reformate to increase the octane of unleaded gasoline would result in unacceptably high levels of benzene. Addressing benzene and total aromatics is the principal challenge facing Pakistan as it moves to eliminate lead in gasoline. 1.46 Pakistan has historically marketed two grades of gasoline: 80 research octane number (RON) and 87 RON. In 2000, 80 RON was withdrawn and replaced with 87 RON. It is worth pointing out that modem gasoline vehicles require at least 91-92 RON gasoline for optimal performance. The 87-RON grade of gasoline should continue to be adequate for the current vehicles in the fleet in Pakistan and for the two- and three- wheeled vehicles. Although eliminating the 80-RON gasoline in favor of a single 87- RON grade is a step in the right direction, further increases in octane will be required in the fuiture to service the requirements of more modem vehicles. 1.47 The current limit on sulfur in diesel is 1 percent by weight, ranking among the highest in the world. While there is a need to understand the relative share of sulfate and carbonaceous components in particulate emissions from diesel engines, at 1 percent sulfur is likely to be making an appreciable contribution. In South Asia, India has lowered the limit to 0.25 percent, and Bangladesh has switched to importing only 0.5-percent- sulfur diesel. In the rest of Asia, Singapore and Thailand have limited sulfur in diesel to 0.05 percent, and the Philippines and India plan to do so by 2004 and 2005, respectively. Downstream Petroleum Sector in Pakistan 1.48 Pakistan consumed about 18 million tons of petroleum products in fiscal 1999-2000. Of this, three domestic refineries were producing less than 6 million tons before the startup of a new, fourth refinery (run by the Pakistan Arab Refinery Company, or PARCO) in 2000. The balance, mainly diesel and fuel oil, is imported. Demand for diesel and fuel oil far exceeds that for gasoline. The estimated demand for the three refined products studied in this report is 1.4 million, 7.4 million, and 9.5 million tons for gasoline, diesel, and fuel oil, respectively in 2000. 1.49 The principal players in the downstream petroleum sector in Pakistan are four refineries, a condensate distillation unit, and five oil marketing companies. The four refineries are as follows: * Attock Refinery Limited (ARL) located in Rawalpindi * National Refinery Limited (NRL) in Karachi * PARCO in Mahmood Kot in the Punjab Province * Pakistan Refinery Limited (PRL) in Karachi Background 21 The condensate distillation unit is located in Dhodak in the province of Punjab. 1.50 Subsequent to PARCO's startup, the 80-RON-grade gasoline produced by local refineries with 0.42 grams of lead per liter (gll) of gasoline was eliminated and replaced by 87 RON with 0.35 g/l of lead. With the exception of ARL, the sulfur level in diesel produced by the local refineries is close to 1 percent, and in fuel oil above 3 percent. Workshop 1.51 To examine ways of introducing cleaner fuels in Pakistan, a "Clean Fuels Workshop" was held in Islamabad on 20-21 October 1997. Sponsored by the Ministry of Environment, Local Government, and Rural Development, the Ministry of Petroleum and Natural Resources (MPNR), and the World Bank, the workshop was attended by representatives from the Government of Pakistan, the downstream petroleum sector, universities, research institutions, and nongovernmental organizations (NGOs), and by specialists from other countries. Workshop participants recommended an action plan for tightening the specifications for gasoline, diesel, and fuel oil, shown in Table 1.3: October 1997 Workshop: Recommended Timetable for Tightening Fuel Specifications, Including 1999 Revisions. The timetable was modified in 1999. Table 1.3: October 1997 Workshop: Recommended Timetable for Tightening Fuel Specifications, Including 1999 Revisions Specifications Timetable Parameter Old New Proposed in 10/97 Revised in 1999 Gasoline lead, g/l 0.42 0.35 end-1998 2000 0.35 0.15 2003 2003 0.15 0.013 2005 2005 Gasoline RON 80 87 Withdraw 80 RON by end-1998 2000 and replace with 87 RON - 92 unleaded Introduce by end-1998 Post-PARCO startup Diesel sulfur, wt% 1.0 0.5 2000 2001 Fuel oil sulfur, wt% 3.5 2.0 2000 2001 Note: g/l grams per liter; RON research octane number; wt%/o percent by weight. - not applicable. 1.52 At the October 1997 workshop, it was decided that the Government of Pakistan and the World Bank would undertake a joint techno-economic analysis of clean- fuels options and the feasibility of the above timetable. The requirements of securing funding as well as internal developments in Pakistan delayed the commencement of the study until mid-1999. 22 Pakistan Clean Fuels Transport Fuel Tax Policy 1.53 Once lead is phased out of gasoline in Pakistan, emissions from diesel vehicles would be expected to be much more harmful to public health than those from gasoline vehicles. Diesel vehicles of the technology used in Pakistan emit much more fine particles than gasoline vehicles. Further, as mentioned earlier, emerging evidence suggests that diesel particulate emissions are carcinogenic. 1.54 The consumption of diesel in the transport sector in Pakistan has historically far exceeded that of gasoline, in part because of the large price difference between gasoline and diesel in favor of the latter. As a result, some owners of gasoline cars even convert their vehicles to run on diesel to take advantage of the considerably lower price of diesel. Over 90 percent of high-speed diesel (HSD) was used in the transport sector in the second half of the 1990s. In the last 10 years the ratio of the price of regular gasoline to that of HSD has varied between the low of 1.64 in 1997 and the high of 2.3 in 1998, with the most recent price adjustment in March 2001 giving a ratio of 1.97. 1.55 Diesel vehicles are inherently more expensive than their gasoline equivalent. While heavy-duty diesel vehicles such as large trucks and buses will continue to run on diesel irrespective of the inter-fuel price differences, light-duty vehicles currently running on diesel might eventually switch to gasoline if the price difference between these two fuels were narrowed. Moreover, and equally important, such price adjustments will prevent future owners of gasoline vehicles from switching to diesel. 1.56 However, raising the price of diesel to narrow the price gap between gasoline and HSD has other consequences. Diesel is used in freight transport, so that a marked rise in the price of diesel could result in economy-wide inflation. If the poor were affected disproportionately by the impact of the diesel price rise, such a measure would be regressive. General inflation would also affect the balance of payments by making export- oriented and import-substitution sectors less competitive. At the same time, because Pakistan is a net importer of diesel, if the consumption of diesel falls in response to a price increase, the petroleum product import bill will be reduced. Further, the government revenue will rise because of greater tax take from the sale of diesel, and this additional income can be used to mitigate some of the adverse effects of the diesel price increase. 1.57 Another consideration is that diesel used for inter-city transport, where emissions occur outside heavily populated centers, do not greatly affect public health, because two conditions need to be met for vehicular emissions to cause damage: high ambient concentrations of harmful pollutants and exposure of the general public to the pollutants. In the extreme, if all light-duty delivery vans switch to diesel, but are driven most of the time outside of urban centers, fuel switching from gasoline to diesel would not be a serious concern. Therefore, it is important to ensure that the vehicles being targeted are driven primarily in cities and not used for inter-city transport. Background 23 1.58 To address the above issues, a study was undertaken to examine two scenarios for narrowing the gap between the gasoline and HSD prices to obtain the first- order estimates of the impact on household expenditures and macroeconomic parameters. Structure of the Report 1.59 This report has two parts. The first concerns fuel quality improvement, specifically addressing the recommendations of the October 1997 workshop. Chapter 2 contains a detailed description of the downstream petroleum sector in Pakistan. This is followed in Chapter 3 by an examination of specific options for implementing the recommended fuel quality specifications, and of the incremental costs of doing so. Chapter 4 reports the outcomes of the workshops held in Islamabad in March 2001 to discuss the findings of the study and agree upon a follow-up action plan. 1.60 The second part concerns Pakistan's fuel tax policy, which has historically priced diesel far below gasoline. Chapter 5 examines how the relative prices of gasoline and diesel can be adjusted to discourage the conversion of light-duty vehicles to diesel, and what the impact of such price adjustments may be on the overall economy and on different income groups. 2 The Downstream Petroleum Sector 2.1 The downstream petroleum sector in Pakistan consists of four refineries and a condensate unit, historically three-and now five-oil marketing companies, and numerous retail outlets. There are three types of retail outlets: (a) those wholly owned by oil marketing companies; (b) franchisees to which the oil marketing companies provide the license, land, and equipment; and (c) franchisees to which the oil marketing companies provide only the license and land. The three historical oil-marketing companies are the Pakistan State Oil Company (PSO), Shell Pakistan, and Caltex Oil (Pakistan). The governnent owns 25 percent of PSO directly and another 74 percent is owned by government-controlled funds. The Shell affiliate owns 52 percent of Shell. Caltex is a wholly owned subsidiary. PSO controls the majority of the market. More recently, PARCO and ARL launched their own marketing companies. 2.2 Among the refineries, NRL is majority government-owned, while the government has a 35 percent stake in ARL. The new PARCO refinery commenced operations in October 2000, the major shareholders being the Government of Pakistan (60 percent), Intemational Petroleum Investment Company of Abu Dhabi (30 percent), and OMV of Austria (10 percent). Role of the Government 2.3 MPNR is actively involved in the downstream petroleum sector, particularly the office of the DG Oil. The DG Oil is responsible for managing the market and allocating crude and products as well as for regulating the sector. This involves controlling various operational aspects of the industry by, for example, allowing ARL to use domestic crude from the southern oil fields in the face of shortages in the north. It also involves governing financial arrangements in the sector (for example, ruling on how the development surcharge on feedstock for NRL's lube-oil refinery should be treated). This regulatory power arises from legislation allowing the DG Oil to issue such decisions. For example, the DG Oil is empowered to determine the terms of access to infrastructure if the parties concerned-that is, the owner and the supplicant-are unable to agree to access terms in the normal course of commercial negotiations. 25 26 Pakistan Clean Fuels Product Pricing 2.4 The DG Oil sets the margins at all stages in the supply chain. With the exception of lubricants, oil products are sold at fixed sales prices. (Recent prices of gasoline, kerosene, and diesel, set by the government, are given in Table 2.1.) The government maintains a policy of pan-territorial energy pricing-that is, uniform pricing across the country. The origins of the policy lie in the past when a key political imperative was to promote the unity of Pakistan. At a time when most electricity was produced in the north and most oil products were produced in the south, pan-territorial pricing was seen as a means of balancing supply and demand. For oil products, pan-territorial pricing is achieved through the freight pool whose cross-subsidy mechanism allows products sent to distant destinations to be priced on a common basis with those closer to source. The basing point for the system is the city of Multan in Punjab Province. Previously, because the area to the south of Multan represented the majority of product consumption, the freight pool generated a surplus. However, as northern consumption grew, so too did the freight bill. The freight pool has now run into deficit-some Rs 5 billion9 in 1999. Some of the deficit arises from the increase in product demand in the north, requiring support; but freight rates tend to be high and the system is also open to some abuse, namely, misreporting of transport of products.'0 2.5 Oil product taxation provides the government with a significant amount of its current revenue. The development surcharges on all petroleum products have amounted to 10-15 percent of total revenue. The ex-refinery price is based on an import parity price. Added to this are customs duties (unchanged since 1992) together with the margin allowed to the distributors and the commission allowed to the dealers. All three elements are set directly by the government and together determine the prescribed price. To the prescribed price is added the inland freight margin (to equalize delivery costs on a national basis) and finally the development surcharge. Figure 2.1 and Figure 2.2 illustrate how these components have changed over time for regular gasoline and high-speed diesel produced at the coastal refineries. 2.6 A significant source of dispute is what is actually meant by import parity prices. The industry's current view is that the prices used are not true parity prices for both imported crude and products, and that the current system places the downstream sector at a disadvantage. The dispute is symptomatic of a system heavily dependent upon price regulation. 9 A billion is 1,000 million. o An anecdotal illustration: A product sold near Karachi may be reported as having been transported from Karachi to Baluchistan (a province in west and southwest Pakistan), while in reality the recipient in Baluchistan smuggles products from Iran in place of the "officially" delivered product. The Downstream Petroleum Sector 27 Table 2.1: Retail Prices (Rs per Liter) Date Gasolinel HSD Kerosene Gasoline/HSD Price Ratio APgasoIine.diesel 28.10.1992 10.85 5.05 4.95 2.15 5.80 14.06.1993 10.85 5.56 5.45 1.95 5.29 19.08.1993 13.13 6.12 6.00 2.15 7.01 13.02.1995 13.22 6.12 6.00 2.16 7.10 26.02.1995 13.13 6.12 6.00 2.15 7.01 14.06.1995 13.75 6.5 6.25 2.12 7.25 27.06.1995 13.75 6.5 6.25 2.12 7.25 28.10.1995 14.71 6.96 6.69 2.11 7.75 12.02.1996 14.71 7.17 6.89 2.05 7.54 14.03.1996 14.71 7.46 6.41 1.97 7.25 14.04.1996 14.91 7.46 7.26 2.00 7.45 12.06.1996 14.69 7.11 7.26 2.07 7.58 21.07.1996 14.54 7.11 6.91 2.05 7.43 12.09.1996 15.42 7.11 7.25 2.17 8.31 04.10.1996 15.42 7.45 7.25 2.07 7.97 07.10.1996 15.85 8.02 7.82 1.98 7.83 22.10.1996 16.51 8.8 8.60 1.88 7.71 13.11.1996 16.81 9.44 9.29 1.78 7.37 05.12.1996 16.81 9.93 9.74 1.69 6.88 09.01.1997 16.81 10.27 10.08 1.64 6.54 19.01.1997 17.23 10.27 10.08 1.68 6.96 04.02.1997 17.23 9.66 9.44 1.78 7.57 15.10.1997 17.75 9.66 9.44 1.84 8.09 18.07.1998 22.19 9.66 9.44 2.30 12.53 19.05.1999 24.40 10.66 10.50 2.29 13.74 11.12.1999 27.00 11.50 11.25 2.35 15.50 20.03.2000 27.50 12.80 11.25 2.15 14.70 22.09.2000 30.00 15.25 14.00 1.97 14.75 30.12.2000 32.25 18.25 16.50 1.77 14.00 14.03.2001 30.00 15.40 15.25 1.95 14.60 Note: HSD high-speed diesel. 'Price of regular gasoline (80 RON) until it was withdrawn in 2000; prices starting on 22 September 2000 are for 87 RON. 2Price difference between gasoline and diesel in rupees. 28 Pakistan Clean Fuels Figure 2.1: Regular Gasoline Price Breakdown for NRLUPRL 35 _ *GST 30 7 23 Freight 25-4 J 20i -UF J 1 1|1 f o Development 201 E t 1 surcharge 0. " 15- F _ ˘ _ l 11 1|1 . I O Dealer 15 -A U Distribution 10 5 0 Customs 0 HlT i a Ex-refinery N C) l Uw cD 1- CO 0 0 0 0 m p 4m 4m as ( a) at Z o o 0 0 0 0 0 C 0 C CC 0 0 vF F F F F F F F N N *) co t co co co 1. w NI co N 00 CA 0 CD aw CO eD 0 w 0 N I 0 N F F . . VF F Figure 2.2: High-Speed Diesel Price Breakdown for NRLUPRL * GST 20 18-w 1 8 ~~~~~~~~~~~0 Freight 74, 1 2 - 1 l El Development CL 1 0 - fii ii i1 l f l surcharge 6 Dealer 4 2 7 * Distribution N (m le Lo CD V_c CD 0 0 0 0 a 0 0 0 0 0 o 0 Customs 0 0 0 0 0 0 0 0s 0 0 F F F F F N N 0 0a U) c a m co CD . o CD 0Ex-refinery 1 0 N o cs - _ F 2.7 The profitability of the downstream sector is set nearly entirely by government regulation. The government sets the ex-refmery price to provide a rate of return ranging between 10 and 40 percent on the paid-up capital of the three old refineries. Given the age of the refinery companies and hence their comparatively low capital levels, this has created a problem that has ruled out any serious investment, compounded by the 0.5 percent turnover tax that has to be paid irrespective of profitability. It is significant that whereas NRL's fuel refinery made only a Rs 22.9 million profit in 1998, its lube oil operations made a profit of Rs 468.9 million. The Downstream Petroleum Sector 29 2.8 PARCO falls under a different dispensation. The government has guaranteed a minimal return of 25 percent on equity. Another incentive provided to PARCO is an average allowance of Rs 1,200 per ton in the product pricing to compensate for the cost of in-land freight from Karachi to Multan. Economic Supply Zones 2.9 This report divides the market in Pakistan into three supply zones to illustrate how supply and demand can be balanced. NRL and PRL fall under Zone 1, PARCO and Dhodak under Zone 2, and ARL under Zone 3, as shown in Table 2.2. Prior to the startup of PARCO, the two zones covered the coastal refineries and ARL. Table 2.2: Economic Supply Zones Post-PARCO startup Zone Refinery Geographical Demarcation 1 NRL + PRL Karachi + Sindh + Balochistan +- 20% of S. Punjab (up to Rahim Yar Khan) 2 PARCO (and 80% of S. Punjab + 50% of C. Punjab (up to Machike) Dhodak) 3 ARL 50% of C. Punjab + N. Punjab + NWFP + AJK Notes: S. Punjab South Punjab; C. Punjab Central Punjab; N. Punjab North Punjab; NWFP Northwest Frontier Province; AJK Azad, Jammu, Kashrnir. Other Agencies 2.10 The Fuel Purchase Committee, which comprises representatives from the government and the oil marketing companies, purchases crude oils. The conmmittee determines quantities and sources for the next year in advance on the basis of requests from the refineries. Product importation is arranged under the same method as crude imports, on a government-to-government basis determined by the committee's decisions. The allocation of products to the oil marketing companies-both domestically produced and imported-is determined on a basis administered by the Oil Company Advisory Committee (OCAC), which is based in Karachi and made up of representatives from the refineries and oil marketing companies. 2.11 Whereas blending of products is carried out by the oil marketing companies, monitoring is the responsibility of the government through the Hydrocarbon Development Institute of Pakistan (HDIP), although the HDIP's function is simply to test samples. Responsibility for sample collection and any subsequent action lies with the MiPNR; deputy commissioners in the provinces are also empowered to take samples. HDIP has technical service agreements with all registered lube oil plants to provide quality control. At the dealer-retail level, there have historically been serious problems with adulteration (for example, of gasoline with kerosene) with implications for fuel quality. The HDIP reports that between 1995 and 1998, close to 20 percent of gasoline and diesel samples tested failed to meet the required specifications. 30 Pakistan Clean Fuels Refinery Configuration 2.12 The configurations and capacities of the four refineries are given in Table 2.3. The ARL, NRL, and PRL facilities are hydroskimming refineries with semi- regenerative reformers. PARCO has a continuous catalyst regeneration (CCR) reformer capable of operating at 100 RON. This reformer needs to be operated at full capacity to generate sufficient hydrogen for the Dieselmax unit, which converts vacuum gas oil into low-sulfur diesel and fuel oil blend components. NRL has units for vacuum distillation and lube-base oil refining. In addition, approximately 1,000 barrels per day of reformate is diverted to aromatics manufacture. At PRL, the full-range naphtha and kerosene are hydrotreated. None of the refineries has middle-distillate hydrodesulfurization. Table 2.3: Configurations and Capacities of Refineries in Pakistan (thousand barrels per day) Refinery Crude distillation Reformer Dieselmax Visbreaker Lubes ARL 67.0 3.8 - - - NRL 49.9 2.8 - - 3.8* PARCO 35.0 5.0 22.5 15.6 - PRL 100.0 14.8 - - - * Equivalent to 180,000 tons per year of lubricants. Note: - not applicable. Selection of Crude Oil 2.13 ARL processes northern and southern domestic crudes. This involves an average of 130 trucks arriving every day, with four times that number in transit at any time. The crude slate consists of a mixture of more than 40 different crudes ranging in density from 12 to 68 °API gravity. The domestic crudes have a high wax content, but tend to have a low sulfur content. Prior to ARL's recent expansion, the coastal refineries were required to process at least 25 percent local southem crudes. Because of the increase in ARL's crude oil demand after the expansion, some of the southern crudes are also transported to ARL by road and the coastal refineries have been importing additional quantities to balance this reduction in supply. The coastal refineries process Abu Dhabi, Iranian and Arabian light crudes. By covenant (see first bullet point below), PARCO will consume at least 40 percent Abu Dhabi crudes (Upper Zakum and/or Murban crudes), the balance being Arabian Light. 2.14 Although switching to low-sulfur crude is one way of achieving lower-sulfur diesel and fuel oil, the crude mix is difficult to change for Pakistan refineries for the following reasons: Pakistan has a long history of close relationships with the Arab Gulf countries. These relationships result in some preferential commercial termns for crude oil purchases. In the case of the PARCO refinery, the investment by Abu Dhabi is tied to processing at least 40 percent Abu Dhabi crude oil. The Downstream Petroleum Sector 31 As Pakistan is inherently deficient in diesel and fuel oil, the yields from the Arabian crude oils are ideally suited for Pakistan. All the refineries in Pakistan were designed to run Arabian Light crude oil. The closest low- sulfur crudes are either in North or West Africa or from Malaysia. Apart from having a lower sulfur content, these crude oils have different yield slates (higher gasoline production would be especially undesirable given the gasoline surplus on the domestic market in Pakistan in coming years), and none are suitable for processing to lubricants at NRL, as shown in Table 2.4. Even if Pakistan were to import these crudes, it would have to bear (a) the higher cost of the crude oil, (b) the incremental freight cost (around US$12 per ton from West Africa versus less than USS3 per ton from the Arabian Gulf), and (c) investment in modifications to the refineries. Table 2.4: Qualities of Low-Sulfur Crudes Crude oil Arab Light Bonny Medium Brega Minas Region Middle East West Africa North Africa Far East Crude specific gravity (g/cc) 0.9 0.9 0.8 0.9 Crude sulfur (wt%) 1.9 0.2 0.2 0.1 C4 and lighter (wt% yield) 0.9 0.4 1.9 0.3 Naphtha C5 to 175°C (wt% yield) 19.0 9.1 28.8 10.2 Middle distillates, 175-350'C (wt% yield) 31.0 48.2 33.6 29.4 Residue, 350°C+ (wt% yield) 49.2 42.4 35.9 60.2 Sulfur in middle distillates, 175-350C (wt%) 0.9 0.1 0.1 0.0 Sulfur in residue, 350'C+ (wt%) 3.2 0.4 0.5 0.1 Suitable for lubricants? Yes No No No Note: g/cc grams per cubic centimeter. 2.15 Individual refineries, however, may decide that it would make sense under certain circumstances to switch to low-sulfur crude oils. For example, PRL has suggested the option of processing 80 percent Omani crude (which is limited in availability) and 20 percent domestic crude which would enable the refinery to produce diesel with approximately 0.5 percent sulfur and fuel oil with less than 2 percent sulfur. Crude and Product Pipelines 2.16 PARCO receives crude by the existing pipeline. The pipeline is nearly 20 years old and was carrying white products until PARCO came on stream. The bulk of the imported diesel used to be shipped to PARCO's pumping station and storage at Korangi in Karachi, from which it was pumped to the up-country depots. Since the startup of PARCO refinery at the end of 2000, this pipeline has been used for transporting crude oil, reducing the diesel-handling capacity of the pipeline from the previous 4.2-4.5 million tons to 1-1.5 million tons per year. 32 Pakistan Clean Fuels 2.17 Another pipeline, this one designed to transport 6 million tons of diesel and kerosene per year, is planned between Port Qasim and Mahmood Kot near Multan, but insufficient progress has been made to put a firm date on the expected commissioning. The current plans indicate that it will be in operation by mid-2002 at the earliest. In the interim, apart from the 1 million tons expected to be transported through the existing pipeline, the balance would have to be transported by rail or road. The current infrastructure, including road networks and the availability of rail wagons and trucks, is limited, and therefore would act as a major constraint. Currently all the oil marketing companies, PARCO, and MPNR are developing a logistics plan to address these issues. Overall Demand and Supply 2.18 Demand for petroleum products since fiscal 1992-93 is shown in Figure 2.3. The amount of products imported during the same period is given in Figure 2.4, with fuel oil and diesel constituting the bulk of product imports. Gasoline 2.19 A geographical breakdown of gasoline demand forecasts to the year 2005, based on past official figures and growth rates as advised by MPNR, is given in Table 2.5. The past official figures may contain distortions-for example, it has been suggested that approximately 40 percent of all cars are in Karachi, but official gasoline consumption there accounts for only 25 percent of the total. Figure 2.3: Demand for Petroleum Products 20,000 - ' 15,000 - OLow-speed diesel oil 0.0 U Kerosene /jet fuel 0 10,000 E~~~~~ ~~~~Gasoline o 5,000 - High-speed diesel aw~~~~~~~~~~~~~ Fue oil O O N n at U7 ED0 0 e) 0) 0) cn 0) 0 le 0 o I- co C I CM - w o - co 0) 0) 0) 0) 0) a) a) 0) 0) 0) 0) 0) 0) 0) 0) CD The Downstream Petroleum Sector 33 Figure 2.4: Imports of Petroleum Products 15,0001 Cu 10,000 Gasoline o High octane C ~~~~~~~~~~~~~~~components 0 o 5,000- | 11 11 | | | a | . Kerosene * High speed diesel 0 E Fuel oil X t e to s e~~~~o m CD O 0~ (0 as . o 0 0a 0 0) 0) ) 0) 0) 0 0) N I, I I a ) 0) 0 0 ) 0) 0) C) CD 0D 0D 0) 0D 0Y) 0) Table 2.5: Pakistan Gasoline Demand Forecasts by Region (thousand tons per year) Year Karachi Sindh Balochistan S. Punjab C Punjab N. Punjab NWFP AJK Total 2000 356 125 19 78 421 230 104 33 1,367 2003 378 132 21 82 446 244 111 35 1,450 2005 388 136 21 84 458 250 114 36 1,487 Notes: S. Punjab South Punjab; C. Punjab Central Punjab; N. Punjab North Punjab; NWFP Northwest Frontier Province; AMK Azad, Jannmu, Kashmir. 2.20 Punjab is forecast to consume more than one-half of the total gasoline in Pakistan owing to its relatively large population, geographic size, and economy. The overall demand for Punjab has been broken down into south, central, and north regions based primarily on the approximate population distribution for these regions within the province. This breakdown is required to evaluate the impact of gasoline production from PARCO refinery on the overall gasoline pool and the demand/supply situation within the economic supply zones illustrated in Table 2.2. 2.21 From 2000 onwards, the commissioning of the PARCO refinery is expected to switch Pakistan from having an overall gasoline/naphtha deficit to a surplus. More specifically, the production from PARCO will add about 710,000 tons per year of gasoline to Pakistan's gasoline pool, resulting in a substantial surplus. 2.22 The Government of Pakistan is currently promoting compressed natural gas (CNG) and liquefied petroleum gas (LPG) as cleaner altemative fuels on a significant 34 Pakistan Clean Fuels scale. In 1999, there were about 40,000 CNG vehicles, increasing to 100,000 by the end of 2000. Because the government's fuel tax policy makes gasoline much more expensive than CNG or diesel, CNG replaces mainly gasoline; thus a successful CNG program will reduce demand for gasoline and further skew the balance between supply and demand. Diesel 2.23 Diesel is consumed mainly in four sectors: power, industry, transport, and "other government."'l On the basis of indications from various consumers in these sectors, OCAC develops forecasts on behalf of MPNR. Since there is flexibility, both in refinery processing and blending, to adjust the split between diesel and kerosene production, the demand for all the middle distillates-kerosene, jet fuel, and diesel-is shown in Table 2.6. Table 2.6 Pakistan Diesel Demand Forecasts by Region, 2000-2005 (thousand tons per year) Year Product Karachi Sindh Balochistan S. Punjab C. Punjab N Punjab NWFP AJK Total 2000 Diesel 833 1,010 340 598 2,679 701 861 341 7,362 Jet fuels 498 3 16 5 173 89 37 0 821 Kerosene 51 30 23 17 209 78 75 24 508 2003 Diesel 1,013 1,229 416 727 3,260 853 1,047 414 8,956 Jet fuels 525 3 17 5 186 96 40 2 872 Kerosene 50 30 23 16 206 77 74 24 500 2005 Diesel 1,155 1,401 471 829 3,716 972 1,194 473 10,211 Jet fuels 548 3 18 5 197 102 43 0 916 Kerosene 50 30 23 16 205 76 73 24 496 Notes: S. Punjab South Punjab; C. Punjab Central Punjab; N. Punjab North Punjab; NWFP Northwest Frontier Province; AJK Azad, Janunu, Kashn-mir. 2.24 This study has used the forecasts for middle distillates to ensure consistency with the overall government's planning process. It is, however, worth noting that the forecasts for growth in demand for middle distillates appear somewhat optimistic, particularly in comparison with recent historical trends. Most of the demand growth is due to the 7 percent annual growth assumed in the transport sector. Even if the actual demand growth is lower than the official forecasts, the ongoing heavy dependence on imports would continue, and the recommended mechanism relating to the diesel quality improvements would remain valid. 2.25 Total domestic supply of diesel was 1.4 million tons per year before PARCO came onstream in late 2000; it will rise to 2.5 million tons per year once PARCO In Pakistan, in the context of fuel consumption, the "other government" sector refers to public sector institutions, primarily the armed forces. The Downstream Petroleum Sector 35 becomes fully operational. An additional 1.1 million tons per year ofjet fuel and kerosene are produced. Fuel Oil 2.26 Although demand for fuel oil increased at close to 10 percent per year in 1992-1999, the annual rate of growth is anticipated to fall to around 2 percent in this decade. Most of the new power-generation plants will be based on natural gas rather than fuel oil owing to ambitious gas development plans to capitalize on recent gas discoveries in Pakistan. Currently around three-quarters of the total fuel oil is consumed in the power sector, with the balance being used by the cement and other industries (where the issue of sulfur in fuel is not an environmental concern). 2.27 MPNR expects the total demand for fuel oil to reach around 11 million tons by 2009-2010. Fuel oil consumption in each province is expected to grow, as the infrastructure and the new electricity transmission grid was developed with further projects in mind. Demand projections are shown in Table 2.7. Table 2.7: Pakistan Fuel Oil Demand Forecasts, by Region (thousand tons per year) Year Karachi Sindh Balochistan S. Punjab C. Punjab N. Punjab NWFP AJK Total 2000 1,985 555 1,865 3,994 501 166 349 31 9,446 2003 2,083 582 1,956 4,190 526 174 366 33 9,909 2005 2,173 607 2,041 4,372 548 182 382 34 10,340 Notes: S. Punjab South Punjab; C. Punjab Central Punjab; N. Punjab North Punjab; NWFP Northwest Frontier Province; AJK Azad, Jamuu, Kashmir. Source: Calculations by Chem Systems based on MPNR statistics and projections. 2.28 The total production of fuel oil from the domestic refineries was around 2.0 million tons in fiscal 1999-2000; the balance of around 6.1 million tons was imported. Despite commencement of PARCO's operations in late 2000, imports of the order of around 7 million tons will still be required, reaching a level of around 7.2 million tons by 2010. Fuel Quality 2.29 The majority of gasoline sold is the 87-RON grade with 0.35 g/l of lead. The two sources of octane are reformate and MTBE (MTBE has not been used since the PARCO startup). The levels of sulfur and olefins in gasoline are low. 2.30 The quantity and quality of diesel produced is shown in Table 2.8. (For the remainder of this report, ktpa is used as an acronym for "thousand [metric] tons per annum.") With the exception of ARL diesel, the level of sulfur in diesel is close to 1 percent. Because of the large quantity of 1-percent-sulfur diesel produced at PARCO, the national average for domestically produced diesel is 0.9 percent. This can be lowered somewhat by blending kerosene into diesel. 36 Pakistan Clean Fuels Table 2.8: Middle Distillate Production D i e s e l Jet fuel/kerosene Refinery ktpa % sulfur ktpa % sulfur NRL 570 0.9 496 0.16 PRL 584 0.9 406 0.16 ARL 217 0.2 137 0.05 PARCO 1,142 1.0 668 0.17 Dhodak 10 0.5 13 0.10 TotalwithoutPARCO 1,381 0.8 1,053 0.14 Total with PARCO 2,523 0.9 1,721 0.15 2.31 Currently all the fuel oil being produced in Pakistan contains over 3.0 percent sulfur, apart from a relatively small quantity produced at ARL with 1.2 percent sulfur. Because none of the refineries in Pakistan has residue desulfurization, they produce relatively high-sulfur fuel oil owing to their sour crude oil slate. Residue desul- furization would require significant capital investment, however, so the government will in the near-to-medium term rely on importing low-sulfur (1 percent) fuel oil to achieve its objective of bringing down the sulfur level in the overall fuel-oil pool. Although Pakistan currently also imports 1-percent-sulfur fuel oil, it is for dedicated use by one of the power plants located up-country near Multan. All the other fuel oil imports are of 3.5 percent sulfur. The sulfur in the domestic fuel oil pool is expected to increase from 2.9 percent to around 3.1 percent with the startup of PARCO, as shown in Table 2.9. Table 2.9: Fuel Oil Production Refinery Production (ktpa) Wt% sulfur NRI 634 3.3 PRL 959 3.2 ARL 350 1.2 Total without PARCO 1,942 2.9 PARCO 1,341 3.5 Total with PARCO 3,283 3.1 3 Improving Fuel Quality 3.1 This chapter outlines options for phasing out lead in gasoline and reducing sulfur in diesel and fuel oil. The Clean Fuels study analyzed the feasibility and least-cost means of achieving the target specifications agreed to at the 1997 workshop. It examined the requirements for meeting the target specifications in the context of supply/demand projections and the available infrastructure in Pakistan. The approach utilized the available refining resources, together with products and component imports, thereby minimizing capital investments. 3.2 The evaluations were undertaken by means of computer modeling to evaluate optimized operations and various blending cases. More specifically, Process Industnres Modeling System (PIMS) software'2 was used to model each refinery and optimize refinery configuration and operations. The resulting mass balances and blending models were subsequently transferred to Excel spreadsheet models to enable the economic analysis to be undertaken. The specifics of the scenarios studied are given in Table 3.1. Table 3.1: Scenarios Studied Gasoline Diesel Fuel Oil Year Refineries RON lead (g/l) ktpa % sulfur ktpa % sulfur ktpa 2000 All except PARCO 87 0.35 1,367 0.5 7,362 2.0 9,446 2003 All 87 0.15 1,450 0.5 8,956 2.0 9,909 2005 All 87 none 1,487 0.5 10,211 2.0 10,340 12 PIMS software is based on linear progranmming (LP) technology and used by over 170 petroleum refmers and chemical manufacturers worldwide for both short-term and strategic applications including feedstock selection, product rmix optimization, process unit optimization, and investment planning. 37 38 Pakistan Clean Fuels Underlying Assumptions 3.3 The refineries' respective capacities for processing crude oil were assumed to remain constant for the purpose of this analysis. The evaluations were based on data the refineries provided on a calendar-year basis. The economic supply zones for individual refineries, defined in Chapter 2, were used to assess regional supply and demand balances. In case of regional surpluses or deficits, the lowest-cost inter-regional transfer options were adopted. 3.4 The analyses were carried out for 2000, 2003, and 2005. For the year 2000, the study assumed that PARCO was not yet operational. (Cost assumptions are detailed in Annex 1.) Capital expenditures were annualized by taking 20 percent of the capital cost. It is important to bear in mind that the proposed schemes are designed to minimize the incremental cost of improving fuel quality for Pakistan as a whole, and not necessarily at each individual refinery. 3.5 The base case for gasoline represents the legal limits and the octane split in 1999: 40 percent 80 RON with 0.42 g/l of lead and 60 percent 87 RON with 0.64 g/l. Up to 15 percent by volume of MTBE was assumed to be permissible in gasoline (similar to the amount of MTBE in reformulated gasoline in the United States). On the basis of information received from ARL, NRL, and PRL, the reformers at these refineries were assumed to be capable of operating at 95-RON severity. Finally, Table 3.2 gives physical parameters assumed in estimating the quality of the blended gasoline. Table 3.2: Quality Parameters Used for Gasoline Blending Options Specific Gravity R VP Benzene Total Aromatics Component (g/cc) (psia) (volYo) (volY) Light naphtha 0.68 10.0 1.5 2 Full-range naphtha 0.72 9.0 1.0 6 Reformate (95 RONC or below) 0.82 6.0 6.0 60 Reformnate with isomerization (95 RONC or below) 0.82 6.0 1.5 60 PARCO reformate (100 RONC) 0.84 4.8 7.0 65 PARCO reformate with isomerization (100 RONC) 0.84 4.8 2.0 65 MTBE 0.75 7.4 0.0 0.0 Notes: RONC research octane number clear; g/cc gramns per cubic centimeter; RVP Reid vapor pressure; psia pounds per square inch absolute; vol% percent by volume. Phaseout of Lead in Gasoline 3.6 The two changes in gasoline specifications that impact the refineries are (a) the elimination of the 80-RON grade in favor of 87 RON in 2000 and (b) the phaseout of lead addition from 0.42g/l in 1999 to lead-free in 2005. Improving Fuel Quality 39 The required clear (lead-free) octane requirements of the overall pool of gasoline blend components, corresponding to changes in gasoline specifications, are shown in Table 3.3. Table 3.3: Leaded and Clear RON Requirements Year Minimum RON Maximum Lead (g/l) Minimum RONof Unleaded Gasoline 1999 80 0.42 73 2000 87 0.35 79 2003 87 0.15 82 2005 87 0.013 87 3.7 The most significant changes are as follows: * From 1999 to 2000, the clear-octane (RONC) requirements of the overall gasoline pool increase by around 6 points as a consequence of the increase in product octane levels and the reduction in lead content. The 80-RON grade with a lead content of 0.42 g/l can be produced by adding lead to a relatively naphthenic straight-run naphtha-as was practiced in Dhodak, and in ARL until the new naphtha reformer was commissioned. The 87- RON grade with a lead content of no more than 0.35 g/l requires blending reformate and/or other high-octane blending components such as MTBE into the gasoline. In 2003, reducing the allowable lead to 0.15 g/l requires a 3-point clear- RON increase of the gasoline pool. * In 2005, the reduction from 0.15 g/l lead to lead-free will require a further 5-point clear-RON increase in the gasoline pool. This large increase is on account of the significant impact of the initial 0.15 g/l of lead gasoline. 3.8 Table 3.4 presents a summary of the average Pakistan gasoline pool with various levels of lead additions, and with the refineries operating at current reformer severities (referred to as the "base case"). The table highlights the quality limitations of the current blending regimes. Only PARCO is judged able to achieve the required 87- RONC level. Dhodak has the lowest octane, reflecting its dependence on straight-run naphtha. 3.9 The key considerations for phasing out gasoline and increasing pool octane are as follows: In 2000, prior to commissioning of PARCO, the clear octane of the overall gasoline pool is estimated to average 72.9 RONC, rising to 82.6 RON with the addition of 0.35 g/l lead and 83.5 RON with the addition of 0.42 g/l lead. The latter corresponds to a product mix of 40 percent 80 RON and 60 percent 87 RON. Only ARL would come close to the required 87 RON at a lead level of 0.35 g/l. 40 Paidstan Clean Fuels Table 3.4: Refinery Gasoline Production in Pakistan, 1999 (Base Case) RON with lead content of: Refine,y bpsd ktpa RONC 0.15 g/l 0.35 g/1 0.42 g/l NRL 8,700 327 70.8 77.1 80.1 80.9 PRL 6,582 250 70.8 79.1 82.0 82.8 ARL 10,000 396 78.2 83.8 86.5 87.5 Dhodak 1,823 70 62.0 70.5 75.4 76.7 Total without PARCO 27,105 1,043 72.9 79.6 82.6 83.5 PARCO 17,063 711 87.2 89.8 92.6 93.1 Total with PARCO 44,168 1,754 78.4 83.5 86.5 87.2 Note: bpsd barrels per stream day. * In 2003, the overall octane increases because of PARCO, and also because of the elimination of full-range naphtha from ARL's gasoline pool. When PARCO runs at near capacity, the 1999 RONC of the total pool is estimated to rise to 78.4 as a result of the 100 RONC of the CCR reformate produced by PARCO. Owing to the increase in ARL's gasoline octane, there will be an additional 3.5 octane points at ARL, bringing the overall pool octane to around 79.3. Therefore, the total octane deficiency will be around 3 points against the target of 82 RONC (87 RON at 0.15 g/l lead). By 2005, when all gasoline is to be lead-free, the estimated octane deficiency is around 7 points. This assumes all refineries except PARCO will be operating their reformers at 95 RON, which will increase the clear- octane pool from 79.3 to around 80.4. The surplus gasoline production capacity will provide the flexibility necessary to back out some of the low- octane naphtha, especially at NRL and PRL, replacing it with high-octane reformate or finished gasoline from PARCO. At the inland locations there is a logistical incentive to achieve as close a practical balance between production and demand as possible. The proposals for meeting the higher clear-octane requirements in 2000, 2003, and 2005 are described next. Proposals for 2000 3.10 The following blending operations and reforner severity are suggested for the year-2000 scenario. * NRL, PRL, and Dhodak blend imported MTBE to a maximum of 15 percent by volume (vol%). * Dhodak adds refornate from PRL in addition to imported MTBE to its gasoline. * ARL avoids blending full-range naphtha into gasoline as much as possible. By so doing, ARL increases the naphtha splitter cut-point such that all full- Improving Fuel Quality 41 range naphtha can be processed, with heavy naphtha production matched with reformer capacity. All three existing refineries have semi-regenerative reformers with R56 catalyst. ARL and NRL operate reformers at 90-RON severity, and PRL operates at 91-92-RON severity. All three refineries expressed confidence in being able to operate at higher severity, producing reformate with up to 95 RON-albeit with some yield loss, reduced regeneration intervals, and the need for minor modifications. This study assumes that the reformers in all the refineries operate at 92 RON until 2005. Some modifications would be required to enable them to operate at 95 RON to meet the lead-free gasoline specification. The gasoline production figures at each refinery as well as import/export figures are given in Table 3.5. Table 3.5: Refinery Gasoline Production, 2000 Parameters ARL NRL PRL Dhodak Total Crude throughput (million tpa) 1.6 3.0 2.3 0.0 6.9 Gasoline pool ('000 bpsd) Full-range naphtha 2.0 0.0 0.0 1.8 3.8 Light naphtha 3.3 5.0 3.3 0.0 11.6 Refornate 4.4 2.2 1.5 1.0 9.1 MTBE 0.0 1.3 0.8 0.5 2.6 Total ('000 bpsd) 9.7 8.4 5.6 3.3 27.1 MTBE content (%) 0.0 15.0 14.2 15.0 9.4 Gasoline pool (RONC) 78.2 77.8 77.7 79.5 78.1 Gasoline pool (RON with 0.35g/l lead) 87.2 87.1 87.0 87.3 87.1 Total gasoline production (ktpa) 413 345 231 140 1,130 Exports (ktpa) Light naphtha 0 55 60 0 115 Heavy naphtha 0 118 98 0 216 Inports (ktpa) MTBE 0 53 34 21 108 Gasoline (87 RON with 0.35g/l lead) 0 0 0 0 237 Note: bpsd barrels per stream day. 3.11 Gasoline production totals 1.13 million tons (including imported MTBE) compared with a demand of 1.37 million tons. The balance of 237,000 tons of gasoline- 87 RON with no more than 0.35 g/l lead-would need to be imported. At the same time, 42 Pakistan Clean Fuels a surplus of 331,000 tons of naphtha would need to be exported. Imports of around 110,000 tons of MTBE would be required for blending at NRL, PRL, and Dhodak. 3.12 The physical properties of the above gasoline are illustrated in Table 3.6. The Reid vapor pressure (RVP) here and in all other scenarios remains below 9 pounds per square inch absolute (psia), which is acceptable given that ozone is not a serious air pollution concern in Pakistan. The amount of benzene in gasoline ranges between 2.4 and 3.4 percent, with an average of 2.8 percent. The amount of total aromatics varies between 17 and 29 percent, averaging 22 percent. As expected, ARL, which does not use MTBE in gasoline, has the highest benzene and total aromatics levels, since reformate is the only source of octane. The average sulfur content is estimated to be in the vicinity of 100 wt ppm, which is good by any international standards. The reason for such a low level of sulfur is that the only sulfur-rich streams in the gasoline pool are the light and full-range naphthas, and the most significant source of sulfur in gasoline in other countries, namely FCC gasoline, is not present in Pakistan. Table 3.6: Physical Properties of Gasoline in 2000 Parameter APIL NRL PRL Dhodak RVP (psia) 8.0 8.6 8.6 7.9 Benzene (vol%) 3.4 2.4 2.5 2.4 Total aromatics (vol%) 29 17 17 22 Proposals for 2003 3.13 PARCO is assumed to be operating at full capacity by 2003. PARCO will need to operate its CCR reformer at almost nameplate capacity in order to produce sufficient hydrogen for its Dieselmax unit. Maximnizing the production of diesel is considered a priority, but the use of the reformer as a source of hydrogen results in a substantial gasoline surplus within its supply zone. As the government has agreed to buy this surplus gasoline from PARCO, it would have to incur significant costs to transport a large portion of this excess gasoline to Karachi for exports. 3.14 The other factor that will influence the overall gasoline pool is the reduced naphtha production at ARL owing to the reduction in domestic crude oil availability from the southern fields and also to the overall crude oil getting heavier with age of the fields. This will eliminate any full-range naphtha being blended into the gasoline pool (as was done in 2000). This change in crude slate will in turn reduce the amount of gasoline produced at ARL, and the overall RON of the gasoline at ARL will increase from 78.2 in 2000 to around 81.7. 3.15 The "optimum" scheme for 2003 focuses on minimization of internal freight and purchase/transfer of high-octane blending components. The proposed blending pattern is outlined in Table 3.7. The key features are as follows: Improving Fuel Quality 43 * PARCO operates the reformer at 100-RON severity, thereby allowing the Dieselmax unit to operate at full capacity. Some of the 100-RONC reformate from PARCO is transferred to Dhodak for blending. * The gasoline production at the coastal refineries is cut back to produce only the quantity required to meet the balance of demand in (Economic Supply) Zone 1 after PARCO's gasoline has been consumed. Table 3.7: Refinery Gasoline Production in 2003 Parameter ARL NRL PRL Dhodak PARCO Total Crude throughput (nillion tpa) 1.5 3.0 2.3 0.0 4.7 11.5 Gasoline pool ('000 bpsd) Full-range naphtha 0.0 0.0 0.0 1.8 0.0 1.8 Light naphtha 3.5 0.8 0.5 0.0 7.2 12.0 Refornate 4.3 1.5 1.1 0.0 0.0 7.0 Reformate (100 RON from 0.0 0.0 0.0 2.4 10.1 12.5 PARCO) Total ('000 bpsd) 7.8 2.3 1.6 4.2 17.3 33.3 Gasohne pool (RONC) 81.8 81.9 82.0 83.2 85.4 83.8 Gasoline pool (RON with 0.15g/1 87.3 87.0 87.0 87.3 90.0 88.7 lead) Total gasoline production (ktpa) 336 100 71 186 757 1,450 Exports (ktpa) Light naphtha 0 183 142 0 0 325 Heavy naphtha 0 77 63 0 0 140 Refonmate 0 30 66 0 0 96 3.16 Exports of leaded gasoline would be difficult, considering that most of the developing countries that could potentially have been a home for this gasoline are moving toward low- or no-lead gasoline. Therefore, the option to cut back on gasoline production to match demand and export the blendstocks as naphtha or as gasoline would depend on the relative price differentials prevailing at the time. This study assumes that rather than exporting blended (and leaded) gasoline, exporting gasoline blendstocks (reformate and naphtha) would be more feasible. 3.17 Gasoline production at NRL and PRL falls to around 170,000 tons, with a corresponding increase in naphtha exports (relative to the year 2000) of approximately 134,000 tons to reach a total of around 465,000 tons. In addition to this naphtha, about 96,000 tons of reformate would also need to be exported from these refineries. As the overall supply needs to match demand, the inherent assumption is that deficit in any zone will be met by supplies from other zones with a surplus. 44 Pakistan Clean Fuels 3.18 The physical properties of the above gasoline are illustrated in Table 3.8. As a result of lead phasedown and elimination of MTBE, which served as a significant source of octane in 2000, the level of benzene in gasoline increases to 4.5 percent on average, which is high by international standards. Total aromatics amount to an average of 38 percent. Table 3.8: Physical Properties of Gasoline in 2003 Parameter ARL NRL PRL Dhodak PARCO RVP (psia) 7.8 7.4 7.4 6.7 7.1 Benzene (vol%) 4.0 4.5 4.5 4.4 4.7 Total aromatics (vol%) 34 41 41 40 39 Proposals for 2005 3.19 The combination of the country moving to lead-free gasoline and demand increasing to around 1.5 million tons will require supplementing the octane pool. This can be done by importing high-octane components and/or by investing in C5/C6 (hydrocarbons with five and six carbon atoms, respectively) isomerization units to upgrade the light naphtha into higher-octane isomerate. Two scenarios, with and without isomerization, are discussed. 2005, No Isomerization 3.20 Achieving the no-lead specification in Pakistan without the use of isomerate requires that the following issues be addressed: * Even if the reformers at ARL, NRL, and PRL are run at 95 RON severity, the overall pool octane is only 80.4 RON. One of the options to enhance the octane pool would be to cut back on the production from the coastal refineries, while all the inland refineries will have to produce on-spec gasoline. * The RONC of Dhodak is 62. Despite blending MTBE to 15 percent, the desired RONC of 87 cannot be achieved. Therefore, some reformate from PARCO will have to be transferred to Dhodak to compensate for this octane deficit at Dhodak. * ARL will be able to achieve a two-point increase over the 82 RON in 2003 if the reformer is operated at 95 RON. However, it will still fall short of the target octane of 87 RONC. This target can be achieved by either blending MTBE or by moving some 100-RON reformate from PARCO. The latter is reconmmended because it is easier logistically, and will also assist PARCO in reducing the benzene and total aromatics content in its gasoline (see below). * After moving reformate to Dhodak and ARL, the octane deficit at PARCO will have to be fulfilled by MTBE blending at PARCO. As mentioned Improving Fuel Quality 45 above, this will assist in diluting the relatively high benzene and total aromatics content of the gasoline at PARCO. 3.21 The other blending logistics assumptions are consistent with that employed for the year 2003. Because the reformers at ARL, NRL, and PRL are all assumed to operate at 95 RON (compared to 92 RON in 2000 and 2003), the yields have been adjusted accordingly. The proposed scheme outlined in Table 3.9 shows that MTBE imports of around 110,000 tons will be required for blending at NRL, PRL, Dhodak, and PARCO to meet the overall demand and specifications in 2005. Despite the optimization of the refinery yields, there is forecast to be a surplus of around 490,000 tons of naphtha and 140,000 tons of reformate. Table 3.9: Refinery Gasoline Production in 2005, No Isomerization Parameters ARL NRL PRL Dhodak PARCO Total Crude throughput (million tpa) 1.5 3.0 2.3 0.0 4.7 11.5 Gasoline pool ('000 bpsd) Full-range naphtha 0.0 0.0 0.0 1.8 0.0 1.8 Light naphtha 3.5 0.3 0.4 0.0 7.2 11.5 Reformate 4.3 0.6 0.9 0.0 0.0 5.8 Reformate (100 RON from PARCO) 2.2 0.0 0.0 2.1 8.3 12.5 MTBE 0.0 0.1 0.1 0.7 1.8 2.7 Total ( '000 bpsd) 10.0 1.0 1.4 4.5 17.3 34.2 MTBE content (%) 0.0 7.8 7.0 15.0 10.4 7.8 Gasoline pool (RONC) 87.0 87.0 87.0 87.1 87.2 87.1 Total gasoline production (ktpa) 436 45 63 198 745 1,487 Exports (ktpa) Light naphtha 0 200 147 0 0 347 Heavy naphtha 0 77 63 0 0 140 Reformate 0 69 71 0 0 139 Imports (ktpa) MTBE 0 3 4 29 76 112 3.22 The qualities of the resulting gasoline pools for all the refineries are shown in Table 3.10. As a result of MTBE addition, the overall content of benzene is 4.1 percent, slightly lower than in 2003, although still high by international standards. The average content of total aromatics in the gasoline pool is estimated to be 35 percent. The sulfur content will be in the neighborhood of 50 wt ppm, which is in line with best international practice. 46 Pakistan Clean Fuels Table 3.10: Physical Properties of Gasoline in 2005, No Isomerization Parameter ARL NRL PRL Dhodak PARCO RVP (psia) 7.2 7.3 7.3 6.9 7.4 Benzene (vol%) 4.6 4.2 4.3 3.6 4.0 Total arornatics (vol%) 41 38 39 32 32 2005, Isomerization 3.23 A gasoline production profile incorporating isomenzation in the year 2005 has been developed as a way of lowering benzene and aromatics levels. Selection of the most appropriate isomerization technology is beyond the scope of this study, and therefore a representative octane enhancement estimate has been used from public domain data (Maples 1993). This case assumes that three, relatively small-scale isomerization units are installed at NRL, PRL, and PARCO. Some economies of scale can be enjoyed if, rather than building smaller isomerization plants (650 and 1,050 barrels per stream day [bpsd] at NRL and PRL, respectively), a larger (around 2,000 bpsd) isomerization facility is established at either NRL or PRL, with the corresponding naphtha/isomerate transfer mechanism. 3.24 As shown in Table 3.11, installing isomerization units reduced the imported MTBE volumes by approximately 87,000 tons, naphtha exports by 54,000 tons, and reformate exports by 34,000 tons. Table 3.11: Refinery Gasoline Production in 2005 with Isomerization Parameters ARL NRL PRL Dhodak PARCO Total Crude throughput (million tpa) 1.5 3.0 2.3 0.0 4.7 11.5 Gasoline pool (ktpsd) Full-range naphtha 0.0 0.0 0.0 1.8 0.0 1.8 Light naphtha 3.5 0.3 0.3 0.0 4.2 8.3 Isomerate 0.0 0.5 1.0 0.0 3.0 4.5 Reformate 4.3 1.0 1.3 0.0 0.0 6.5 Reformate(lOORONfromPARCO) 2.2 0.0 0.0 2.2 8.1 12.5 MTBE 0.0 0.0 0.0 0.6 0.0 0.6 Total ('000 bpsd) 10.0 1.8 2.6 4.6 15.3 34.3 MTBE content (percent by volume) 0.0 0.0 0.0 13.0 0.0 1.7 Gasoline pool (RONC) 87.0 86.0 86.9 87.0 87.1 87.0 Total gasoline production (ktpa) 436 76 112 202 662 1,488 Exports (ktpa) Light naphtha 0 180 112 0 0 292 Heavy naphtha 0 77 63 0 0 140 Reformate 0 54 51 0 0 105 Imports (ktpa) MTBE 0 0 0 25 0 25 Note: ktpsd thousand [rnetric] tons per stream day. Improving Fuel Quality 47 3.25 Table 3.12 shows a comparison of gasoline quality with and without use of isomerate. With the exception of ARL, which is not using isomerate in 2005, gasoline from the other refineries will see a fall in the amount of benzene, averaging 2.0 percent nationally. In the case of the isomerization option, total aromatics increase slightly at Dhodak and PARCO because of the phaseout of MTBE, which acts as a diluent. Table 3.12: Impact of Isomerization on Gasoline Physical Properties in 2005 Parameter Unit ARL NRL PRL Dhodak PARCO RVP, without isomerization psia 7.2 7.3 7.3 6.9 7.4 RVP, with isomerization psia 7.2 8.7 9.0 6.9 7.9 Benzene, without isomerization vol% 4.6 4.2 4.3 3.6 4.0 Benzene, with isomerization vol% 3.5 1.1 0.9 1.3 1.5 Total aromnatics, without isomerization vol% 41 38 39 32 32 Total aromatics, with isomerization vol% 41 33 31 33 35 Diesel 3.26 The proposed plan involves reducing the limit on sulfur in diesel from 1 percent to 0.5 percent. The local refineries will continue to produce relatively higher- sulfur diesel owing to the nature of the crude and the processing hardware. 3.27 The following altematives are available to reduce this sulfur level: * Import both 0.5-percent- and 0.25-percent-sulfur diesel, and invest in diesel blending facilities * Install distillate hydrotreating at the refineries * Modify the crude mix, and import low-sulfur crudes. Although installing distillate hydrotreating would reduce the sulfur levels to less than 0.05 percent, it is an expensive option requiring a capital investment of at least US$205 million, and as such is not considered an immediate or a short-term option for Pakistan. However, because Pakistan may want to pursue this option under the longer-term strategy to align itself with best intemational practice, preliminary economic assessment is provided in Annex 1. The crude mix is difficult to modify for the reasons give in Chapter 2. Therefore, this study focuses on imported diesel quality as a near-term strategy for fuel quality improvement. 3.28 The limit on sulfur of 0.5 percent can be achieved by blending the diesel produced from the local refineries and surplus kerosene with sufficient imported 0.25- percent-sulfur diesel to achieve the target specification. The balance can be imported as 0.5-percent-sulfur diesel. 3.29 Currently there is no infrastructure to support this blending operation and new facilities would be required. Storage at Keamari would be used to handle imported 0.5-percent-sulfur diesel to serve the Karachi and Balochistan markets by road. Any 48 Pakistan Clean Fuels residual storage capacity can be used for intermediate storage prior to transfer to a proposed blending facility. This blending facility could be established in the Korangi Industrial Area, which would be connected via pipelines to the refineries and the PARCO pipeline. 3.30 In the year 2000, Pakistan imported an estimated 6 million tons of diesel (see Table 3.13). Even if all of these imports were of 0.5-percent-sulfur diesel, the overall Pakistan pool sulfur level would still be slightly higher than the desired 0.5 percent. The overall specification of 0.5 percent sulfur in the respective zone-wise pools could have been met by importing around 4 million tons of 0.5-percent-sulfur diesel and around 2 million tons of 0.25-percent-sulfur diesel. Table 3.13: Specification Blending for Diesel, 2000 Zone I Zone 2 Total Supply/demand ktpa % sulfur ktpa % sulfur ktpa % sulfur Demand 4,656 - 2,706 - 7,362 - NRL production 570 0.90 - - 570 0.90 PRL production 584 0.90 - - 584 0.90 Dhodak production 10 0.50 - - 10 0.50 ARL production - - 217 0.20 217 0.20 Total domestic supply 1,164 0.90 217 0.20 1,381 0.79 Imports 0.5% sulfur 1,692 0.50 2,489 0.50 4,181 0.50 0.25% sulfur 1,800 0.25 0 0 1,800 0.25 Imports 3,492 0.37 2,489 0.50 5,981 0.42 Supply 4,656 0.50 2,706 0.48 7,362 0.49 Note: - not applicable. 3.31 The diesel blending becomes more complex in 2003 as a consequence of adding the even-higher-sulfur diesel produced at PARCO to the overall pool in Pakistan. (While Dieselmax produces low-sulfur diesel, the diesel pool at PARCO comprises other components high in sulfur.) By 2003, kerosene would also be substantially in surplus owing to the forecast reduction in demand. Therefore, refineries could either alter the distillation cut points in order to yield more diesel and relatively less kerosene, or blend kerosene up to the maximum allowable 20 percent or so (remaining within the flash point limits). If these blending modifications are not undertaken, the total imports are forecast to exceed 6 million tons. This blending of kerosene into diesel would reduce the diesel imports by the same quantity in 2003. The addition of kerosene would also reduce the sulfur level in the domestic diesel pool by around 0.1 percent, to 0.8 percent. 3.32 Even if the refineries carry out the blending of lower-sulfur kerosene, substantial imports of 0.5- and 0.25-percent-sulfur diesel will still be required to meet the Improving Fuel Quality 49 overall 0.5-percent-sulfur requirements. Blending around 4 million tons of 0.25-percent- sulfur diesel and 2 million tons of 0.5-percent-sulfur diesel with the domestically pro- duced diesel will be required. It is assumed that the demand in Karachi will be met solely by imports of 0.5-percent-sulfur diesel. The proposed scheme is given in Table 3.14. Table 3.14: Specification Blending for Diesel, 2003 Zone I Zone 2 Zone 3 Total Supply/demand ktpa % sulfur ktpa % sulfur ktpa % sulfur ktpa % sulfur From Refineries NRL 687 0.77 - - - - 687 0.77 PRL 716 0.76 - - - - 716 0.76 PARCO - - 1,415 0.94 - - 1,415 0.94 Dhodak - - 10 0.49 - - 10 0.49 ARL - - - - 217 0.20 217 0.20 Total 1,403 0.77 1,426 0.94 217 0.20 3,046 0.81 Interzone transfers FromZone I - - 1,116 0.50 0 - - - FromZone 2 0 - - - 2,830 0.50 - - Imports For specification blend 1,500 0.25 2,500 0.25 0 0.25 4,000 0.25 Only for Karachi 1,013 0.50 0 0.00 0 0.00 1,013 0.50 Balance imports 0 0.50 0 0.50 897 0.50 897 0.50 Supply 3,916 0.50 5,041 0.50 3,944 0.48 8,956 0.49 Demand 2,800 - 2,212 - 3,944 - 8,956 - Surplus for interzone transfer 1,116 0.50 2,830 0.50 0 - - Note: - not applicable. 3.33 The main blending would be carried out at Karachi and Mahmood Kot owing to the availability of the required infrastructure and the adjacent refineries. Around 1.1 million tons of blended diesel would be transported from Karachi to Zone 2. Similarly the surplus of around 2.8 million tons from Zone 2 would have to be transported to Zone 3. This should result in an overall balance, least freight cost, and all regions in Pakistan having access to low-sulfur diesel. 3.34 A similar approach is adopted to achieve the diesel balance in 2005, both in terms of overall demand as well as specifications. The surpluses from Zones 1 and 2 fall significantly owing to the growth in demand in these regions. The results are shown in Table 3.15. 50 Pakistan Clean Fuels Table 3.15: Specification Blending for Diesel, 2005 Zone I Zone 2 Zone 3 Total Supply/demand ktpa % sulfur ktpa % sulfiur ktpa % sulfur ktpa % sulfur From Refineries NRL 675 0.78 675 0.78 PRL 704 0.77 - - - - 704 0.77 PARCO - - 1,399 0.95 - - 1,399 0.95 Dhodak - - 10 0.49 - - 10 0.49 ARL - - - - 217 0.20 217 0.20 Total 1,380 0.78 1,409 0.95 217 0.20 3,006 0.82 Interzone transfers FromZone I - - 700 0.50 0 - - - From Zone 2 0 - - - 2,087 0.50 - - Imports For specification blend 1,500 0.25 2,500 0.25 0 0.25 4,000 0.25 Only for Karachi 1,013 0.50 0 0.00 0 0.00 1,013 0.50 Balance imports 0 0.50 0 0.50 2,192 0.50 2,192 0.50 Supply 3,892 0.50 4,609 0.50 4,497 0.49 10,211 0.50 Demand 3,193 - 2,522 - 4,497 - 10,211 - Surplus for interzone transfer 700 0.50 2,087 0.50 0 - 0 - Note: - not applicable. 3.35 With respect to other parameters for diesel fuel quality, the Middle East crude oils processed in NRL, PRL, and PARCO have good cetane numbers. The more naphthenic domestic crude oils processed by ARL produce diesel fuel with a slightly lower cetane number. The distillation temperature of the heavy end of diesel fuel produced by NRL and PRL is somewhat higher than the EU specifications (current and proposed). Lowering this could be achieved by a combination of improved fractionation in the bottom of the crude distillation tower and reducing the operating temperature. The latter would reduce the yield of diesel fuel. For Arab Light crude oil, a 10°C reduction in cut point would reduce the yield of diesel by around 1.8 percent on crude oil, and correspondingly increase the yield of fuel oil. 3.36 Reducing the sulfur content of diesel fuel to 0.5 percent may be viewed as a first step toward reducing sulfur levels to internationally acceptable standards. Desulfurized diesel with 0.05 percent sulfur is starting to become available from the Middle East in response to the demand in East Asia. Thus, there is scope for reducing the sulfur content of diesel fuel further in Pakistan by importing lower-sulfur product. 3.37 Importing only 0.25-percent-sulfur diesel in 2005 would reduce the overall pool's sulfur content to only 0.42 percent. Importing only 0.05-percent-sulfur diesel fuel Improving Fuel Quality 51 would reduce the overall pool to 0.28 percent sulfur. Any further reduction in sulfur would therefore require investment in hydrodesulfurization in the refineries in Pakistan, especially at NRL, PRL, and PARCO, which process higher-sulfur crude oils. Fuel Oil 3.38 This study did not consider the option of setting a limit of 2 percent on sulfur in fuel oil throughout Pakistan because the local refineries would not be able to produce lower-sulfur fuel oil without sizable investment in hydrodesulfurization. Instead, the study focused on the following: * Achieving the planned reduction in average sulfur content of the fuel oil to 2 percent (in line with the government's stated target, but not through a direct mandate on fuel quality). This is expected to be achieved by importing both low- and high-sulfur fuel oils. * Optimizing the allocation of fuel oil, by ensuring that the lower-sulfur product is utilized where possible in the more environmentally sensitive regions (for example, by setting tighter emission standards or a limit on sulfur for those industries operating in densely populated areas). This study did not evaluate residue hydrotreating because it is an extremely expensive option that would not be feasible for Pakistan's relatively small refineries. 3.39 The alternatives available to reduce sulfur levels in fuel oil and sulfur emissions in general are to: * Modify the crude mix, and import low-sulfur crudes * Install flue gas desulfurization (FGD) at the larger power plants * Increase the use of natural gas. 3.40 To understand the impact of changing the crude mix, in addition to the factors discussed in Chapter 2, it is informative to look at the contribution to the overall pool's sulfur content in 2003 as illustrated in Figure 3.5. NRL is confined by the need to produce lubricants (as discussed earlier), and PARCO is limited by the requirement to process 40 percent Abu Dhabi crude. As a result, their contribution to the overall sulfur pool of lower-sulfur fuel oil refined from low-sulfur crudes would be small. Therefore, switching to lower-sulfur crudes was not considered in this study. FGD is discussed in Annex 1. 52 Pakistan Clean Fuels Figure 3.5: Contribution to Sulfur Content of Overall Fuel Oil Pool, 2003 NRL ARL 8% A2% PARCOJ, 16% Imports 64% 3.41 To lower the overall content of sulfur in fuel oil, the recommended option is to import lower-sulfur fuel oil, albeit at a substantial incremental cost. The prioritization of supply to the various consumers could be based on the relative proximity to urban centers. It is worth noting that 4 of the 14 power plants consume around 80 percent of the total fuel oil consumed by the sector. 3.42 Table 3.16 shows the fuel oil balances and import levels required in each zone to reduce the overall pool's sulfur content to 2 percent in the year 2000. Over two- thirds of fuel oil imported would need to contain only I percent sulfur to achieve a national average of 2 percent. Table 3.16: Fuel Oil Pools, 2000 Zone 1 Zone 2 Total Supply/Demand ktpa % sulfur ktpa % sulfur ktpa Demand 8,750 - 696 - 9,446 Supply Production NRL 634 3.3 - - 634 PRL 959 3.2 - - 959 ARL - - 350 1.2 350 Imports 3.5% sulfur 2,158 3.5 246 3.5 2,404 1.0% sulfur 5,000 1.0 100 1.0 5,100 Total supply 8,750 2.0 696 2.0 9,446 Note: - not apphcable. Improving Fuel Quality 53 3.43 By 2003, PARCO is assumed to be fully operational, and the supply zones altered to incorporate its supplies. The other impact on supply will come from some additional fuel oil produced at ARL, as the domestic southem crudes are expected to get heavier (i.e., yielding more fuel) over time. The demand and supply for the three zones are presented in Table 3.17 and Table 3.18 for 2003 and 2005, respectively. In 2003, despite importing only 1 -percent-sulfur fuel oil, Zone 2 will have an overall sulfur level slightly above the 2 percent target because of the relatively high-sulfur fuel oil produced at PARCO. Table 3.17: Fuel Oil Pools, 2003 Zone I Zone 2 Zone 3 Total Supply/demand ktpa % sulfur ktpa % sulfur ktpa % sulfur ktpa Demand 5,459 - 3,614 - 836 - 9,909 Supply Production NRL 780 3.3 - - - - 780 PRL 1,000 3.2 - - - - 1,000 PARCO - - 1,540 3.5 - - 1,540 ARL - - - - 483 1.2 483 Imports 3.5% sulfur 660 3.5 0 - 300 3.5 960 1.0% sulfuir 3,019 1.0 2,074 1.0 53 1.0 5,146 Total supply 5,459 2.0 3,614 2.1 836 2.0 9,909 Note: - not applicable. Table 3.18: Fuel Oil Pools, 2005 Zone I Zone 2 Zone 3 Total Supply/demand ktpa % sulfur ktpa % sulfur ktpa % sulfur ktpa Demand 5,696 3,772 872 10,340 Supply Production NRL 870 3.3 - - - - 870 PRL 1,020 3.2 - - - - 1,020 PARCO - - 1,540 3.5 - - 1,540 ARL - - - - 550 1.2 550 Imports 3.5% sulfur 500 3.5 0 - 300 3.5 800 1.0% sulfur 3,306 1.0 2,232 1.0 22 1.0 5,560 Total supply 5,696 2.0 3,772 2.0 872 2.0 10,340 Note: - not applicable. 54 Pakistan Clean Fuels Incremental Cost of Fuel Quality Improvement 3.44 Calculations were carried out to assess the overall impact of the fuel quality improvement initiatives on Pakistan. Those required for making individual investment decisions were not undertaken, since the objective of this study was to compute the order-of-magnitude incremental cost for Pakistan as a whole without optimizing investment at each refinery. Wherever possible, recommended solutions have focused on making the best use of the existing facilities, rather than embarking on large capital expenditure programs. The methodology adopted has been directed toward developing least-cost options that are practical and relatively easy to implement. 3.45 The following step-by-step approach was taken to deternine the economic impact of the fuel quality improvements recommended in the foregoing sections: Step 1 Establish a "market parity" pricing mechanism that is representative of the grades/qualities of refined products being considered. Step 2 Evaluate the overall incremental octane requirements for gasoline and the import requirements for lower-sulfur diesel and fuel oil. Step 3 Compare these estimates with the "base case." The base case assumes meeting the forecast demand volumes for the selected reference years (2000, 2003, and 2005) for each product, but retaining the product quality specifications in place in the year 1999. Thus, under the base case gasoline quality would remain at 80 and 87 RON with a lead content of 0.42 and 0.64 g/l, respectively. The limits on sulfur in diesel and fuel oil would continue to remain at a maximum of 1.0 and 3.5 percent by weight, respectively. Step 4 Estimate the incremental cost for the recommended cases. 3.46 The required capital investments were also estimated and reported, the overall objective being to minimize them so as to cover only the required improvements. Although the economics and attractiveness of these individual projects were not calculated for the purpose of this study, the projects are considered likely to offer modest, rather than high, economic returns. More details are given in Annex 1. Refined Product Pricing Basis 3.47 The price forecasts used in this study were those developed by Chem Systems (U.K.). This study assumed a slightly declining trend in crude oil price (in constant dollars); the refined products also show a similar trend. A forecast improvement in refining margins and tightening demand-supply situation will result in prices increasing in real terms during 2001-02, and then following the crude oil price trend beyond 2003- 04. It should be noted that the incremental cost of fuel quality improvement depends primarily on the price differences between various grades of the finished petroleum products rather than the absolute price levels. Annex 1 explains the development of appropriate prices for gasoline, diesel, and fuel oil corresponding to the Pakistan market on the basis of Chem Systems' price forecasts. Improving Fuel Quality 55 3.48 Over the past decade, the rising price of lead has converged with the cost of producing octane in refineries or buying octane through the use of high-octane blendstocks such as MTBE. As a result, there is currently little economic motivation to add lead. This is demonstrated in Table A1. I of Annex 1. 3.49 This study assumed a price difference of US$1.70 per ton between 0.5- and 1.0-percent-sulfur diesel fuels, and of US$2.50 per ton between 0.5- and 0.25- percent-sulfur diesels. For fuel oil, the difference between 3.5 and 1.0 percent sulfur was assumed to amount to US$20 per ton. Economics for Gasoline 3.50 The gasoline economic evaluations were undertaken on the basis of the following distinct, but related, methodologies: * Free-market pricing: Evaluating the cost of introducing higher-quality grades (higher octane and lower lead), based on free-market pricing, and also expressed per liter of (domestically consumed) gasoline. * Cost to Pakistan: A single-year snapshot of the net impact of imports, exports, and annualized capital expenditures (taken as 20 percent of capital). * Isomerization economics: Comparison of the annualized capital expenditures versus non-capital alternatives (such as importing MTBE), taking account of the net impact on imports, exports, and operating costs. 3.51 The first two cases were undertaken for 2000, 2003, and 2005 compared against a 1999 reference grade structure (but based on the demand of the year being evaluated). The isomerization economics were carried out for 2005 only, because the main implication is the level of benzene and total aromatics in the unleaded gasoline produced. The startup of PARCO in the year 2000 complicates this study because it brings in a significant boost in octane supply capabilities compared to the 1999 reference year. The incremental costs for all the three years in this study are based on the 1999 gasoline octane and quality structure rather than that following the Parco startup. 3.52 The free-market pricing scenario is shown in Table 3.19. The comparison shows that the net cost of introducing higher-octane gasoline should be largely offset by the savings through reductions in the cost of lead purchases. 3.53 The recommended plan in this study requires some additional storage at NRL and PRL for naphtha and MTBE. Furthermore, when lead is eliminated, further investment would be required to revamp the reformers at all refineries other than PARCO so as to produce 95-RONC reformate rather than the current 92. The estimated capital investment requirement associated with these initiatives is US$2 million for storage facilities at NRL and PRL, and US$9 million for reformer modifications at ARL, NRL, and PRL. The overall incremental cost to the refineries in Pakistan is shown in Table 3.20. 56 Pakistan Clean Fuels Table 3.19: Gasoline Quality Improvement: Free-Market Pricing Parameter 2000 2003 2005 Demand (ktpa) 1,367 1,450 1,487 Base-case RONC 73 73 73 Reconmnended case RONC 79 82 87 Incremental RONC 6 9 14 Total octane cost (US$ million) 9.0 14.4 22.9 Total lead savings (US$ million) -5.0 -13.0 -18.0 Net cost impact (US$ nrillion) 4.0 1.4 4.9 Cost per liter (US cents) 0.3 0.1 0.3 Note: 1998 U.S. dollars and cents. Table 3.20: Gasoline Quality Improvement: Cost to Pakistan Refineries Parameter 2000 2003 2005 Change in imports Gasoline MTBE Total Gasoline MTBE Total Gasoline MTBE Total Incremental import costs (US$ 0.5 11.9 12.4 0 0 0 0 27.1 27.1 million) Change in exports Reformate Naphtha Reformate Naphtha Incremental export revenues 0.0 -6.2 -6.2 60.1 47.9 12.2 43.2 -50.7 -7.5 (US$ million) Total impact (USS million) 6.2 12.2 19.6 Incremental freight cost (US$ 0.2 -5.1 -2.3 million) Total lead savings (US$ -5.0 -13.0 -18.0 million) Charge for capital investment Naphtha and MTBE 0.4 0.4 0.4 storage at NRL and PRL (US$ million) Revamp reformers at 1.8 NRL,PRL and ARL to produce 95 RON (US$ million) Net impact (US$ million) 1.8 -5.5 1.5 Cost per liter (US cents) 0.1 -0.3 0.1 Note: 1998 U.S. dollars and cents. Improving Fuel Quality 57 3.54 Although Pakistan will be able to eliminate lead completely by 2005, some imported MTBE will still be required at NRL, PRL and PARCO. This will also depend on the Govermment of Pakistan's decision on whether to impose benzene and aromatics specifications comparable to those in other Asian countries. Incorporating isomerization will assist in reducing the amount of naphtha and reformate exports at relatively less competitive prices; it will also result in reduced MTBE imports. An estimate of the capital investment and operating costs for installing isomerization units at NRL, PRL and PARCO is outlined in Table A1.6. The total capital cost, including naphtha hydrotreaters and naphtha splitter modifications, is US$56 million. The incremental cost of installing isomerization units in 2005 is shown in Table 3.21. The table shows that there is little incentive to install isomerization purely on economic grounds. The main reason is that the capacities of the units are very small and therefore lack suitable economies of scale. However, installing isomerization units would achieve a dilution of the overall benzene and aromatics in the gasoline blend, although at a significant cost. Table 3.21: Costs of Isomerization in 2005 Parameter No Isomerization Isomerization Change Savings in MTBE imports cost (US$ million) -21 Change in exports Reformate Naphtha Reformate Naphtha Exports revenue reduction (USS rnillion) -26 -71 -19 -63 14 Total impact (US$ million) - - - - -6.8 Reduction in freight cost (US$ million) - 1.6 - 0.3 -1.3 Charge for capital investment Naphtha and MTBE storage at NRL and PRL - 0.4 - 0.4 0.0 (US$ rnillion/year) Revamp reformers at NRL,PRL, and ARL to - 1.8 - 1.8 0.0 produce 95 RON (US$ million/year) Isomerization - - - 11.1 11.1 Incremental capital charge (US$ million/year) - - - - 11.1 Isomerization operating cost (US$ million/year) - - - - 2.6 Net impact (US$ million) - - - - 5.7 Cost per liter (US cents) - - - - 0.3 Note: 1998 U.S. dollars and cents. - not applicable. Incremental Cost of Diesel Sulfur Reduction 3.55 Key observations concerning the financial impact of the options developed for achieving the desired reduction in sulfur to 0.5 percent from around 1 percent are as follows: 58 Pakistan Clean Fuels The volume of imports is forecast to remain at almost the same level between 2000 and 2003, because production from PARCO is estimated to be almost equal to the growth in demand over this period. * In order to maintain the quality of diesel at 0.5 percent sulfur, more than twice the volume of 0.25-percent-sulfur diesel as compared to 2000 will need to be imported in 2003 and 2005. This reflects the high level of sulfur in diesel from PARCO. * Blending facilities and interconnecting piping will be required to ensure a consistent supply of the desired-quality diesel to all of Pakistan. This is because the domestic refineries will continue to produce relatively high- sulfur diesel, whereas imports will be of much better quality. 3.56 As shown in Annex 1 in Table A1.8, a total investment of approximately US$10 million will be required to construct the infrastructure for blending the high- sulfur, domestically produced diesel with lower-sulfur imported diesel to achieve the desired uniform specification of 0.5 percent sulfur in Pakistan. In order to estimate the annualized costs for implementing the diesel quality initiatives, 20 percent of this investment has been included. The total incremental cost consists of the additional costs of importing better quality diesel and the charge on this investment. A summary is given in Table 3.22. Table 3.22: Cost of Reducing Sulfur in Diesel Fuel Year Parameter Cost 2000 Incremental imports cost (US$ mnillion) 14.7 Annualized capital (US$ million) 2.0 Total cost (US$ million) 16.7 Cost per liter (US cents) 0.3 2003 Incremental imports cost (US$ million) 20.0 Annualized capital (USS million) 2.0 Total cost (US$ million) 22.0 Cost per liter (US cents) 0.3 2005 Incremental imports cost (US$ million) 22.2 Annualized capital (US$ million) 2.0 Total cost (US$ million) 24.2 Cost per liter (US cents) 0.3 Note: 1998 U.S. dollars and cents. 3.57 As discussed earlier, any more-stringent specifications beyond 2005 would require investment in diesel hydrodesulfurization at the NRL, PRL, and PARCO refineries. An order-of-magnitude estimate of the total capital cost is US$205 million, as shown in Table Al.10 in Annex 1, resulting in desulfurizing 3 million tons per year of Improving Fuel Quality 59 diesel down to 0.05 percent sulfur. The achievement of even lower sulfur levels, combined with de-aromatization, would require more severe hydrotreatment and involve up to 30 percent more capital investment. In the case of NRL and PRL, which depend on the small semi-regenerative reformers for hydrogen production, hydrogen availability would be tight. A hydrogen shortage in turn could result in the possible need for additional investment for hydrogen production. This would also be true for PARCO, as the hydrogen production is balanced between the production from the reformer and consumption by Dieselmax unit. 3.58 A comparison of discounted cash-flow analysis between a 0.5-percent- sulfur diesel pool without investment in hydrodesulfurization and a 0.25-percent-sulfur pool with investment in hydrodesulfurization shows that, assuming a 10 percent discount rate, the total discounted cost is around US$226 million over the period 2003-2015. The economic incentive of only US$2.5 per ton (0.5 versus 0.25 percent sulfur) is not sufficient to impact the overall situation. Therefore, any investment in hydrodesulfurization would have to be based on environmental considerations rather on economic ones. Economics of Fuel-Oil Sulfur Reduction 3.59 The cost of lowering the sulfur content in fuel oil to 2 percent averaged over Pakistan is substantial. The results are given in Table 3.23. A comparison of installing an FGD unit at a power plant and using lower-sulfur fuel oil is given in Table A1.12 in Annex 1. The cost of installing an FGD unit is also substantial, and may not represent a more attractive solution than importing lower-sulfur fuel oil. More analysis is needed to evaluate the two options on a plant-by-plant basis. Table 3.23: Cost of Reducing Sulfur in Fuel Oil Year Parameter 3.5% Sulfur 1% Sulfur Total Cost (ktpa) (ktpa) (ktpa) (1998 US$ million) 2000 Base-case imports 7,504 0 7,504 457 Proposed-case imports 2,404 5,100 7,504 561 Cost differential - - - -104 2003 Base-case imnports 6,106 0 6,106 451 Proposed-case imports 960 5,146 6,106 556 Cost differential - - - -105 2005 Base-case imports 6,360 0 6,360 430 Proposed-case imnports 800 5,560 6,360 544 Cost differential - - - -114 Note: - not applicable. 4 Building a National Consensus 4.1 Two workshops were held in Islamabad at the end of March 2001 to discuss the findings of the study described in Chapter 3 and reach a consensus on what concrete steps to take in the coming months. The target audience for the first workshop, hosted by the Ministry of Environment, Local Govenment, and Rural Development, was stakeholders in the environment sector. Attending the workshop were representatives from the Pakistan Environment Protection Agency (PEPA), other government agencies, NGOs, universities, research institutions, and one refinery. The second workshop was organized by MPNR, aiming specifically to go over the technical details of the study findings with the refiners and oil marketing companies. The workshop programs are given in Table 4.1. Table 4.1: Workshop Programs Topic Speaker 26 March 2001: Ministry of Environment, Local Government, and Rural Development Opening remarks Mr. Sheikh Ghazanfar Hussain, Additional Secretary, Ministry of Environment, Local Government, and Rural Development Urban Air Quality Management in Pakistan Mr. Asif S. Khan, Director General, PEPA Role of Energy Conservation in Clean Air Mr. Arif Allauddin, Managing Director, ENERCON Pakistan Clean Fuels Masami Kojima, World Bank Mitigating Emissions from Two-Stroke- Masami Kojima, World Bank Engine Vehicles Concluding Remarks Mr. Arif Allauddin, Managing Director, ENERCON 29 March 2001, Ministry of Petroleum and Natural Resources Introduction Mr. G.A. Sabri, Director General (Oil), MPNR Clean Fuels Study Mr. Phil Hunt, Chem Systems Discussion and Responses Secretary Abdullah Yusuf, and representatives from refineries and oil marketing companies 61 62 Pakistan Clean Fuels 4.2 At the first workshop, the findings of the study were summarized as follows: * The cost of eliminating lead in gasoline is surprisingly low because PARCO, a new refinery capable of producing high-octane blending components, has recently come on stream. The incremental cost to consumers would be on the order of 0.5 to 1 percent of the retail price, requiring little capital expenditure. * In the process of eliminating lead, it would be important to introduce limits on benzene and aromatics. Five percent benzene and 40-45 percent total aromatics would be considered minimally acceptable by international standards, and Pakistan is in a position to impose these limits without additional capital expenditures. * The incremental cost of reducing sulfur in diesel from 1 percent to the 0.5 percent now considered minimally acceptable by international standards is similarly low-about 1 percent of the retail price and requiring capital expenditures of about US$ 10 million.'3 * The cost to Pakistan of reducing sulfur in fuel oil, in contrast, would be substantial: more than US$100 million per annum as a result of importing lower-sulfur fuel oil. This argues all the more for accelerating the switch from fuel oil to natural gas. High levels of lead in blood and even in milk were highlighted at this workshop. The need for the government to demonstrate its commitment to cleaner fuels by acting upon the Clean Fuels Program was reiterated. 4.3 At the workshop organized by MPNR, Chem Systems gave a presentation that focused on two points: * The incremental cost of eliminating lead in gasoline and reducing sulfur in diesel to 0.5 percent is surprisingly low, for the former because PARCO has already made much of the investment needed to eliminate lead, and for the latter because Pakistan relies heavily on imports. * It is important to introduce limits on benzene and total aromatics, and Pakistan can immediately initiate limits of 5 percent and 40-45 percent, respectively, without incurring any capital expenditures in the future at the time of complete lead elimination. This is important for preventing benzene from exceeding 5 percent if and when octane grades higher than the current 87 RON are introduced on a wide scale. 4.4 MPNR, the Ministry of Environment, and industry representatives expressed strong interest in accelerating the timetable for eliminating lead in gasoline. In 13 The expenditures would be for storage tanks and other infrastructure requirements for blending domestically produced diesel with imported lower-sulfur (0.25 percent) diesel. Building National Consensus 63 particular, the relatively low incremental cost of doing so was seen as a unique opportunity for the Government of Pakistan to upgrade the quality of petroleum products. 4.5 Mr. Yusuf, Secretary of the MPNR, asked if, given this situation, Pakistan could accelerate lead phaseout. Chem Systems responded that, given the relatively low lead-time and modest investment required, Pakistan should in fact be able to eliminate lead in gasoline in one to two years. Nearly all representatives from refineries and marketing companies responded that they were in a position to switch entirely to unleaded gasoline. The workshop concluded with the following action items: * The timetable for lead phaseout is to be accelerated, with the final date for lead elimination brought forward from the original date of 2005 to 2002 or 2003. One option is to supply unleaded gasoline to all areas except those served by ARL as soon as possible. * The government will issue revised gasoline specifications, limiting benzene to 5 percent and aromatics to 40-45 percent (precise level to be finalized). * Because of the contract with Kuwait Petroleum Corporation, which informed Pakistan that they cannot supply 0.5-percent-sulfur diesel until June 2002 (because of a fire at one of their refineries), Pakistan will switch to 0.5-percent-sulfur diesel in June 2002. The logistics of importing 0.25- percent-sulfur diesel and blending with domestically produced diesel would need to be finalized. * Because the incremental cost of lowering sulfur in fuel oil is considerable, the government should accelerate switching from fuel oil to natural gas, and consider supplying imported lower-sulfur fuel oil to fuel oil users located near densely populated areas. 5 Fuel Tax Policy 5.1 The consumption of diesel fuel in Pakistan has historically exceeded that of gasoline several-fold, as illustrated in Figure 2.3 (see Chapter 2). The bulk of diesel is used in the transport sector. In fiscal 1999-2000, for example, vehicles are reported to have consumed 94.5 percent of HSD (HDIP and MPNR 2000), and the consumption of HSD in the transport sector exceeded that of gasoline by more than a factor of five. Many light-duty vehicles that might otherwise run on gasoline are powered by diesel to take advantage of the considerably lower retail price of diesel. If a large price difference between HSD and gasoline continues to be maintained, an increasing proportion of light- duty vehicles may eventually switch to diesel from gasoline. 5.2 To reverse this trend, two mechanisms for reducing the inter-fuel price difference between gasoline and HSD may be considered: * Decrease the price of gasoline by a small amount, and increase the price of HSD by a large amount. * Decrease the price of gasoline by a large amount, and increase the price of HSD by a small amount. The magnitude of the price adjustments will be determined by the price levels that would make the owners of light-duty vehicles indifferent to the choice of fuel on economic grounds. This chapter summarizes the findings of the analysis. Fuel Consumption by Vehicle Category 5.3 Data on the number of vehicles are generated by provincial governments and is available in summary form in the annual Economic Survey. Estimates by vehicle type are presented in Table 5.1. The three types of light-duty vehicles that can run on either gasoline or diesel-delivery vans, taxis, and jeeps-recorded an annual growth rate of over 8 percent (as much as 13 percent in the case of delivery vans) during the last decade. 65 66 Pakistan Clean Fuels Table 5.1: Motor Vehicle Population in Pakistan ('000) Wagonl Year 2-wheel 3-wheel Cars Taxis Vans Jeeps minibus Buses Trucks Tractors Others Total 1989 818.4 40.2 395.7 28.4 52.9 28.2 64.2 40.8 78.4 242.5 49.8 1839.5 1990 896.2 41.3 427.7 30.9 57.6 30.8 69.3 43.3 82.7 258.2 51.5 1989.5 1991 980.0 42.8 433.7 33.7 94.6 35.1 45.5 46.0 85.5 276.7 57.1 2130.7 1992 1176.6 47.2 474.2 40.7 112.9 39.8 50.7 52.9 94.8 355.4 61.2 2506.4 1993 1300.8 51.1 503.3 45.3 122.0 42.6 55.3 57.8 102.9 379.3 83.0 2743.4 1994 1417.1 54.1 528.6 48.7 129.5 46.2 58.8 62.4 109.2 402.5 71.1 2928.2 1995 1497.4 59.4 550.6 52.5 136.3 48.9 62.2 66.1 115.2 427.2 75.3 3091.1 1996 1593.2 66.4 577.6 55.4 142.4 51.4 65.3 69.8 121.4 444.3 79.6 3266.8 1997 1710.7 75.5 606.3 58.7 148.9 54.1 68.4 74.4 128.4 466.2 84.2 3475.8 1998 1843.7 82.9 636.8 63.2 157.4 57.5 72.6 78.7 136.5 492.2 89.7 3711.2 1999 1987.1 91.1 668.9 68.1 166.6 61.2 77.2 85.3 144.9 519.7 96.1 3966.2 Annual growth rate, 1989-1999 (%0) 9.3 8.6 5.4 9.2 13.3 8.1 2.9 7.7 6.4 7.9 6.8 8.0 Sources: Economnic Adviser's Wing, Government of Pakistan; Economic Survey, Islarnabad. 5.4 Data on vehicle registration by fuel type are not available in Pakistan. To determine the split between gasoline- and HSD-powered vehicles, a survey of 45,000 vehicles at 20 refueling stations was conducted in mid-May 2000 in Karachi and Lahore. Three-quarters of jeeps were found to run on diesel, followed by taxis at 21 percent, passenger cars at 15 percent, and vans at 14 percent (see Table 5.2). Table 5.2: Results of Survey of 20 Refueling Stations in Karachi and Lahore Total Total Share of HSD Vehicle type HSD HOBC 87 RON 80 RON Gasoline Fuel (%) 2-wheel 0 121 9,234 12,234 21,589 21,58 0 9 3-wheel 0 0 169 5,030 5,199 5,199 0 Cars 1,430 408 7,043 436 7,887 9,317 15 Jeeps 805 2 185 91 278 1,083 74 Taxis 151 0 444 112 556 707 21 Passenger vans 0 3 1,097 721 1,821 1,821 0 Delivery vans 0 0 1,436 2,194 3,630 3,630 0 Mini-trucks 901 0 0 0 0 901 100 Subtotal vans 901 3 2,533 2,915 5,451 6,352 14 Mini-buses / coaches 509 0 0 0 0 509 100 Passenger buses 154 0 0 0 0 154 100 Note: HOBC high-octane blending components, or high-octane gasoline. 5.5 In addition, a survey of 100 owners of goods and commercial transport vehicles in Karachi, Lahore, and Peshawar, and 50 owners of passenger vehicles in Fuel Tax Policy 67 Karachi and Lahore was conducted to collect data on costs and reasons for fuel switching (see Table 5.3). The data collected were used to cross-check the data provided by vehicle manufacturers and dealers. The data shown should be interpreted with caution because of the small sample size and varying engine capacity. The fuel economy of three-wheelers appears to be very low, and may reflect incorrect recollections by the vehicle owners interviewed. In the car and taxi categories, diesel yields higher fuel economy than gasoline, and this trend is consistent with the general observation that diesel is a more efficient automotive fuel. In the van category, the reverse trend seen is a function primarily of vehicle weight and engine size, where diesel vehicles have much larger capacities. When the fuel economy and daily vehicle kilometers traveled (VKT) data were used in conjunction with the vehicle population data given in Table 5.1 to compute overall consumption of HSD in the transport sector, the total amounts computed for fiscal 1997-1998 and 1998-1999 came within 3 percent of the actual consumption figures. Table 5.3: Survey of 150 Vehicle Owners in Karachi, Lahore, and Peshawar Vehicle Type, by Fuel and Number of Vehicle Usage Average Conversion Conversion Status Vehicles (km/day) FuelEconomy Cost (rupees) Cars 18 Gasoline 6 29 10 km/i HSD 1 49 13 km/i - HSD, converted 3 25 15 kmn/l 39,333 CNG, converted 5 52 14 km/m3 19,700 LPG, converted 3 47 15 krn/kg 10,400 Taxis 12 Gasoline 3 92 11 knn/I HSD 1 164 19 kn/1 - HSD, converted 2 77 12 knm/I 34,000 CNG, converted 2 173 18 kmim3 26,500 LPG, converted 4 160 16 kn/kg 4,667 Three-wheelers, gasoline 4 136 13 kmlI Passenger vans 16 Mini-buses, HSD 13 170 6 kmn/I Suzuki, gasoline 3 257 10 kin/I Delivery vans 60 Suzulci, gasoline 47 57 10 km/i Mazda, HSD 13 III 9 kn/I Mini trucks, HSD 40 91 6 krn/I Note: - not applicable. 5.6 Estimates of annual VKT by fuel type for each vehicle category and the total amount of fuel consumed in inter-city and intra-city transport were made on the basis of data from two sources: (a) the aforementioned survey of 150 vehicle owners, and (b) interviews with officials of various transport owners' associations and provincial 68 Pakistan Clean Fuels excise and taxation departments, as well as with agriculturists (for data on use of tractors). On the basis of the responses, 100 percent of two- and three-wheeler usage was assumed to occur for intra-city transport.14 All gasoline used by cars and jeeps was assumed to be consumed in intra-city transport, in contrast to 60 percent (based on annual VKT) of diesel consumed by cars and jeeps. Most trips were assumed to occur in urban areas for taxis (83 percent for gasoline and 94 percent for diesel) and for vans (97 percent for gasoline and 54 percent for diesel). As for the remaining vehicle categories, they run essentially exclusively on diesel. Sixty percent of annual VKT for wagon/minibus/coach and bus categories, 10 percent for trucks, 5 percent for tractors, and 90 percent for the "other" category was assumed to be for intra-city transport. The total amounts of fuel consumed by vehicle type based on these assumptions are shown in Table 5.4. Table 5.4: Intra- and Inter-City Fuel Consumption ('000 metric tons) G a s o I i n e High-speed Diesel 1997-98 1998-99 1997-98 1998-99 Vehicle category Intra Inter Intra Inter Intra Inter Intra Inter Two-wheelers 272 0 293 0 0 0 0 0 Three-wheelers 213 0 234 0 0 0 0 0 Cars 385 0 404 0 29 19 30 20 Jeeps I 0 o 11 0 13 8 13 9 Taxis 88 18 95 20 20 1 22 1 Vans 184 6 194 6 37 31 39 33 Wagon/minibus/coaches 0 0 0 0 132 88 141 94 Buses 0 0 0 0 629 419 582 455 Trucks 0 0 0 0 169 1,523 180 1,616 Tractors 0 0 0 0 68 1,300 72 1,372 Others 0 0 0 0 1,001 11I 1,072 119 Total 1,153 24 1,233 26 2,098 3,501 2,250 3,719 Notes: "Intra-city" in this table includes all modes of transport except that between cities or villages; it specifically includes transport by two- and three-wheelers within villages. 5.7 As Table 5.4 shows, nearly all gasoline was used in intra-city transport (98 percent), in contrast to about two-fifths of diesel (37 and 38 percent for fiscal 1997-98 and 1998-99, respectively). If light-duty diesel vehicles used in intra-city transport were hypothetically converted to gasoline, this would represent diesel savings of approximately 250,000 metric tons. Even more important is preventing the future conversion of gasoline 14 Although this categorizes two- and three-wheelers used in rural areas as "intra-city transport," this simplification would not have much impact on this study because (a) their usage in rural areas is estimated to be relatively small, (b) two-wheelers are not candidates for conversion to diesel, and (c) the conversion of three-wheelers to diesel in Pakistan has not occurred yet and is not likely to occur on a wide scale in the future. Fuel Tax Policy 69 vehicles driven in urban centers (all except gasoline used by two- and three-wheelers)- amounting to 700,000 metric tons-to diesel. Incentives for Fuel Switching 5.8 Vehicle owners will switch from gasoline to diesel if the total cost of owning and operating a gasoline-powered vehicle exceeds that of diesel-powered vehicle by a large margin. At present, the incentive stems from the large price differential between gasoline and diesel. As Table 2.1 shows, the price difference was Rs 8 per liter or lower until July 1998 when it widened markedly; it has remained above Rs 14 per liter since December 1999. Because diesel vehicles are more expensive to purchase and operate, diesel vehicles are particularly attractive for high-usage vehicle owners who can take full advantage of the gasoline-diesel price difference. 5.9 There are different ways of increasing the cost of owning and operating a light-duty diesel vehicle to match that of its gasoline equivalent. One is to differentiate vehicle tax by fuel type, that is, to tax diesel-powered light-duty vehicles much more. Discussions held with provincial tax officials indicated, however, that such a tax scheme is unlikely to be feasible given the limitations of Pakistan's tax collection mechanism. Another approach is to narrow the price difference between gasoline and diesel so that the diesel vehicle owner cannot recover the higher purchase price and operating costs of diesel vehicles. This study has focused on this latter approach. 5.10 Two cases of fuel switching are considered in this study. In the first case, hereafter referred to as conversion, the owner remachines an existing gasoline vehicle so it can run on diesel. In the second case, referred to as replacement, at the time of vehicle retirement, the owner of a gasoline engine vehicle about to be scrapped or sold buys a diesel engine vehicle in its place. Taking passenger cars as an example, first-order cost estimates illustrate the magnitude of the incentive for switching. Consider two original- equipment-manufacturer (OEM)15 Toyota Corollas: the Corolla XE with its 1.3-liter gasoline engine, and the Corolla Diesel 2.OD with its 2.0-liter engine, selling for Rs 730,000 and Rs 889,000, respectively. The opportunity cost of this capital, whatever the payment method used, is equivalent to taking out a loan at the prevailing interest rate of 20 percent for the life of the vehicle, which in this case is assumed to be 20 years. This amounts to an annual repayment of capital and interest equal to 20.5 percent of the original capital amount, in the place of which 20 percent will be used for simplicity's sake. Detailed information collected from Toyota dealers indicates that maintenance costs for the gasoline and diesel vehicles respectively are Rs 1,490 and Rs 2,034 per 1,000 km. Obtaining parts from independent auto parts dealers may lower these costs by an additional Rs 500 or so, but what will determine the owner's decision to switch is the cost difference. For the remainder of this section, a maintenance cost difference of Rs 500 per 1000 km is assumed. Based on these simplifying assumptions, annual VKT at which the new owner of the vehicle will become indifferent to the choice of fuel is 18,600 km at the 15 That is, the vehicles have not been converted to use a different type of fuel. 70 Palistan Clean Fuels retail fuel prices in mid-2000, and 21,000 km at the retail fuel prices after the most recent price adjustment of March 2001. These correspond approximately to daily VKT of 60 to 70 kin, which many commercial operators (for example, taxi drivers) exceed. 5.11 Even more attractive to many vehicle owners is converting an existing gasoline vehicle. At an annualized conversion cost of Rs 10,000, converting to diesel becomes attractive above annual VKT of 6,000 to 7,000 km. The objective of a fuel tax policy that narrows the price differential between gasoline and diesel would be to increase the threshold annual VKT above which it becomes attractive to switch to diesel. If the threshold levels are raised considerably as a result, only the owners of extensively driven vehicles would consider conversion to diesel. 5.12 The approach used in this study is to increase the threshold level for conversion three-fold and determine the fuel price adjustments needed. Two scenarios were considered: * Decrease the retail price of gasoline by 10 percent, and increase the price of HSD by a large amount. Increase the price of HSD by 10 percent, and reduce the price of gasoline by a large amount. The base prices used were those for 87-RON gasoline and HSD between March and September 2000. The calculations assumed an annualized conversion cost of Rs 10,000 and annualized capital cost (for the purchase of new vehicles) of Rs 150,000 and Rs 180,000 for gasoline and diesel, respectively. The final set of numbers selected for the remainder of this study is as follows: * Scenario 1: A 10 percent fall in the price of gasoline and a 67 percent increase in the price of diesel. Compared to the base prices of Rs 29.50 and Rs 12.80 per liter for gasoline and diesel, respectively, the corresponding new prices are Rs 26.55 and Rs 21.38 per liter, narrowing the price difference on a per-liter basis to within 20 percent. * Scenario 2: A 29 percent fall in the price of gasoline and a 10 percent increase in the price of diesel. The resulting prices are Rs 20.95 and Rs 14.08 per liter for gasoline and diesel, respectively, narrowing the price difference to within one-third. These numbers correspond to a threshold annual VKM of (a) about 19,000 km in the case of converting an existing gasoline vehicle to diesel and (b) 55,000-60,000 km in the case of replacing a gasoline vehicle with a diesel one at the time of vehicle retirement. (Because of the large number of assumptions made, it should be borne in mind that these calculations are for illustrative purposes only and give only first-order estimates.) The impact of varying assumptions on the price changes required is shown in Table 5.5. Fuel Tax Policy 71 Table 5.5: Price Adjustments under Different Scenarios Corresponding Fuel Economy Retailprice Annual VKT Price chanze required (%) Fuel Scenario (km/l) (Rslliter) (km) Conversion Replacement Gasoline 1 9 29.50 19,000 -10 -10 Diesel 1 11 12.80 19,000 65 -25 Gasoline 2 9 29.50 19,000 -30 2 Diesel 2 11 12.80 19,000 10 10 Gasoline 1 9 30.00 19,000 -10 -10 Diesel 1 11 15.40 19,000 41 -34 Gasoline 2 9 30.00 19,000 -23 9 Diesel 2 11 15.40 19,000 10 10 Gasoline 1 10 29.50 19,000 -10 -10 Diesel 1 12 12.80 19,000 53 -46 Gasoline 2 10 29.50 19,000 -25 10 Diesel 2 12 12.80 19,000 10 10 Gasoline 1 9 29.50 25,000 -10 -10 Diesel 1 11 12.80 25,000 76 7 Gasoline 2 9 29.50 25,000 -34 -9 Diesel 2 11 12.80 25,000 10 10 Impact on Prices and Household Expenditures 5.13 The study examined the impact of changes in fuel prices outlined in the above two scenarios on household expenditures by means of input-output analysis and using household expenditure survey results. The input-output table used is the one developed by the Federal Bureau of Statistics (FBS) in Pakistan in collaboration with the Institute of Social Studies in the Netherlands. The economy is classified into 86 sectors and the coefficients relate to fiscal 1989-90. The most recent Household Integrated Economic Survey (HIES) of the FBS for fiscal 1996-97 provided data on household expenditures. The calculations were carried out in terms of percentage changes, and relative prices were not adjusted between fiscal 1989-90 (input-output table), fiscal 1996-97 (HIES), and March to September 2000 (base prices for gasoline and diesel), on account of the approximate nature of the calculations. 5.14 The impact of changing fuel prices on changes in prices of goods and services is estimated by inverting the matrix I-A T, where I is the identity matrix and AT is the transpose of the input-output matrix, and multiplying the resulting matrix by a column vector f with zero entries for all sectors except the petroleum refining sector. Because the input-output table has only one coefficient for the petroleum sector, the entry for this 72 Pakistan Clean Fuels sector corresponds to the weighted price change in fuel prices. The column vector AP, which indicates the resulting changes in sectoral price levels, is given by Ap (I-AT)-' f. 5.15 The results of these calculations are given in Table A2.1 in Annex 2. In scenario 1, there is a marked increase in the average price of refined products: 33 percent. In scenario 2, general price increases are small, even in the petroleum sector where the average price increases by less than 2 percent. It should be noted that the accuracy of the results is limited by the fact that the input-output coefficients are a decade old and significant changes may have occurred in the coefficients in the intervening years. Further, fuel price changes are assumed to have no impact on the input-output coefficients, wages, and other components of value added. 5.16 Increasing the price of diesel will increase input prices for major production sectors. The tradable sectors will therefore face increased foreign competition as a result of the higher input costs. Pakistan's major exports include rice, cotton, fisheries, cotton yarn, cotton cloth, manufactured textile goods, knitwear, garments, carpets, leather and leather products, surgical instruments, and sports goods. The major import substitution sectors include wheat, crude oil and natural gas, vegetable oil (facing competition from imported palm oil and soya bean oil), sugar, pharmaceuticals, fertilizers and pesticides, chemicals, metal products, machinery, and equipment. Table A2.1 shows that the impact of scenario 1 ranges from a price increase of more than 3 percent for fisheries to about 1 percent for cotton in the production sectors, and from more than 3.5 percent for machinery to about 1 percent for sugar in import substitution sectors. In contrast, the impact of scenario 2 is negligibly small. These results suggest that, whereas there may be little need for corrective policy action in scenario 2, preserving the competitiveness of the domestic industry in scenario 1 may require a small devaluation of the national currency. 5.17 Household consumption of the goods in the sectors represented in the input-output table was calculated for income quartiles in urban and rural areas. The estimates of consumption by sector are based on a primary data set obtained from the FBS. The average annual expenditures by sector are given in Table A2.2 and Table A2.3, respectively, for urban and rural households. The estimates of private transport-related expenditures are made separately because the input-output table contains only expenditures on public transport. The relative shares of gasoline and HSD in the private transport-related expenditures are taken from the results of the survey of vehicles carried out at refueling stations undertaken in this study. The results are shown in Table 5.6. 5.18 To estimate the impact of price increases on household expenditures, quantities of goods consumed are assumed to be unaffected by the price changes as a first approximation. For each scenario, the impact on household expenditures minus savings in private transport-related expenditures, arising from the fall in the price of gasoline, is computed. The impact of fuel price changes on household expenditures in the two scenarios is shown in Table 5.7 and Table 5.8. Fuel Tax Policy 73 Table 5.6: Annual Household Private Transport Expenditures, by Income Quartile (rupees) Item Location 15' Quartile 2nd Quartile 3td Quartile 4th Quartile All Gasoline/HSD purchase Urban 6 100 589 4,560 1,270 Lubricants and oils Urban 4 18 97 626 180 Private transport expenditure Urban 10 118 687 5,187 1,451 Gasoline/HSD purchase Rural 3 20 75 593 172 Lubricants and oils Rural 1 5 18 126 37 Private transport expenditure Rural 4 25 94 719 210 Gasoline/HSD purchase All 4 32 188 1,783 500 Lubricants and oils All I 10 45 267 80 Private transport expenditure All 4 42 233 2,050 580 Notes: Urban first quartile up to Rs 39,600 per annum; second quartile between Rs 39,600 and 57,600; third quartile between Rs 57,600 and 90,000; fourth quartile above Rs 90,000. Rural first quartile up to Rs 30,000 per annum; second quartile between Rs 30,000 and 44,436; third quartile between Rs 44,436 and 67,800; fourth quartile above Rs 67,800. All (countrywide) first quartile up to Rs 32,400 per annum; second quartile between Rs 32,400 and 48,000; third quartile between Rs 48,000 and 73,704; fourth quartile above Rs 73,704. Table 5.7: Changes in Annual Household Expenditure in Scenario I Rise in household Fall in private Average Household expenditure on goods transport Net impact on income (Rs per Impact as% category and services (Rs) expenditure (Rs) expenditure (Rs) annum) of income Rural 812 (9) 803 62,641 1.3 1st Quartile 415 0 415 21,855 1.9 2nd Quartile 610 (1) 609 36,712 1.7 3rd Quartile 804 (4) 800 53,032 1.5 4b Quartile 1,436 (30) 1,406 140,274 1.0 Urban 1,171 (64) 1,107 75,339 1.5 1st Quartile 567 0 567 29,960 1.9 2nd Quartile 864 (5) 859 47,459 1.8 3rd Quartile 1,206 (29) 1,177 71,175 1.7 4b Quartile 2,092 (228) 1,864 156,746 1.2 All groups 919 (25) 894 66,435 1.4 Notes: Urban first quartile up to Rs 39,600 per annun,; second quartile between Rs 39,600 and 57,600; third quartile between Rs 57,600 and 90,000; fourti quartile above Rs 90,000. Rural first quartile up to Rs 30,000 per annun,; second quartile between Rs 30,000 and 44,436; third quartile between Rs 44,436 and 67,800; fourth quartile above Rs 67,800. 74 Pakistan Clean Fuels Table 5.8 Changes in Annual Household Expenditure in Scenario 2 Rise in household Fall in private Average Household expenditure on goods transport Net impact on income (Rs per Impact as% category and services (Rs) expenditure (Rs) expenditure (Rs) annum) ofincome Rural 47 (34) 13 62,641 0 lstQuartile 23 (1) 22 21,855 0.10 2nd Quartile 34 (4) 30 36,712 0.08 3rd Quartile 45 (15) 30 53,032 0.06 4h Quartile 89 (119) (30) 140,274 -0.02 Urban 87 (254) (167) 75,339 -0.22 lstQuartile 31 (1) 30 29,960 0.10 2nd Quartile 49 (20) 29 47,459 0.06 3 Quartile 76 (118) (58) 71,175 -0.08 4h Quartile 196 (912) (716) 156,746 -0.46 All groups 59 (100) (41) 66,435 -0.06 Notes: Urban first quartle up to Rs 39,600 per annum; second quartile between Rs 39,600 and 57,600; third quartile between Rs 57,600 and 90,000; fourth quartile above Rs 90,000. Rural first quartile up to Rs 30,000 per annum; second quartile between Rs 30,000 and 44,436; third quartile between Rs 44,436 and 67,800; fourth quartile above Rs 67,800. 5.19 Scenario 1 is seen to have a significant impact on the cost of living of households, amounting to an increase of 1.4 percent of income on average. The impact is higher for urban households (1.5 percent) than for rural (1.3 percent). The impact is regressive, with the increase in household expenditure falling from 1.9 percent for the bottom income quartile to 1 percent for the top income quartile in rural areas, and from 1.9 percent to 1.2 percent for the corresponding income groups in urban areas. Therefore, if scenario 1 is adopted as a policy, it may be necessary to try to mitigate the impact on lower income groups by means of safety-net measures. 5.20 In contrast, the impact on the cost of living is generally negligible in scenario 2, with the increase expressed in percentage of income remaining less than 0.1 percent. The top income quartile in rural areas, and the top two income quartiles in urban areas, actually benefit as a result of a large fall in the price of gasoline. Balance of Payments and Tax Revenue 5.21 To estimate the impact of fuel price changes on macro-economic parameters, the study analyzed the impact of price changes on aggregate quantities of fuels consumed. Elasticities of demand for gasoline and diesel were estimated using translog equations and are summarized in Table 5.9. Both fuels have an income elasticity in the neighborhood of 1.3. Own price elasticities are also comparable at between -0.2 and -0.3. Fuel Tax Policy 75 Table 5.9: Demand Elasticities for Gasoline and Diesel Parameter Gasoline HSD Own price -0.22 -0.26 Income (gross national product) 1.3 1.4 5.22 On the basis of the translog demand equations, the study estimated aggregate fuel demands in response to fuel price changes for the two scenarios. As Table 5.10 shows, consumption of diesel falls markedly in scenario 1. Because Pakistan is an importer of diesel, a fall in the consumption of diesel would yield import-bill savings. Taking the refining sector after PARCO becomes fully operational, Pakistan becomes an exporter of gasoline blending components, so that a rise in consumption of gasoline would mean less exports. Making a simplifying assumption that the difference in gasoline consumption in metric tons would all have been exported in the base case, and taking average free-on-board (FOB) prices of gasoline and HSD in fiscal 1999-2000, net import bill savings were also computed. In scenario 2, the import bill increases because the fall in the consumption of diesel is small while the increase in the consumption of gasoline is relatively large. Table 5.10: Consumption of Gasoline and Diesel in Two Scenarios and Impact on Balance of Payments and Tax Revenue in Fiscal 1999-2000 Fuel Scenario I Scenario 2 Gasoline consumption relative to base (%) +16 +10 HSD consumption relative to base (% change) -18 -1 Net import bill savings (US$ million) 175 -14 Change in total tax revenue (Rs rnillion) 45,426 -3,202 Change in customs/excise duty -100 209 Change in sales tax 5,654 -116 Change in development surcharge 39,873 -3,295 5.23 The petroleum sector is a major source of revenue in the form of excise duty, customs duty, general sales tax (GST), and the petroleum development surcharge. Therefore, changes in revenue from petroleum products can have significant implications for the government budget. The tax rates used in this study were those that were in place in the year 2000, consisting of a customs duty on imports or an excise duty on locally refined products which was levied at a flat rate of Rs 0.88 per liter of gasoline and Rs 0.25 per liter of diesel; a GST of 15 percent of the retail price, and a development surcharge consisting of a fixed levy and a variable surcharge. The impact on the government's tax revenue is shown in Table 5.10. Scenario 1 leads to an increase in tax revenue of over Rs 45 billion. There is some loss of revenue, about Rs 3 billion, in scenario 2. 76 Pakistan Clean Fuels Impact on the Macroeconomy 5.24 Using the above findings it is possible to estimate macroeconomic implications of changes in fuel prices. For this purpose, the Social Policy Development Centre's (SPDC). Integrated Social Policy and Macroeconomic (ISPM) model was used. The model has two principal components, macroeconomy with 165 equations and social development with 100 equations. The 64 exogenous variables driving the model consist of 22 blocks, which can be divided into two groups as follows: * Macroeconomy: production, index of economic infrastructure, input demand and unemployment, macroeconomic expenditure, international trade, monetary and price blocks, federal revenue, federal expenditure, federal deficit, provincial revenue, provincial expenditure, provincial and total budget deficit, local revenue, local expenditure, and index of fiscal efforts * Social development: human capital index, public health index, poverty, unemployment of educated workers, gender inequality, and malnutrition. 5.25 Most of the variables are policy-related and enable the model to analyze the consequences of key policy changes. Some of the policy-related variables are as follows: * Real effective exchange rate * Interest rates * Intergovernmental fiscal relations * New taxation * Level of petroleum development surcharges * Defense expenditure * Cost recovery in different services * Subsidies * Grants by federal and provincial governments. The outputs of this model for some of the key parameters are shown in Table 5.11. The impact of scenario 2 is small and, given the approximate nature of this analysis, can be considered to be not significantly different from zero for all intents and purposes. The impact of scenario 1, however, is significant, and is discussed in some depth below. 5.26 GDP growth. The short-run shock to the economy of a large rise in the price of diesel is likely to appear in the form of a contraction in the road transport sector equivalent to about 0.5 percent of the GDP. However, simulation using the macroeconomic model shows that the overall impact on the GDP is a reduction of about 0.26 percent. Part of the negative shock is mitigated by generation of significantly higher tax revenues, some of which are used to fmnance a higher level of public investment in the economy, which in turn contributes to growth. Fuel Tax Policy 77 Table 5.11: Changes in Macroeconomic Parameters for Fiscal 1999-2000 Macroeconomic variable Unit Scenario ! Scenario 2 GDP growth rate %, absolute -0.26 -0.02 Unemployment rate %, absolute 0.27 -0.03 Rate of inflation %, absolute 1.43 -0.08 Current account deficit % of GDP -0.47 0.07 Budget deficit % of GDP -1.03 0.1 Rate of depreciation of nominal exchange rate %, absolute 1.43 -0.03 Ratio of tax to gross domestic product %, absolute 1.29 -0.08 Incidence of poverty % of population 1 -0.05 5.27 Unemployment. The unemployment rate in the economy is higher by about 0.27 percent. This is partly the consequence of a lower GDP growth and partly because of some labor displacement in the road transport sector, a sector that is relatively labor- intensive. 5.28 Rate of inflation. The inflation rate is higher by 1.43 percent, exceeding somewhat the initial cost-push shock on the economy of about 1.35 percent. One may expect a priori that higher tax revenues would lead to a smaller fiscal deficit, less government borrowing from the banking system, less monetary expansion and, therefore, less inflation. However, part of this effect is neutralized by greater monetary expansion from the foreign sector resulting from the improvement in the current account deficit of the balance of payments. In addition, the model keeps the real effective exchange rate constant in all scenarios, resulting in greater depreciation of the nominal exchange rate in scenario I and adding to inflation. 5.29 Current account deficit. There is a positive shock on the economy because of the reduction in the import bills on petroleum products, equivalent to about 0.40 percent of the GDP. The actual improvement is larger, closer to 0.47 percent of the GDP. This is due to the additional depreciation of the nominal exchange rate, which stimulates exports. 5.30 Budget deficit. The budget deficit declines by about 1 percent of the GDP. The initial shock is an improvement in tax-revenues-to-GDP ratio of about 1.36 percent, but this is partly used for higher public expenditure on development and external debt servicing (due to higher depreciation of the currency), leading to a less-than- corresponding reduction in the fiscal deficit. 5.31 Incidence of poverty. The SPDC model has a poverty block from which it is possible to derive the implications of different scenarios on the level of poverty in Pakistan. The poverty line is defined as the minimum income level required to fulfill basic nutritional requirements (as set by calorie intake) and other basic needs. The poverty module in the SPDC model contains household-level GDP, per capita GDP, economy-wide human capital index, food price index, real remittances (cash plus in-kind 78 Pakistan Clean Fuels payments) in rupees per capital, and open (as opposed to hidden) unemployment. It appears that the impact of the shocks due to the change in fuel prices is to raise the incidence of poverty by 1 percent from its present level of about 34 percent. This is primarily due to the resulting lower per capita income, higher inflation, and higher unemployment rate. Social Policies to Mitigate Adverse Impact 5.32 Because the impact of changing fuel prices is regressive with an adverse impact on low income households, potentially increasing the number of poor families by as many as 1.5 million, it would be worthwhile formulating a social policy package to mitigate the impact on low-income groups. 5.33 A review of existing social safety nets in Pakistan is given in Annex 3. The principal form of cash transfers to the poor is through the publicly administered Zakat system (along with private charitable contributions). The Ushr is also designed to subsidize the poor in rural areas but it has floundered on grounds of inadequate collections. Cash transfers have acquired importance more recently by the launching of the cash-based Atta (wheat flour) Subsidy Scheme (ASS) through the Bait-ul-Maal. A traditional social safety net has been the generalized wheat subsidy, a primary source of expenditure by both federal and provincial governments. 5.34 In the area of social security, the federal government operates an insurance scheme for elderly retired employees through a semi-autonomous institution, the Employees Old Age Benefits Institution (EOBI). The coverage of workers under this scheme remains limited. There are proposals for more elaborate private pensions schemes with matching employer contributions and tax breaks by government. The House Building Finance Corporation (HBFC) continues to operate a subsidized housing-finance scheme. 5.35 Among commercial banks and other institutions such as the Small Business Finance Corporation and the Pakistan Poverty Alleviation Fund, plans are afoot to launch ambitious micro-credit schemes for self-employment. This is considered pivotal in the creation of opportunities, especially for educated youth at a time when employment prospects have significantly worsened. However, experience with such schemes (such as the Yellow Cab scheme16) has not been encouraging because of poor targeting and high default rates in repayment of loans. Perhaps the largest operational micro-credit scheme is a joint venture of the commercial bank, Habib Bank Limited (HBL), and a large nongovernmental organization, the National Rural Support Program (NRSP). HBL provides the bulk credit line and NRSP undertakes retail lending operations. 16 A scheme devised initially to provide self-employment and subsequently expanded to generate employment and improve public transport. The scheme provided credit for the purchase of taxis, initially, and subsequently mini-buses, passenger coaches, and-more latterly-mini-trucks, trucks, and trailers. Fuel Tax Policy 79 5.36 These social safety net programs have been evaluated on the basis of a number of standard criteria (Pasha and others 2000) and the results are shown in Table 5.12. Briefly stated, the criteria are as follows: Targeting efficiency is a measure of the extent to which a program's expenditure actually reaches poor people rather than relatively well-off segments of the population. * The extent of the program coverage is the proportion of poor households that receive benefits from the program. * The ease of access is the level of transactions costs imposed on eligible households in accessing to the program, as indicated by the simplicity and transparency of procedures, documentation requirements, and the level of discretion enjoyed by program officials in benefit disbursement. * The share of program expenditures dedicated to benefits is measured by how much of the program budget is spent on benefits rather than on administrative costs. * The adequacy of support is the extent to which the benefit reduces the poverty of a recipient. * The income equivalence of transfer is the extent to which the transfer is equivalent to a cash transfer and does not distort consumption choices of beneficiaries. * The absence of negative incentive effects considers the fact that anti- poverty interventions can give disincentives for seeking employment or increasing income. * The extent of self-financing/progressive financing concerns the fiscal sustainability of the program. * The degree of independence from private transfers addresses whether the transfer displaces corresponding transfers by households or private sector entities. * The degree of impact on development attempts to assess the program's direct or indirect contribution to development. 5.37 By and large, the existing social security instruments in operation have a limited targeting efficiency, inadequate coverage levels, a low-to-medium degree of ease of access, a high level of administration and related costs, and a low level of fiscal sustainability. Programs that perform somewhat better on these criteria are Zakat, EOBI social security, and the micro-credit scheme. Altogether, public expenditure on social safety nets is estimated at Rs 12 billion, or 0.4 percent of GDP. 80 Pakistan Clean Fuels Table 5.12: Evaluation of Social Safety Net Programs Bait-ul- Wheat HBL - Score summarv Criterion Zakat Maal Ushr Subsidy EOBI HBFC NRSP H M L Targeting Efficiency M M M L H L M 1 4 2 Program Coverage L L L H L L L 1 0 6 Ease of Access M M M H L L L 1 3 3 Share of program H H H L H L M 4 1 2 expenditure of benefits Adequacy of support M M L H M M M 1 5 1 Income equivalence of H H H M H M H 5 2 0 transfer Absence of negative M M L L L M H 1 3 3 incentive effects Extent of self-financing/ H L M L M H L 2 2 3 progressive financing Degree of independence L M M M M M H 1 5 1 from private transfers Degree of impacton L L L L L M H 1 1 5 development Summary of scores High 3 2 2 3 3 1 4 Medium 4 5 4 2 3 5 3 Low 3 3 4 5 4 4 3 Notes: H high, M medium, L low. 5.38 Because the existing social safety nets have neither the coverage nor the ability to target the poor to effectively mitigate the negative impact of fuel price changes in scenario 1, a very broad-based, comprehensive instrument that can reach all strata of the population may be needed. If the negative impact of the fuel price increase is to be fully neutralized, the magnitude of intervention will be sizeable, implying a significant increase in the existing outlays on social safety nets. There is a genuine danger that this may further lower the targeting efficiency of the intervention by increasing leakages. The overhead cost to government for providing the safety net should be low so that most of the gains in tax revenues in scenario 1 can be used to compensate the affected households. As such a key feature of the intervention should be that it reaches the affected population easily with little need for targeting and with minimal cost, preferably through changes in prices that impact on all households. 5.39 The need for social safety net intervention is much less of an issue in scenario 2. If anything, there is need for some taxation of the richest segment of urban households to offset the benefit of a significant fall in the price of gasoline price. One Fuel Tax Policy 81 possible targeted intervention is a 5 percent surcharge on personal income tax liabilities beyond a certain minimum level of taxable income (for example, Rs 100,000 per annum). 5.40 Given the above considerations, it is proposed that for scenario 1, instead of direct intervention through a social safety net, fiscal policy may prove more effective in compensating for most of the increase in the cost of living of households. The tax relief should benefit especially low-income households in both urban and rural areas. Over and above this, if part of the adverse impact remains uncompensated for, then specific direct intervention through social safety nets may be used. In that case the most appropriate instrument to reach the poorest of the poor is Zakat. 5.41 One fiscal policy instrument that is broad-based, comprehensive, and large enough to compensate for the sizable increase in the cost of living of households-and that at the same time provides a disproportionate amount of relief to lower income groups-is the GST. The GST is levied on a wide range of goods and services. The incidence of GST is regressive: the tax base declines sharply as income increases both in urban and rural areas. Although the standard GST rate is 15 percent, the effective rate is closer to 12 percent because of lack of proper application of the tax at all stages of value added, especially the retail stage, and because of tax evasion. As such, the effective burden of the tax falls from about 4.9 percent of the income of the lowest quartile to 3.6 percent in urban areas and from 5 percent to 2 percent in rural areas. As part of the alleviation strategy, it is suggested that the GST rate be reduced to 10 percent from the current 15 percent. As shown in Table 5.13, the rate reduction will lower the average tax burden by 1.36 percent of income in urban areas and 1 percent in rural areas. This intervention will effectively compensate for more than 92 percent of the negative impact stemming from fuel price changes in urban areas, and more than 77 percent in rural areas. 5.42 For compensation of the residual burden (after relief due to lower GST) additional instruments with stronger targeting features are required. In particular, to compensate for the residual burden on the bottom income quartile, which is in the range of 0.2 percent of income in both the urban and rural areas, it is suggested that the monthly Zakat allowance be enhanced by Rs 50. 5.43 The aforementioned social safety net package is unlikely to put a net burden on the exchequer because it can be financed by the extra revenues generated through the petroleum-development surcharge. The loss in GST revenue due to nominal rate reduction from 15 percent to 10 percent (estimated to be in the range of Rs 38 billion) and enhanced expenditure on Zakat and Ushr (about Rs 1 billion) can be financed out of the revenue gain of Rs 45 billion. As such, the proposed package is also fiscally sustainable. An increase in the price of HSD by as much as 67 percent is likely to be met by strong opposition, and the only way to pre-empt such opposition would be to announce an equally significant move for tax relief such as a one-third reduction in the standard GST rate. 82 Pakistan Clean Fuels Table 5.13: Impact of Changes in GST Item Location 15' Quartile 2nd Quartile 3rd Quartile 4th Quartile All Tax base for GST(Rs) Urban 12,200 18,115 25,839 47,557 25,670 Tax base as % of income Urban 40.7 38.2 36.3 30.3 34.1 Incidence of GST (%) Urban 4.88 4.58 4.36 3.64 4.09 Reduction in incidence of Urban -1.63 -1.53 -1.45 -1.21 -1.36 GST (%) Incidence of fuel price Urban 1.89 1.81 1.65 1.19 1.47 changes (%) Residual burden of fuel price Urban 0.26 0.28 0.2 -0.02 0.11 changes (%) Tax base for GST (Rs) Rural 9,038 12,873 16,507 23,701 15,450 Taxbaseas%ofincome Rural 41.4 35.1 31.1 16.9 24.7 Incidence of GST (%) Rural 4.97 4.21 3.73 2.03 2.96 Reduction in incidence of Rural -1.66 -1.4 -1.24 -0.68 -0.99 GST (%) Incidence of fuel price Rural 1.9 1.66 1.51 1 1.28 changes (%) Residual burden of fuel price Rural 0.24 0.26 0.27 0.32 0.29 changes (%) Note: The incidence of GST is computed at an effective rate of 12 percent. The reduction in the incidence of GST is based on a reduction of one-third. Conclusions and Recommendations 5.44 The study finds that gasoline can substitute for only about 11 percent of the intra-city consumption of HSD, which is equivalent to only about 4 percent of total HSD consumption. A continuing wide gap between gasoline and diesel prices, however, could encourage further fuel switching from gasoline and diesel, with as much as 700,000 metric tons of gasoline currently consumed in urban centers potentially converting to diesel. In order to encourage as many light-duty vehicle owners as possible to switch back to, or remain with, gasoline, two options were considered: scenario 1, which involves a large increase (67 percent) in HSD price and a small decrease (10 percent) in gasoline price; and scenario 2, which involves a small increase in diesel price (10 percent) and a large decrease (29 percent) in gasoline price. 5.45 Scenario 1 has major economy-wide consequences. Because diesel is used in freight transport, a marked rise in its price affects heavy-duty diesel vehicles for which the pricing scheme is not intended, resulting in economy-wide inflation. Scenario 1 generates substantial additional revenues (thereby reducing the budget deficit) and reduces imports significantly (thereby improving the balance of payments) at the cost of somewhat lower growth (due primarily to contraction of the road transport sector), significantly higher short-run inflation, and slightly higher unemployment. The impact on Fuel Tax Policy 83 the cost of living is regressive, with the poor being the most severely affected. The poor are conservatively estimated to increase in number by almost 1.5 million. 5.46 Scenario 2 benefits the richer car users considerably, and encourages rather than discourages the use of private cars in urban areas. It has limited macroeconomic implications compared to scenario 1, achieving the same desired fuel indifference between HSD and gasoline among vehicle owners but causing much smaller dislocation to the economy. There are some minor revenue losses and a small worsening in the balance of payments, but it marginally affects the poorer sections of society while conferring some benefits to car owners. The adverse political implication of the former can be countered relatively easily. 5.47 The sharp diesel price hike contemplated in scenario 1 is likely to meet stiff resistance, especially because heavy-duty vehicles (which account for bulk of diesel consumption) will have no option but to bear the higher input costs and raise transport tariffs. This highlights the limitation of not incorporating differentiated vehicle tax in the analysis. The government can match the diesel price increase with a countervailing relief in the form of a large reduction in the standard GST rate. Such a counter-measure may or may not prove to be successful. Its success will depend essentially on the perceived burden of GST and the extent to which the fall in the rate of GST is accompanied by a corresponding fall in the prices of the essential goods and services. On balance, the political feasibility of raising the HSD price sharply is considered low. If a differentiated vehicle tax scheme must be ruled out, Scenario 2 may be a less disruptive strategy, although it may also have serious adverse effects on the transport sector. 5.48 The findings presented in this chapter suggest that fuel tax policy alone is a poor instrumnent for inducing a shift from diesel to gasoline. While scenario 2 may have negligible economy-wide consequences, the transport sector in Pakistan is plagued by urban congestion and inadequate provision for road maintenance. A move that will certainly encourage greater urban private car use will further exacerbate problems encountered in the transport sector, even if there are environmental gains to be made. These observations highlight the importance of coordinating policies across environment, transport, and energy sectors, and of using several policy instruments rather than just one to address environmental and transport problems. Annex 1. Incremental Cost Calculations Al. 1 This annex explains the following aspects of the incremental cost calculations used in the Clean Fuels study: * Pricing basis * The economics of improving gasoline quality * The economics of reducing sulfur in diesel * The economics of reducing sulfur in fuel oil. Pricing Basis A1.2 An octane value17 of US$1.10 per ton18 was used to determine the prices of the grades of gasoline in Pakistan. For the surplus naphtha and reformate blendstocks that will be exported, the appropriate reference price is free-on-board (FOB) Singapore minus freight,19 while the prices of all the other gasoline grades that are imported are based on Arab Gulf prices plus the relevant freight costs. Marine insurance at 0.5 percent has been added to arrive at the cost, insurance, and freight (CIF) prices. A1.3 As the domestic market will continue to have leaded gasoline, the price of leaded gasoline is calculated as the sum of the value of unleaded gasoline and the cost of lead added. The price of leaded gasoline is therefore a function of both the value of the clear octane and the cost of lead blended. Gasoline prices in Pakistan used in this study are shown in Table Al.1. A1.4 The differential between 0.5- and 1.0-percent-sulfur gasoil20 for FOB Singapore has not varied significantly over the last decade despite the large variations in crude oil price. For the study, the overall average of US$1.70 per ton has been used. For a reduction to 0.25 percent sulfur, a differential of US$2.50 per ton with respect to 0.5 percent sulfur has been selected. The resulting prices are presented in Table A1.2. A1.5 Finally, on the basis of historical data, the study used a price differential for FOB Singapore of US$12 per ton between 3.5- and 1.0-percent-sulfur fuel oil. This differential would be equivalent to approximately US$19-20 per ton based on FOB Arab 17 The octane value is the dollar amount payable for every increase in octane per ton of gasoline. 8 For this annex, all dollar amounts are in 1998 U.S. dollars. 19 FOB Singapore is the price quoted in Singapore for goods to be exported from Singapore. Freight here refers to freight charges from Pakistan to Singapore. 20 Gasoil is an intermediate distillate produced used for diesel fuel, for heating fuel, and sometimes as feedstock. 85 86 Pakistan Clean Fuels Gulf. It should be noted that, because only very limited volumes of 1 -percent-sulfur fuel oil are currently available for export from the Middle East, FOB Singapore is the relevant reference for this quality. The resulting fuel oil prices are presented in Table A1.3. Table A1.1 : Gasoline Prices in Pakistan (1998 US$ per ton) Product Basis Freight 2000 2001 2002 2003 2004 2005 95 RON unleaded FOB Arab Gulf 139 151 168 175 174 174 MTBE FOB Arab Gulf 211 202 225 235 233 234 Naphtha FOB Singapore 130 140 155 162 160 161 97 RON unleaded 6 148 160 177 185 183 184 95 RON unleaded 6 145 158 175 182 180 181 92RONunleaded 6 142 155 172 179 177 178 87 RON unleaded 6 136 149 166 173 172 173 82 RON unleaded 6 131 144 161 168 166 167 79RONunleaded 6 128 140 157 165 163 164 73 RON unleaded 6 121 134 151 158 156 157 87 RON @ 0.64 g/I lead (1) 135 147 164 172 170 171 87 RON @0.35 g/l lead (2) 135 148 165 172 170 171 87 RON @ 0.15 g/l lead (3) 134 147 164 171 169 170 80 RON @0.42 g/l lead (4) 130 134 151 158 156 157 MTBE 8 219 210 233 243 241 242 Reformate FOB Karachi (5) -6 148 161 178 185 183 184 Naphtha FOB Karachi (6) -15 115 125 140 147 145 146 Notes: (1) 73 RONC plus cost of lead ($13.60/ton); (2) 79 RONC plus cost of lead ($7.50/ton); (3) 82 RONC plus cost of lead ($3.20/ton); (4) 73 RONC plus cost of lead ($8.90/ton); (5) based on Arab Gulf; (6) based on Singapore. Table A1.2: Diesel Prices in Pakistan (1998 US$ per ton) Product Basis Freight 2000 2001 2002 2003 2004 2005 0.25% sulfur FOB Arab Gulf 116 133 149 155 158 159 1.0% sulfur CIF Karachi 6 119 135 151 158 160 161 0.5% sulfur CIF Karachi 6 121 137 153 160 162 163 0.25% sulfur CIF Karachi 6 123 140 156 162 165 165 Table A1.3: Fuel Oil Prices in Pakistan (1998 US$ per ton) Product Basis Freight 2000 2001 2002 2003 2004 2005 3.5% sulfur FOB Arab Gulf 58 62 70 71 67 64 1.0% sulfur FOB Singapore 77 82 89 90 87 84 3.5% sulfur CIF Karachi 3 61 66 73 74 71 68 1.0% sulfur CIF Karachi 4 81 86 94 94 91 88 Annex 1 87 Economics of Gasoline Quality Improvement A1.6 The free-market pricing scenario is illustrated in Table A1.4. The cost of tetraethyl lead (TEL) was taken to be US$6,400 per ton. At a lead concentration of 39.4 percent in TEL, this translates to US$16,244 per ton of lead. Gasoline density is assumed to be equivalent to 1,312 liters per ton of gasoline. Capital costs are annualized by taking 20 percent of the total capital. Table AI.4: Gasoline Quality Improvement: Free-Market Pricing Parameter 2000 2003 2005 Demand (ktpa) 1,367 1,450 1,487 Specifications Base-case specifications 80 RON @0.42 g/l lead 87 RON @0.64 g/l lead Reconmmended specifications 87 RON @0.35 g/l lead 87 RON @0.15 g/l lead 87 RON lead-free Base-case RONC 73 73 73 Recommended RONC 79 82 87 Incremental octane 6 9 14 Cost per octane ton (US$) 1.1 1.1 1.1 Total cost (US$ million) 9.0 14.4 22.9 Lead required (thousand tons) Base case 0.84 1.08 1.11 Recommended case 0.53 0.28 0.00 Reduction 0.31 0.80 1.11 Cost of lead (US$ per ton) 16,244 16,244 16,244 Total savings (US$ million) -5.0 -13.0 -18.0 Net cost impact (US$ million) 4.0 1.4 4.9 Cost per liter (US cents) 0.26 0.07 0.26 Note: 1998 U.S. dollars and cents. A1.7 Table A1.5 shows the cost to Pakistan of adjusting refinery throughputs, imports, and exports; investing in additional storage for naphtha and MTBE; and making minor modifications to the reformers at ARL, NRL, and PRL to be able to run at 95 RON severity. A1.8 An estimate of the capital investment and operating costs for installing isomerization units at NRL, PARCO, and PRL is outlined in Table A1.6. The resulting cost comparison is presented in Table A1.7. 88 Pakistan Clean Fuels Table A1.5: Gasoline Quality Improvement: Cost to Pakistan Refineries Parameter 2000 2003 2005 Demand (ktpa) 1,367 1,450 1,487 Change in Imports Gasoline MTBE Total Gasoline MTBE Total Gasoline MTBE Total Base case (ktpa) 236 54 0 0 0 0 Recommended case (ktpa) 236 108 0 0 0 112 Incremental amount (ktpa) -0.4 54 0 0 0 112 Price (CIF Karachi, $/ton) Base case 133 219 243 0 242 Recommended case 135 219 171 243 173 242 Incremental import costs (US$ 0.5 11.9 12.4 0 0 0 0 27 27 million) Change in exports Reformate Naphtha Reformate Naphtha Base case (ktpa) 0 277 421 140 374 140 Recommended case (ktpa) 0 331 96 465 139 487 Incremental exports (ktpa) 0 54 -325 325 -235 347 Price (FOB Karachi, $/ton) 148 115 185 147 184 146 Incremental export revenues 0.0 -6.2 -6.2 60.1 -47.9 12.2 43.2 -50.7 -7.5 (US$ million) Total impact (US$ million) 6.2 12.2 19.6 Additional freight charge (US$ million) Additional MTBE to 0.2 1.3 Dhodak/PARCO PARCO reformate to ARL 0.4 No requirements to move -5.1 -4.0 PARCO's reformate for export Incremental freight cost (US$ 0.2 -5.1 -2.3 million) Lead required (thousand tons) Base case 0.84 1.08 1.1 Recommended case 0.53 0.28 0.0 Lead reduced 0.31 0.80 1.1 Cost per ton lead (USS per ton) 16,244 16,244 16,244 Total savings (US$ million) -5.0 -13.0 -18.0 Charge for capital investment Naphtha and MTBE storage at 0.4 OA 0.4 NRL and PRL (US$ million)l Revamp reformers at NRL, 1.8 PRL and ARL to produce 95 RON2 Net impact (US$ million) 1.8 -5.5 1.5 Cost per liter (US cents) 0.12 -0.29 0.08 Note: 1998 U.S. dollars and cents. 'Total capital cost US$2 million. 2 Total capital cost USS9 million. Annex 1 89 Table A1.6: Cost of Installing Isomerization Units Refinery Item Capacity Investment (bpsd) (US$ million) NRL Once-through isomerization 600 7 Light naphtha hydrotreater 600 5 Modifications to naphtha splitter 2 Total capital cost 14 Incremental operating costs, per year 0.3 PRL Once-through isomerization 1,100 9 Modifications to naphtha splitter 2 Total capital cost 11 Incremental operating costs, per year 0.6 PARCO Once-through isomerization 3,100 17 Light naphtha hydrotreater 3,100 12 Modifications to naphtha splitter 2 Total capital cost 31 Incremental operating costs, per year 1.7 Note: 1998 U.S. dollars and cents. Table A1.7 Impact of Isomerization in 2005 Parameter No Isomerization Isomerization Change Change in MTBE imports (ktpa) 112 25 -87 Price (CIF Karachi, US$/ton) 242 Savings in MTBE imports cost (US$ million) -21 Change in exports Reformate Naphtha Reformate Naphtha Exports 139 487 105 432 Price (FOB Karachi ($/ton) 184 146 184 146 Exports revenue reduction (US$ million) -26 -71 -19 -63 14 Total impact (US$ million) -6.8 Reduction in freight cost (US$ million) 1.6 0.3 -1.3 Charge for capital investment (US$ million/year) Naphtha and MTBE storage at NRL and PRL 0.4 0.4 0.0 Revamp reformers at NRL,PRL and ARL to 1.8 1.8 0.0 produce 95 RON Isomnerization 11.1 11.1 Incremental capital charge (US$ million/year) 11.1 Isomerization operating cost (US$ million/year) 2.6 Net impact (US$ million) 5.7 Cost per liter (US cents) 0.3 Note: 1998 U.S. dollars and cents. 90 Pakistan Clean Fuels Economics of Diesel Sulfur Reduction A1.9 Approximately US$10 million investment would be required to construct the infrastructure for blending the high-sulfur, domestically produced diesel with lower- sulfur imported diesel to achieve the desired uniform specification of 0.5 percent sulfur in Pakistan. The figures are given in Table A1.8. The incremental cost of lowering sulfur in diesel would consist of the additional cost of importing lower-sulfur diesel and the annualized cost of capital. The results are shown in Table A1.9. Table A1.8: Infrastructure Investment Costs for Diesel Sulfur Reduction (1998 US$ million) Item Investment Cost Buffer storage at Korangi for blending 5 65,000 ton storage at Zulfiqarabad Oil Terminal (ZOT) 3 Pipeline between buffer storage and refineries 2 Total 10 Table A1.9: Cost of Diesel Sulfur Reduction Sulfur Cost (1998 Year Parameter 1% 0.50% 0.25% Total US$ million) 2000 Imports (ktpa) Base case 5,981 0 0 5,981 711 Proposed case 0 4,181 1,800 5,981 726 Incremental irnports cost 14.7 Annualized capital (US$ million) 2.0 Total cost (US$ million) 16.7 Cost per liter (US cents) 0.2 2003 Irnports (ktpa) Base case 5,910 0 0 5,910 933 Proposed case 0 1,910 4,000 5,910 953 Incremental imports cost 20.0 Annualized capital (US$ mnillion) 2.0 Total cost (US$ million) 22.0 Cost per liter (US cents) 0.3 2005 Imports (ktpa) Base case 7,205 0 0 7,205 1,161 Proposed case 0 3,205 4,000 7,205 1,183 Incremental imports cost 22.2 Annualized capital (US$ million) 2.0 Total cost (US$ million) 24.2 Cost per liter (US cents) 0.3 Annex 1 91 A1.10 Any more-stringent specifications beyond 2005 would require investment in diesel hydrodesulfurization at the NRL, PRL, and PARCO refineries. The order-of- magnitude investment required for each refinery to achieve 0.05-percent-sulfur product- or 95 percent desulfurization-is shown in Table A1.10. Table A1.10: Capital Investment Required for Middle Distillate Hydrodesulfurization Capacity Investment Refinery (bpsd) (1998 US$ million) NRLI 20,000 73 PRL 15,000 64 PARCO 30,000 67 Total 65,000 205 IAmiine and sulfur recovery units included. Economics of Fuel-Oil Sulfur Reduction A1.11 The "no capital investment" scenario for fuel-oil sulfur reduction assumes that 1-percent-sulfur fuel oil will be imported. A summary of incremental costs is presented in Table Al . 1. Table A1.11: Cost of Fuel-Oil Sulfur Reduction, 1998 US$ million S u lf u r Cost (1998 Year Parameter 3.5% 1% Total US$ million) 2000 Base case imports (ktpa) 7,504 0 7,504 457 Proposed case imports (ktpa) 2,404 5,100 7,504 561 Cost differential -104 2003 Base case imports (ktpa) 6,106 0 6,106 451 Proposed case imports (ktpa) 960 5,146 6,106 556 Cost differential -105 2005 Base case imports (ktpa) 6,360 0 6,360 430 Proposed case imports (ktpa) 800 5,560 6,360 544 Cost differential -114 Al.12 The estimated investment for an FGD unit capable of removing sulfur dioxide emissions from a 1-gigawatt power plant burning 3.5-percent-sulfur fuel oil is about US$150 million. This assumes retrofitting, which is more expensive than installing FGD as part of a new plant. A simple calculation considering FGD at Hub Power Company as an example is presented in Table A1.12. The figures in the table give a simple payback period of 6 years. 92 Pakistan Clean Fuels Table A1.12: Flue Gas Desulfurization Economics Parameter Value Unit Capacity 1.0 gigawatt Cost (retrofit) 150 US$ million Capacity 1.3 gigawatt Fuel oil consumed 1,440 ktpa FGD cost 175 US$ rnillion Fuel oil price difference 20 US$/ton Incremental fuel oil cost 29 US$ mnillion Annex 2. Inter-Fuel Pricing: Selected Results Table A2.1: Impact of Fuel Price Changes on Sectoral Price Levels (%) No. Sector Scenario I Scenario 2 I Major crops: rice 1.19 0.06 2 Major crops: wheat 1.12 0.06 3 Major crops: cotton 1.00 0.05 4 Major crops: sugar cane 0.97 0.05 5 Major crops: tobacco 0.72 0.04 6 Major crops: others 1.09 0.06 7 Minor crops: pulses and grams 0.44 0.02 8 Minor crops: potatoes 1.06 0.06 9 Minor crops: vegetables and condiments 0.72 0.04 10 Minor crops: fruits 0.62 0.03 12 Minor crops: oil seeds 0.84 0.05 13 Minor crops: others 0.66 0.04 14 Livestock and slaughtering products 0.59 0.03 15 Forestry 1.37 0.07 16 Fisheries 3.03 0.16 17 Mining: coal 2.18 0.12 18 Mining: crude oil and natural gas 1.19 0.06 20 Mining: other 2.56 0.14 22 Vegetable oil 1.53 0.08 23 Milled grains 1.59 0.09 24 Bakery products 1.31 0.07 25 Sugar 1.06 0.06 26 Other food items 1.50 0.08 27 Beverages 1.22 0.07 28 Cigarettes and tobacco 0.56 0.03 29 Ginned cotton 1.34 0.07 30 Cotton yam 1.56 0.09 93 94 Pakistan Clean Fuels No. Sector Scenario ] Scenario 2 31 Cotton cloth 1.81 0.10 32 Art silk 1.78 0.10 33 Made-up textile goods 1.19 0.06 34 Knitwear 1.62 0.09 35 Carpets 1.75 0.10 36 Garments 1.78 0.10 37 Other textile products 1.62 0.09 38 Leather and leather products 1.28 0.07 39 Footwear 0.94 0.05 40 Wood, wood products, and furniture 1.65 0.09 41 Paper and printing 1.75 0.10 42 Pharmaceuticals 1.75 0.10 43 Fertilizers and pesticides 1.72 0.10 44 Chemicals, consumer products 1.75 0.10 45 Refined petroleum products 33.01 1.80 46 Rubber and plastic products 1.81 0.10 47 Other chemicals 2.62 0.14 48 Bricks 1.28 0.07 49 Cement 6.12 0.33 50 Other non-metallic mineral product 1.87 0.10 51 Basic metal products 3.09 0.17 52 Metal products 1.93 0.11 53 Non-electrical machinery 3.55 0.19 54 Electrical equipment 2.09 0.11 55 Transport equipment 2.28 0.12 56 Surgical instruments 2.59 0.14 57 Handicrafts 1.31 0.07 58 Sports goods 1.93 0.11 59 Jewelry (precious metals) 1.34 0.07 60 Other manufacturing products 1.59 0.09 61 Electricity, water works, and supply 3.59 0.20 62 Gas supply 0.72 0.04 64 Construction and land improvement 2.43 0.13 65 Trade: wholesale 1.15 0.06 66 Trade: retail 0.41 0.02 Annex 2 95 No. Sector Scenario I Scenario 2 67 Hotels and restaurants 1.40 0.08 68 Transport: railway 8.64 0.47 69 Transport: road 8.76 0.47 70 Transport: water 2.25 0.12 71 Transport: air 9.36 0.51 72 Transport other and storage 1.34 0.07 73 Communication 0.40 0.02 74 Banking: central monetary authority 0.50 0.03 75 Banking: scheduled and cooperative bank 0.44 0.02 76 Banking: other credit institutions 0.16 0.01 77 Banking: nominal industry 0.37 0.01 78 Insurance 0.28 0.01 79 Real estate services 1.43 0.08 80 Ownership of dwellings 0.37 0.02 81 Business services 3.62 0.20 82 Public administration and defense 2.34 0.13 83 Education 0.34 0.01 84 Health care 0.78 0.04 85 Social and cultural services 1.06 0.06 86 Personal and household services 0.84 0.05 Table A2.2: Annual Urban Household Expenditures, by Income Quartile and Sector (rupees) No. Sector I" Quartile 2nd Quartile 3d Quartile 4rh Quartile Aggregate 1 Major crops: rice 635 1,042 1,408 1,918 1,244 2 Major crops. wheat 443 459 584 879 587 6 Major crops: other 2 6 5 18 8 7 Minor crops: pulses and grams 595 795 1,010 1,257 911 8 Minor crops: potatoes 400 565 643 767 592 9 Minor crops: vegetables and condiments 2,276 3,214 4,077 5,362 3,715 10 Minor crops: fruits 504 869 1,348 2,919 1,392 13 Minor crops: other 143 181 267 321 227 14 Livestock and slaughtering products 4,909 7,463 10,795 18,335 10,283 15 Forestry 667 576 535 352 534 96 Pakistan Clean Fuels No. Sector 15' Quartile 2nd Quartile 3,d Quartile 4th Quartile Aggregate 16 Fisheries 132 254 307 563 311 20 Mining: other 31 53 48 77 52 22 Manufacturing: vegetable oils 1,956 2,708 3,543 4,543 3,174 23 Manufacturing: milled grains 2,957 4,315 5,300 5,557 4,526 24 Manufacturing: bakery products 317 600 1,020 2,679 1,135 25 Manufacturing: sugar 1,182 1,590 1,981 2,489 1,804 26 Manufacturing: other food items 894 1,395 2,066 4,212 2,116 27 Manufacturing: beverages 69 132 227 778 295 28 Manufacturing: cigarettes and tobacco 490 784 1,046 1,730 1,004 31 Manufacturing: cotton cloth 753 1,122 1,527 2,222 1,397 33 Manufacturing: nade-up textile goods 171 283 445 822 426 35 Manufacturing: carpets 0 4 8 52 16 36 Manufacturing: ganrnents 204 320 532 1,006 510 37 Manufacturing: other textile products 1,564 2,314 3,233 4,872 2,975 38 Manufacturing: leather and leather 3 4 13 45 16 products 39 Manufacturing: footwear 411 643 933 1,509 867 40 Manufacturing: wood, wood products 48 85 165 568 212 and furniture 42 Manufacturing: pharmaceuticals 509 710 1,102 2,221 1,122 44 Manufacturing: chenicals, consumner 1,714 2,497 3,490 5,451 3,264 products 46 Manufacturing: rubber and plastic 182 269 333 690 364 products 47 Manufacturing: other chemnicals 267 313 379 789 432 50 Manufacturing: other non-metallic 138 213 297 568 301 mnineral products 52 Manufacturing: metal products 60 74 123 214 117 53 Manufacturing: non-electrical machinery 9 13 32 67 30 54 Manufacturing: electrical equipment 177 320 565 1,164 549 56 Manufacturing: surgical instruments 2 10 9 14 9 60 Manufacturing: other manufactured 167 267 454 833 425 products 61 Electricity water works and supply 1,296 1,952 2,629 4,420 2,552 62 Gas supply 501 994 1,401 2,212 1,267 64 Construction and land improvement 196 279 492 1,210 536 Annex 2 97 No. Sector 15' Quartile 2 d Quartile 3rd Quartile 4th Quartile Aggregate 66 Trade: retail 3 50 183 987 297 67 Hotels and restaurants 753 846 1,148 2,316 1,253 68 Transport: railway 19 35 39 175 66 69 Transport: road 908 1,564 2,248 3,686 2,084 71 Transport: air 0 0 2 140 34 72 Transport: other and storage 18 15 27 36 24 73 Communication 85 231 595 2,717 883 76 Banking: other credit institutions 9 27 23 47 26 78 Insurance 0 4 15 81 24 79 Real estate services 6,869 10,465 14,891 29,208 15,190 81 Business services 0 30 5 60 23 82 Public administration and defense 116 196 284 784 339 83 Education 1,129 2,243 4,190 9,763 4265 84 Health care 446 593 799 1,477 821 85 Social and cultural services 7 22 48 152 56 86 Personal and household services 1,024 2,011 3,167 7,910 3,473 Average household income 29,960 47,459 71,175 156746 75,339 Average household expenditures 38,366 58,119 82,577 144,604 80,169 Notes: First quartile up to Rs 39,600 per annum; second quartile between Rs 39,600 and 57,600; third quartile between Rs 57,600 and 90,000; fourth quartile above Rs 90,000. Table A2.3: Annual Rural Household Expenditures by Income Quartile and Sector (rupees) No. Sector P Quartile 2" Quartile 3rd Quartile 4th Quartile Aggregate I Major crops: rice 484 807 1,064 1,373 925 2 Major crops. wheat 1487 2,027 2,856 4,189 2,628 6 Major crops: other 23 71 113 180 96 7 Minor crops: pulses and gramns 577 758 917 1,183 855 8 Minor crops: potatoes 405 560 672 822 612 9 Minor crops: vegetables and condiments 1931 2,682 3,303 4,143 2,999 10 Minor crops: fruits 361 575 866 1,369 788 13 Minorcrops: other 384 318 690 438 459 14 Livestock and slaughtering products 4154 6,254 8,810 13,838 8,219 15 Forestry 1139 1,493 1,783 2,198 1,646 98 Pakistan Clean Fuels No. Sector I"t Quartile 2nd Quartile 3d Quartile 4Ih Quartile Aggregate 16 Fisheries 104 167 180 181 157 20 Mining: other 28 37 42 52 40 22 Manufacturing: vegetable oils 1750 2,323 2,634 3,009 2,417 23 Manufacturing: milled grains 1815 2,776 3,185 2,992 2,672 24 Manufacturng: bakery products 159 290 381 710 382 25 Manufacturing: sugar 1274 1,767 2,255 2,992 2,061 26 Manufacturing: other food items 1,102 1,900 3,212 6,356 3,125 27 Manufacturing: beverages 25 65 140 237 116 28 Manufacturing: cigarettes and tobacco 509 785 964 1,244 870 31 Manufacturing: cotton cloth 541 782 960 1,277 885 33 Manufacturing: made-up textile goods 170 243 319 592 329 35 Manufacturing: carpets 1 1 5 8 4 36 Manufacturing: garments 128 183 257 362 232 37 Manufacturing: other textile products 1,356 2,002 2,531 3,490 2,331 38 Manufacturing: leather and leather 2 4 7 26 10 products 39 Manufacturing: footwear 326 504 697 1,048 640 40 Manufacturing: wood, wood products 61 89 141 393 170 and furniture 42 Manufacturing: pharmaceuticals 532 681 1,090 1,474 941 44 Manufacturing: chemicals, consumer 1,300 1,825 2,203 2,959 2,061 products 46 Manufacturing: rubber and plastic 162 211 286 407 266 products 47 Manufacturing: other chemicals 204 244 290 392 282 50 Manufacturing: other non-metallic 105 151 213 307 193 mineral products 52 Manufacturing: metal products 32 54 67 120 68 53 Manufacturing: non-electrical machinery 8 15 46 50 30 54 Manufactuing: electrical equipment 138 254 419 950 438 56 Manufacturing: surgical instruments 2 2 7 8 5 60 Manufacturing: other manufactured 95 173 257 469 247 products 61 Electricity water works and supply 547 834 1,235 1,820 1,103 62 Gas supply 30 58 105 223 103 64 Construction and land improvement 200 303 486 1,321 575 Annex 2 99 No. Sector I" Quartile 2nd Quartile 3rd Quartile 4th Quartile Aggregate 66 Trade: retail 2 4 10 50 16 67 Hotels and restaurants 258 252 333 456 325 68 Transport: railway 6 23 40 79 37 69 Transport: road 706 1,122 1,422 5,012 2,056 71 Transport: air 0 0 0 47 12 72 Transport: other and storage 9 16 28 40 23 73 Communication 19 45 104 277 111 76 Banking: other credit institutions 2 4 19 3 7 78 Insurance 3 6 6 6 5 79 Real estate services 2,838 3,676 4,446 5,852 4,185 81 Business services 2 10 42 338 98 82 Public administration and defense 32 49 84 129 73 83 Education 767 1,411 2,408 5,992 2,630 84 Health care 310 592 726 1,243 712 85 Social and cultural services 1 7 7 17 8 86 Personal and household services 711 1,336 1,887 3,001 1,720 Average household income 21,855 36,712 53,032 140,274 62,641 Average household expenditures 29,320 42,744 56,582 83,864 52,837 Notes: First quartile up to Rs 30,000 per annum; second quartile between Rs 30,000 and 44,436; third quartile between Rs 44,436 and 67,800; fourth quartile above Rs 67,800. Annex 3. Historical Overview of Social Safety Nets A3. 1 Pakistan currently has a number of social safety nets in operation: * Zakat * Bait-ul-Maal * Ushr * Wheat Subsidy * Employees Old Age Benefits Institution * Housing Finance by the Housing Building Finance Corporation * Micro-Credit Scheme of HBL-NRSP Zakat A3.2 The Zakat and Ushr Ordinance was passed in 1980. Zakat is a form of charity religiously mandated under Islam and officially collected only from Sunni Muslims. An autonomous Zakat council administers the Central Zakat Fund maintained by the State Bank of Pakistan (SBP), which does not form part of the federal consolidated fund. This council is supported by the Zakat and Ushr wing of the Ministry of Religious Affairs. Disbursement in the provinces is regulated by the provincial Zakat councils. The most important tier is the local Zakat committee, which identifies the Mustahqin (the needy and the indigent). It is estimated that there are about 1.5 million Mustahqin at present. These committees, of which there are about 39,000, have seven elected, non- official, unpaid members. Each committee can spend up to 10 percent of its allocated funds on administration. A3.3 Compulsory deductions for Zakat are made once a year from Sunni Muslims at the rate of 2.5 percent on the value of specified financial assets. Collections in fiscal 1997-98 are estimated at Rs 4.1 billion, a drop from the peak of Rs 4.7 billion collected in fiscal 1993-94. More than half the revenue comes from a tax on savings bank accounts and about 16 percent from fixed deposits. A judgment by the Supreme Court has allowed all sects to file a declaration seeking exemption from payment of Zakat on financial assets, putting in jeopardy the mechanism of compulsory deductions and therefore affecting the level of contributions. A3.4 The Central Zakat Fund retains a portion of the proceeds, which it invests on a non-interest basis. The outstanding cash balance in January 1997 was almost Rs 11 billion. Provincial disbursements are based on population, although this criterion is not strictly followed. Distribution of funds by the provincial Zakat council is formula-driven, with 60 percent going to local Zakat committees and the remaining 40 percent to 101 102 Pakistan Clean Fuels institutions such as deeni madaris (religious schools), public hospitals, and vocational training institutions. A3.5 Those eligible to receive Zakat, either directly or indirectly, include needy, indigent, and poor people (especially widows and orphans) and people with handicaps or disabilities. Local Zakat committees give two main types of support: a monthly subsistence allowance of Rs 250 to each Mustahqin with an additional Rs 50 per child, and a rehabilitation grant of up to Rs 3,000. These two grants constitute about 70 percent of the support. Grants for Jahez (marriage dowry), educational, and medical expenses make up the remaining 30 percent. All payments are made through banks. A3.6 Zakat performs well on a number of criteria. The support provided in the form of subsistence allowance appears to be adequate. According to one estimate, this allowance is about three times the average income gap of people living in poverty (World Bank 1995). Since the allowance is in cash, this is equivalent in welfare terms to an increase in income of the same amount. Administration costs as a whole are low, primarily because of voluntary inputs provided by members of the local committees. One of the strongest points in favor of the Zakat is its access to an earmarked source of revenue, although contributions are likely to be adversely affected by the Supreme Court judgment on compulsory deductions. Reliance on a specific source not only ensures sustainability, but the nature of the tax (on financial assets) is such that the burden falls mostly on upper- income households. As a result, the Zakat has the potential of playing a strong redistributive role. A3.7 Problems with the Zakat include its targeting efficiency. There is conflicting evidence, with some studies showing that about half the benefits go to the lowest quintile of households in 1991 (World Bank 1995, Jehle 1995), whereas Shirazi (1996) shows that as much as 94 percent of Zakat (official and private) is received by families in the lowest quintile of the income distribution. Access to the benefit is another problem. A number of stages are involved in defining a Mustahqin, and there is inevitably some patronage involved at the local level. The number of Mustahqin has grown slowly despite the significant increase in the number of people below the poverty line. With only 1.5 million Mustahqin, it is clear that the program covers only a small proportion of poor households. This demonstrates inadequate access and program coverage. A3 .8 Being a recurring cash transfer, Zakat runs the risk of creating a state of dependency among recipients and reducing the incentive to search for productive work. However, most of the Mustahqin are widows and the disabled who are not in a position to join the labor force. A3.9 Also at issue is the interaction with private transfers. To the extent that Zakat is deducted at source, there is the possibility that private transfers may be correspondingly reduced. This has been the basis for the argument that Zakat paymnents should be largely voluntary. Annex 3 103 Bait-ul-Maal A3.10 Pakistan Bait-ul-Maal (PBM) was established in February 1992 under the provisions of the Pakistan Bait-ul-Maal Act of 1991, mainly to provide assistance to those in need (such as minorities) who are not covered by Zakat. PBM is administered by an autonomous board of management consisting of the chair (Ameen), five non-official members (appointed by the federal government) and three official members. At about 2 percent of total funds, administrative costs are low. A3.11 Funds for the PBM come essentially in the forn of non-lapsable grants21 from the federal government. Originally, the grants came from the proceeds of the excise duty on bank advances, but since this duty was abolished in fiscal 1997-98 funding has fallen sharply from Rs 1 billion in fiscal 1996-97 to Rs 0.2 billion in fiscal 1998-99. The PBM also receives small grants from the Central Zakat Fund and provincial and local governments. A3.12 PBM provides two main benefits: the Individual Financial Assistance (IFA) scheme, which disbursed Rs 14 million to about 5,000 beneficiaries in fiscal 1997-98; and the Food Subsidy Scheme (FSS), renamed the Atta Subsidy Scheme (ASS). In fiscal 1997- 98, ASS provided a monthly cash stipend of Rs 200 to about 240,000 families, consisting of 29 percent widows, 19 percent disabled people or invalids, and the remaining 52 percent families living below the poverty line. The total disbursement was Rs 0.6 billion. Until 1994, PBM ran a food stamp scheme, now abandoned, that reached 4.2 million people. A3.13 Applying for assistance from PBM is a time-consuming procedure. Three local people (including a local Zakat committee member) must attest to the accuracy of the application form, which is then processed both at the district and provincial levels. However, the prime minister and other high-level functionaries can sanction amounts in open kutcheries (public gatherings) or elsewhere for individual financial assistance. A3.14 PBM's limited coverage is one of its biggest problems. With only 240,000 people receiving the atta subsidy, it is clear that subventions from PBM make only a minor dent on poverty in Pakistan. There is also a likelihood of overlap with recipients of Zakat. Unlike the Zakat, PBM no longer has any identifiable source of income. Its exclusive reliance now on budgetary support makes it particularly vulnerable to changing fiscal conditions, as has been demonstrated by the steep fall in government contributions in fiscal 1998-99. Transparency also appears to be a serious problem in terms of the level of discretion that exists with high-level functionaries in allocating funds from PBM, one example being the recent arrest of a former chief minister of Punjab on allegations of embezzlement of funds from PBM. 21 These funds do not lapse at the end of each year; instead, unutilized amounts are added to the funds for the next year. 104 Pakistan Clean Fuels Ushr A3.15 A religious tax, Ushr, is levied under the Zakat and Ushr Ordinance on agricultural produce exceeding 948 kilograms (kg) of wheat, or the equivalent value of other crops. Like Zakat, it is paid by Sunni Muslims. According to religious statutes, the rate of Ushr is 5 percent of the value of crops at a farm site for irrigated land and 10 percent in the case of non-irrigated (barani) land. Even though a uniform rate of 5 percent is being applied in practice, the revenue potential of the tax is sizeable. The administration of the Ushr by local committees, with voluntary inputs by members, minimizes overhead costs and increases the share of program benefits. Subventions to the poor are in the form of cash transfers. A3.16 Unlike Zakat, the collection and distribution of Ushr are completely decentralized down to the local Zakat committees. Collection began in 1983, and revenues peaked at Rs 0.3 billion in fiscal 1984-85. Since then, the local committees have largely failed in the task of assessment and collection and, at present, are collecting less than Rs 10 million across the whole of Pakistan. An attempt was made in the Finance Act of 1990 to transfer collection responsibility to the provincial Boards of Revenue (BOR), but this proposal has not been effectively implemented. The Ushr, which has the potential to become a major source of help to poverty-stricken rural households, is essentially moribund today. A3.17 The issue is whether (a) the tax should be revived and its collection improved through a stronger tax administration (by involvement of provincial BOR) or (b) the focus should be on development instead of the agricultural income tax as emphasized by the International Monetary Fund (RIF). If the objective is to develop social safety nets in rural areas, where poverty is high and likely to increase, then development of Ushr is clearly a better strategy. Like Zakat, it has the potential to emerge as a significant redistributive mechanism. The problem with the agricultural income tax is that its revenue accrues to the provincial consolidated fund and may be used for purposes other than poverty alleviation. Wheat Subsidy A3.18 The wheat subsidy has the merit of being a generalized intervention, with no problem of program coverage, except perhaps of rural households living in inaccessible areas. At the federal level, the subsidy consists of the difference between the import price and the issue price to mills. At the provincial level the subsidy is represented by the difference between the procurement price offered to domestic farmers and the issue price plus the transport and incidental costs. In fiscal 1997-98 the subsidy bill was Rs 4.2 billion to the federal govemment and Rs 7.0 billion to the four provincial governments combined. The total subsidy has varied from year to year, with a peak of over Rs 11 billion in fiscal 1997-98 and a trough of less than Rs 1 billion in fiscal 1993-94. A3.19 There is potentially a high degree of wastage because of target inefficiency. One question is how much of the subsidy actually gets through to consumers in the form of lower prices and how much is captured by mill owners, middlemen, and corrupt officials. There is evidence that the wheat subsidy does not contribute much to lowering prices Annex 3 105 (Zaman 1996). Wheat availability, which is regulated, can be manipulated. Another question is whether the subsidized wheat prices could affect the domestic producers by lowering farm incomes, particularly those of small farmers. A3.20 Even if some of the benefits of the subsidy trickle through to consumers, because it is a general, population-wide subsidy (in the absence of rationing), a major share of the benefit is likely to accrue to upper-income households. Based on the consumption patterns of atta in the country, it is estimated that almost 85 percent of the consumption is by households in the upper four quintiles. This is a measure of the potential extent of program leakage. A3.21 There are serious concerns about the negative incentive effects of the wheat subsidy, including the impact on the level of domestic wheat production, to the extent that it keeps farm-gate prices low. It has also been alleged that rent-seeking22 in access to wheat quotas from the food department has led to substantial over-investmnent in milling capacity. The dependency of the wheat subsidy on federal and provincial budgets and the government commitment to phase it out as part of the IMF program indicate that the source of financing is highly uncertain. Employees Old Age Benefits Institution A3.22 The Employees Old Age Benefits Institution (EOBI) started functioning as an autonomous body at the federal level under the Employees Old Age Benefits Act of 1976. Applicable to all enterprises with 10 or more employees, it aims to provide pensions to workers who earn less than Rs 3,000 a month. EOBI takes care of all the functions including collection of employer contributions, investment of funds, and payment of pensions through banks. It has a network of offices from which employers can get the necessary forms. Overhead costs are estimated at less than 1 percent of the pension fund. A3.23 Policymaking and overall supervision of the institution rests with a 19- member board of trustees, with representation from federal ministries, provincial labor departments, employers, and employees. The secretary of the Federal Ministry of Labor acts as the chair. The institution's accounts are subject to audit both by the government and an extemal auditor. A3.24 Employers pay periodic contributions (at 5 percent of wages) for their registered workers. By June 1997, more than 37,000 employers were making contributions for 1.2 million registered workers. The annual growth rate in contributions in the 1990s was 6 percent, and the annual income from such contributions is currently estimated at about Rs 1 billion. The federal government traditionally gives a grant of up to Rs 1 billion from the budget each year, although it was slashed for the first time in fiscal 1997-98 because of fiscal constraints. Even so, EOBI has built up a fund of over Rs 27 billion. 22 The use of real resources to obtain access to goods or services whose supply is restricted by law or policy. 106 Pakistan Clean Fuels A3.25 Anyone who has worked for at least 15 years and is 60 years of age (55 years for women) is eligible for a monthly pension provided the employer makes the EOBI contributions. The amount of pension is determined by a formula based on the number of years worked. The minimum an individual receives is Rs 675. There is provision for a reduced pension for retirement before the age of 60, a pension for invalids for the duration of the illness, a survivor's pension, and old age grants. Currently 128,000 workers are receiving pensions, and the annual amount paid out by EOBI in pensions or other benefits is about Rs 1 billion. A3.26 The only form of social security currently available to low-paid workers in Pakistan is the EOBI. Targeting efficiency has been enhanced by limiting the coverage to workers with wages below Rs 3,000 per month. The program coverage is low: the 1.2 million registered workers make up only 20 percent of the total employees in urban areas. This is due partly to the preponderance of small establishments (employing fewer than ten people) in the country. It is also probably the result of large-scale evasion by employers (although theoretically a worker can prevent this by registering directly). This scheme can be extended without its financial viability being affected significantly because of the rapidly expanding labor force and a large proportion of young workers. A3.27 The pension scheme also has some negative impacts. First, because all contributions are made by employers ad valorem, they add to the cost of hiring labor (although this may be reflected in a lower wage rate), they therefore have an anti- employment bias. In this sense, they go against the interests of the very group that they are designed to protect. Second, informal social security at the joint household level is widely prevalent in Pakistan. Pension payments from EOBI may, therefore, at least partially substitute for private transfers among members of a household (for example, a working son supporting a retired father). Housing Finance by the Housing Building Finance Corporation A3.28 Established in 1952 under an act of parliament, the Housing Building Finance Corporation (HBFC) now has 11 zonal offices and 58 district offices throughout the country. It provides financial assistance for house construction and purchase to lower and middle income groups. The original subsidized credit provided by the SBP has been discontinued, and the sole source of funding for the program is the amount recovered from past loans. This amounts to about Rs 2 billion annually. To be eligible for a HBFC loan, an applicant should have a clear land title and be able to pay off the loan in regular installments. The average interest rate is 13 percent, with the interest rate rising with the size of loan. A3.29 Since January 1999, the maximum limit for a HBFC loan has been raised to Rs 2 million. During 1997, HBFC disbursed Rs 1.3 billion to more than 9,000 borrowers. Fifty-five percent of the loans during the last five years were below Rs 100,000, 40 percent were between Rs 100,000 and Rs 200,000, and the remaining 5 percent were above Rs 200,000. Default rates are as high as 30 percent. Annex 3 107 A3.30 All the symptoms of bad financial intermediation are present with HBFC. These include a distorted pattern of lending (bias toward large cities and for medium-sized loans), high overhead costs, low rates of recovery, and the resulting inability to compete in the capital market for funds. To become effective in improving housing conditions for the poor, HBFC needs substantial revamping. Micro-Credit Scheme of HBL-NRSP A3.31 Registered in November 1991 as a non-profit public company under the Companies Ordinance 1984, the National Rural Support Program (NRSP) operates in 13 rural areas of Pakistan. It replicates the successful programs of Aga Khan Rural Support Program in the northern areas and rural micro-credit programs of Grameen Bank in Bangladesh. The program aims to reduce poverty among small farmers and landless laborers through micro-credit rural financing with community participation. The Government of Pakistan has provided a Rs 500 million grant to set up an endowment fund and, since July 1997, NRSP has obtained access to a credit line facility with Habib Bank Limited (HBL). A3.32 NRSP's partnership with Habib Bank is a breakthrough in the rural micro- credit financing history of Pakistan. Between July 1997 and November 1998, credit disbursement increased from Rs 0.1 billion to almost Rs 1 billion, and the number of borrowers rose from 23,000 to 52,000 in almost 4,000 community organizations. One- fourth of the expected loan is initially pledged by the borrower as collateral. Peer pressure and social reputation of the individual and the community organization are effectively used as a collateral tool. Even though the annual rate of interest is 18 to 20 percent, the recovery rate is high. This has been achieved by developing an effective credit disbursement procedure. A3.33 The credit disbursement procedure has eight well-defined steps. The first step is the introduction of the credit program to rural communities and community-based organizations through field visits by social organizers of NRSP. This is followed by identification of needs involving both a social and technical appraisal. The remaining steps involve the determination of terms and conditions of the credit and subsequent disbursement. A3.34 The NRSP has clearly developed an effective procedure for disbursement of credit, which has enabled a high rate of recovery of loans from low-income communities at market interest rates. 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Inorganic Lead. Geneva. 2000. Chapter 3: "Health-based Guidelines" in Guidelines for Air Quality. Geneva. Zaman, A. 1996. Wheat Subsidy: An Economic Review to Determine Welfare and Budgetary Effects. Karachi: Arshad Zaman Associates (Pvt.) Ltd. Joint UNDP/World Bank ENERGY SECTOR MANAGEMENT ASSISTANCE PROGRAMME (ESMAP) LIST OF REPORTS ON COMPLETED ACTIVITIS Region/Country Activity/Report Title Date Number SUB-SAHARAN AFRICA (AFR) Africa Regional Anglophone Africa Household Energy Workshop (English) 07,/88 085/88 Regional Power Seminar on Reducing Electric Power System Losses in Africa (English) 08/88 087/88 Institutional Evaluation of EGL (English) 02/89 098/89 Biomass Mapping Regional Workshops (English) 05/89 -- Francophone Household Energy Workshop (French) 08/89 -- Interafrican Electrical Engineering College: Proposals for Short- and Long-Term Development (English) 03/90 112/90 Biomass Assessment and Mapping (English) 03/90 -- Syrnposium on Power Sector Reform and Efficiency Improvement in Sub-Saharan Africa (English) 06/96 182/96 Commercialization of Marginal Gas Fields (English) 12/97 201/97 Commercilizing Natural Gas: Lessons from the Seminar in Nairobi for Sub-Saharan Africa and Beyond 01/00 225/00 Africa Gas Initiative - Main Report: Volume I 02/01 240/01 First World Bank Workshop on the Petroleum Products Sector in Sub-Saharan Africa 09/01 245/01 Angola Energy Assessment (English and Portuguese) 05/89 4708-ANG Power Rehabilitation and Technical Assistance (English) 10/91 142/91 Africa Gas Initiative - Angola: Volume II 02/01 240/01 Benin Energy Assessment (English and French) 06185 5222-BEN Botswana Energy Assessment (English) 09/84 4998-BT Pump Electrification Prefeasibility Study (English) 01/86 047/86 Review of Electricity Service Connection Policy (English) 07/87 071/87 Tuli Block Farms Electrification Study (English) 07/87 072/87 Household Energy Issues Study (English) 02/88 -- Urban Household Energy Strategy Study (English) 05/91 132/91 Burkina Faso Energy Assessment (English and French) 01/86 5730-BUR Technical Assistance Program (English) 03/86 052/86 Urban Household Energy Strategy Study (English and French) 06/91 134/91 Burundi Energy Assessment (English) 06/82 3778-BU Petroleum Supply Management (English) 01/84 012/84 Status Report (English and French) 02/84 011/84 Presentation of Energy Projects for the Fourth Five-Year Plan (1983-1987) (English and French) 05/85 036/85 Improved Charcoal Cookstove Strategy (English and French) 09/85 042/85 Peat Utilization Project (English) 11/85 046/85 Energy Assessment (English and French) 01/92 9215-BU Cameroon Africa Gas Initiative - Cameroon: Volume III 02/01 240/01 Cape Verde Energy Assessment (English and Portuguese) 08/84 5073-CV Household Energy Strategy Study (English) 02/90 110/90 Central African Republic Energy Assessement (French) 08/92 9898-CAR Chad Elements of Strategy for Urban Household Energy The Case of N'djamena (French) 12/93 160/94 Region/Country Activity/Report Title Date Number Comoros Energy Assessment (English and French) 01/88 7104-COM In Search of Better Ways to Develop Solar Markets: The Case of Comoros 05/00 230/00 Congo Energy Assessment (English) 01/88 6420-COB Power Development Plan (English and French) 03/90 106/90 Africa Gas Initiative - Congo: Volume IV 02/01 240/01 C6te d'Ivoire Energy Assessment (English and French) 04/85 5250-IVC Improved Biomass Utilization (English and French) 04/87 069/87 - Power System Efficiency Study (English) 12/87 - Power Sector Efficiency Study (French) 02/92 140/91 Project of Energy Efficiency in Buildings (English) 09/95 175/95 Africa Gas Initiative - C6te d'Ivoire: Volume V 02/01 240/01 Ethiopia Energy Assessment (English) 07/84 4741-ET Power System Efficiency Study (English) 10/85 045/85 Agricultural Residue Briquetting Pilot Project (English) 12/86 062/86 Bagasse Study (English) 12/86 063/86 Cooking Efficiency Project (English) 12/87 -- Energy Assessment (English) 02/96 179/96 Gabon Energy Assessment (English) 07/88 6915-GA Africa Gas Initiative - Gabon: Volume VI 02/01 240/01 The Gambia Energy Assessment (English) 11/83 4743-GM Solar Water Heating Retrofit Project (English) 02/85 030/85 Solar Photovoltaic Applications (English) 03/85 032/85 Petroleum Supply Management Assistance (English) 04/85 035/85 Ghana Energy Assessment (English) 11/86 6234-GH Energy Rationalization in the Industrial Sector (English) 06/88 084/88 Sawmill Residues Utilization Study (English) 11/88 074/87 Industrial Energy Efficiency (English) 11/92 148/92 Guinea Energy Assessment (English) 11/86 6137-GUI Household Energy Strategy (English and French) 01/94 163/94 Guinea-Bissau Energy Assessment (English and Portuguese) 08/84 5083-GUB Recommnended Technical Assistance Projects (English & Portuguese) 04/85 033/85 Management Options for the Electric Power and Water Supply Subsectors (English) 02/90 100/90 Power and Water Institutional Restructuring (French) 04/91 118/91 Kenya Energy Assessment (English) 05/82 3800-KE Power System Efficiency Study (English) 03/84 014/84 Status Report (English) 05/84 016/84 Coal Conversion Action Plan (English) 02/87 -- Solar Water Heating Study (English) 02/87 066/87 Peri-Urban Woodfuel Development (English) 10/87 076/87 Power Master Plan (English) 11/87 -- Power Loss Reduction Study (English) 09/96 186/96 Implementation Manual: Financing Mechanisms for Solar Electric Equipment 07/00 231/00 Lesotho Energy Assessment (English) 01/84 4676-LSO Liberia Energy Assessment (English) 12/84 5279-LBR Recommnended Technical Assistance Projects (English) 06/85 038/85 Power System Efficiency Study (English) 12/87 081/87 Madagascar Energy Assessment (English) 01/87 5700-MAG Power System Efficiency Study (English and French) 12/87 075/87 -3- Region/Country Activity/Report Title Date Number Madagascar Environmental Impact of Woodfuels (French) 10/95 176/95 Malawi Energy Assessment (English) 08/82 3903-MAL Technical Assistance to Improve the Efficiency of Fuelwood Use in the Tobacco Industry (English) 11/83 009/83 Status Report (English) 01/84 013/84 Mali Energy Assessment (English and French) 11/91 8423-MLI Household Energy Strategy (English and French) 03/92 147/92 Islarnic Republic of Mauritania Energy Assessment (English and French) 04/85 5224-MAU Household Energy Strategy Study (English and French) 07/90 123/90 Mauritius Energy Assessment (English) 12/81 3510-MAS Status Report (English) 10/83 008/83 Power System Efficiency Audit (English) 05/87 070/87 Bagasse Power Potential (English) 10/87 077/87 Energy Sector Review (English) 12/94 3643-MAS Mozambique Energy Assessment (English) 01/87 6128-MOZ Household Electricity Utilization Study (English) 03/90 113/90 Electricity Tariffs Study (English) 06/96 181/96 Samnple Survey of Low Voltage Electricity Customers 06/97 195/97 Namnibia Energy Assessment (English) 03/93 11320-NAM Niger Energy Assessment (French) 05/84 4642-NIR Status Report (English and French) 02/86 051/86 Improved Stoves Project (English and French) 12/87 080/87 Household Energy Conservation and Substitution (English and French) 01/88 082/88 Nigeria Energy Assessment (English) 08/83 4440-UNI Energy Assessment (English) 07/93 11672 -UNI Rwanda Energy Assessment (English) 06/82 3779-RW Status Report (English and French) 05/84 017/84 Improved Charcoal Cookstove Strategy (English and French) 08/86 059/86 Improved Charcoal Production Techniques (English and French) 02/87 065/87 Energy Assessment (English and French) 07/91 8017-RW Commercialization of Inproved Charcoal Stoves and Carbonization Techniques Mid-Term Progress Report (English and French) 12/91 141/91 SADC SADC Regional Power Interconnection Study, Vols. I-IV (English) 12/93 - SADCC SADCC Regional Sector: Regional Capacity-Building Program for Energy Surveys and Policy Analysis (English) 11/91 -- Sao Tome and Principe Energy Assessment (English) 10/85 5803-STP Senegal Energy Assessment (English) 07/83 4182-SE Status Report (English and French) 10/84 025/84 Industrial Energy Conservation Study (English) 05/85 037/85 Preparatory Assistance for Donor Meeting (English and French) 04/86 056/86 Urban Household Energy Strategy (English) 02/89 096/89 Industrial Energy Conservation Program (English) 05/94 165/94 Seychelles Energy Assessment (English) 01/84 4693-SEY Electric Power System Efficiency Study (English) 08/84 021/84 Sierra Leone Energy Assessment (English) 10/87 6597-SL Somalia Energy Assessment (English) 12/85 5796-SO Republic of South Africa Options for the Structure and Regulation of Natural Gas Industry (English) 05/95 172/95 - 4 - Region/Country Activity/Report Title Date Number Sudan Management Assistance to the Ministry of Energy and Mining 05/83 003/83 Energy Assessment (English) 07/83 451 1-SU Power System Efficiency Study (English) 06/84 018,'84 Status Report (English) 11/84 026/84 Wood Energy/Forestry Feasibility (English) 07/87 073/87 Swaziland Energy Assessment (English) 02/87 6262-SW Household Energy Strategy Study 10/97 198/97 Tanzania Energy Assessment (English) 11/84 4969-TA Peri-Urban Woodfuels Feasibility Study (English) 08/88 086/88 Tobacco Curing Efficiency Study (English) 05/89 102/89 Remote Sensing and Mapping of Woodlands (English) 06/90 -- Industrial Energy Efficiency Technical Assistance (English) 08/90 122/90 Power Loss Reduction Volume 1: Transmnission and Distribution SystemTechnical Loss Reduction and Network Development (English) 06/98 204A/98 Power Loss Reduction Volume 2: Reduction of Non-Technical Losses (English) 06/98 204B/98 Togo Energy Assessment (English) 06/85 5221-TO Wood Recovery in the Nangbeto Lake (English and French) 04/86 055/86 Power Efficiency Imnprovement (English and French) 12/87 078/87 Uganda Energy Assessment (English) 07/83 4453-UG Status Report (English) 08/84 020/84 Institutional Review of the Energy Sector (English) 01/85 029/85 Energy Efficiency in Tobacco Curing Industry (English) 02/86 049/86 Fuelwood/Forestry Feasibility Study (English) 03/86 053/86 Power System Efficiency Study (English) 12/88 092/88 Energy Efficiency Improvement in the Brick and Tile Industry (English) 02/89 097/89 Tobacco Curing Pilot Project (English) 03/89 UNDP Terminal Report Energy Assessment (English) 12/96 193/96 Rural Electrification Strategy Study 09/99 221/99 Zaire Energy Assessment (English) 05/86 5837-ZR Zambia Energy Assessment (English) 01/83 4110-ZA Status Report (English) 08/85 039/85 Energy Sector Institutional Review (English) 11/86 060/86 Power Subsector Efficiency Study (English) 02/89 093/88 Eneigy Strategy Study (English) 02/89 094/88 Urban Household Energy Strategy Study (English) 08/90 121/90 Zirbabwe Energy Assessment (English) 06/82 3765-ZIM Power System Efficiency Study (English) 06/83 005/83 Status Report (English) 08/84 019/84 Power Sector Management Assistance Project (English) 04/85 034/85 Power Sector Management Institution Building (English) 09/89 Petroleum Management Assistance (English) 12/89 109/89 Charcoal Utilization Prefeasibility Study (English) 06/90 119/90 Integrated Energy Strategy Evaluation (English) 01192 8768-ZIM Energy Efficiency Technical Assistance Project: Strategic Framework for a National Energy Efficiency Improvement Program (English) 04/94 -- Capacity Building for the National Energy Efficiency Improvement Programme (NEEIP) (English) 12/94 -- Region/Country Activit/RWeport Title Date Number Zimbabwe Rural Electrification Study 03/00 228/00 EAST ASIA AND PACIFIC (EAP) Asia Regional Pacific Household and Rural Energy Seminar (English) 11/90 -- China County-Level Rural Energy Assessments (English) 05/89 101/89 Fuelwood Forestry Preinvestment Study (English) 12/89 105/89 Strategic Options for Power Sector Reform in China (English) 07/93 156/93 Energy Efficiency and Pollution Control in Township and Village Enterprises (TVE) Industry (English) 11/94 168/94 Energy for Rural Development in China: An Assessment Based on a Joint Chinese/ESMAP Study in Six Counties (English) 06/96 183196 Improving the Technical Efficiency of Decentralized Power Companies 09/99 222/999 Fiji Energy Assessment (English) 06/83 4462-FIJ Indonesia Energy Assessment (English) 11/81 3543-IND Status Report (English) 09/84 022/84 Power Generation Efficiency Study (English) 02/86 050/86 Energy Efficiency in the Brick, Tile and Lime Industries (English) 04/87 067/87 Diesel Generating Plant Efficiency Study (English) 12/88 095/88 Urban Household Energy Strategy Study (English) 02/90 107/90 Biomass Gasifier Preinvestment Study Vols. I & II (English) 12/90 124/90 Prospects for Biomass Power Generation with Emphasis on Palm Oil, Sugar, Rubberwood and Plywood Residues (English) 11/94 167/94 Lao PDR Urban Electricity Demand Assessment Study (English) 03/93 154/93 Institutional Development for Off-Grid Electrification 06/99 215/99 Malaysia Sabah Power System Efficiency Study (English) 03/87 068/87 Gas Utilization Study (English) 09/91 9645-MA Myanmar Energy Assessment (English) 06/85 5416-BA Papua New Guinea Energy Assessment (English) 06/82 3882-PNG Status Report (English) 07/83 006/83 Energy Strategy Paper (English) -- -- Institutional Review in the Energy Sector (English) 10/84 023/84 Power Tariff Study (English) 10/84 024/84 Philippines Commercial Potential for Power Production from Agricultural Residues (English) 12/93 157/93 Energy Conservation Study (English) 08/94 -- Strengthening the Non-Conventional and Rural Energy Development Program in the Philippines: A Policy Framework and Action Plan 08/01 243/01 Solomon Islands Energy Assessment (English) 06/83 4404-SOL Energy Assessment (English) 01/92 979-SOL South Pacific Petroleum Transport in the South Pacific (English) 05/86 -- Thailand Energy Assessment (English) 09/85 5793-TH Rural Energy Issues and Options (English) 09/85 044/85 Accelerated Dissemination of Improved Stoves and Charcoal Kilns (English) 09/87 079/87 Northeast Region Village Forestry and Woodfuels Preinvestment Study (English) 02/88 083/88 - 6 - Region/Country Activity/Report Title Date Number Thailand Irnpact of Lower Oil Prices (English) 08/88 -- Coal Development and Utilization Study (English) 10/89 Tonga Energy Assessment (English) 06/85 5498-TON Vanuatu Energy Assessment (English) 06/85 5577-VA Vietnam Rural and Household Energy-Issues and Options (English) 01/94 161/94 Power Sector Reform and Restructuring in Vietnam: Final Report to the Steering Committee (English and Vietnamese) 09/95 174/95 Household Energy Technical Assistance: Improved Coal Briquetting and Commercialized Dissemination of Higher Efficiency Biomass and Coal Stoves (English) 01/96 178/96 Petroleum Fiscal Issues and Policies for Fluctuating Oil Prices In Vietnam 02/01 236/01 Western Samoa Energy Assessment (English) 06/85 5497-WSO SOUTH ASIA (SAS) Bangladesh Energy Assessment (English) 10/82 3873-BD Priority Investment Program (English) 05/83 002/83 Status Report (English) 04/84 015/84 Power System Efficiency Study (English) 02/85 031/85 Small Scale Uses of Gas Prefeasibility Study (English) 12/88 -- India Opportunities for Commercialization of Nonconventional Energy Systems (English) 11/88 091/88 Maharashtra Bagasse Energy Efficiency Project (English) 07/90 120/90 Mini-Hydro Development on Irrigation Dams and Canal Drops Vols. I, II and III (English) 07/91 139/91 WindFarm Pre-Investment Study (English) 12/92 150/92 Power Sector Reform Seminar (English) 04/94 166/94 Environmental Issues in the Power Sector (English) 06/98 205/98 Environmental Issues in the Power Sector: Manual for Enviromnental Decision Making (English) 06/99 213/99 Household Energy Strategies for Urban India: The Case of Hyderabad 06/99 214/99 Greenhouse Gas Mitigation In the Power Sector: Case Studies From India 02/01 237/01 Nepal Energy Assessment (English) 08/83 4474-NEP Status Report (English) 01/85 028/84 Energy Efficiency & Fuel Substitution in Industries (English) 06/93 158/93 Pakistan Household Energy Assessment (English) 05/88 -- Assessment of Photovoltaic Programs, Applications, and Markets (English) 10/89 103/89 National Household Energy Survey and Strategy Formulation Study: Project Terminal Report (English) 03/94 -- Managing the Energy Transition (English) 10/94 Lighting Efficiency Improvement Program Phase 1: Commercial Buildings Five Year Plan (English) 10/94 -- Clean Fuels 246/01 10/01 Sri Lanka Energy Assessment (English) 05/82 3792-CE Power System Loss Reduction Study (English) 07/83 007/83 Status Report (English) 01/84 010/84 Industrial Energy Conservation Study (English) 03/86 054/86 - 7 - Region/Country Activity/Report Title Date Number EUROPE AND CENTRAL ASIA (ECA) Bulgaria Natural Gas Policies and Issues (English) 10/96 188/96 Central Asia and The Caucasus Cleaner Transport Fuels in Central Asia and the Caucasus 08/01 242/01 Central and Eastern Europe Power Sector Reform in Selected Countries 07/97 196/97 Increasing the Efficiency of Heating Systems in Central and Eastern Europe and the Former Soviet Union 08/00 234/00 The Future of Natural Gas in Eastern Europe (English) 08/92 149/92 Kazakhstan Natural Gas Investment Study, Volumes 1, 2 & 3 12/97 199/97 Kazakhstan & Kyrgyzstan Opportunities for Renewable Energy Development 11/97 16855-KAZ Poland Energy Sector Restructuring Program Vols. I-V (English) 01/93 153/93 Natural Gas Upstream Policy (English and Polish) 08/98 206/98 Energy Sector Restructuring Program: Establishing the Energy Regulation Authority 10/98 208/98 Portugal Energy Assessment (English) 04/84 4824-PO Romania Natural Gas Development Strategy (English) 12/96 192/96 Slovenia Workshop on Private Participation in the Power Sector (English) 02/99 211/99 Turkey Energy Assessment (English) 03/83 3877-TU Energy and the Environment: Issues and Options Paper 04/00 229/00 MIDDLE EAST AND NORTH AFRICA (MNA) Arab Republic of Egypt Energy Assessment (English) 10/96 189/96 Energy Assessment (English and French) 03/84 41 57-MOR Status Report (English and French) 01/86 048/86 Morocco Energy Sector Institutional Development Study (English and French) 07/95 173/95 Natural Gas Pricing Study (French) 10/98 209/98 Gas Development Plan Phase II (French) 02/99 210/99 Syria Energy Assessment (English) 05/86 5822-SYR Electric Power Efficiency Study (English) 09/88 089/88 Energy Efficiency Improvement in the Cement Sector (English) 04/89 099/89 Energy Efficiency Improvement in the Fertilizer Sector (English) 06/90 115/90 Tunisia Fuel Substitution (English and French) 03/90 -- Power Efficiency Study (English and French) 02/92 136/91 Energy Management Strategy in the Residential and Tertiary Sectors (English) 04/92 146/92 Renewable Energy Strategy Study, Volume I (French) 11/96 190A/96 Renewable Energy Strategy Study, Volume II (French) 11/96 190B/96 Yemen Energy Assessment (English) 12/84 4892-YAR Energy Investment Priorities (English) 02/87 6376-YAR Household Energy Strategy Study Phase I (English) 03/91 126/91 LATIN AMERICA AND THE CARIBBEAN (LAC) LAC Regional Regional Seminar on Electric Power System Loss Reduction -8 - Region/Country Activiy/lReport Title Date Number LAC Regional in the Caribbean (English) 07/89 -- Elimination of Lead in Gasoline in Latin America and the Caribbean (English and Spanish) 04/97 194/97 Elimnination of Lead in Gasoline in Latin America and the Caribbean - Status Report (English and Spanish) 12/97 200/97 Harmonization of Fuels Specifications in Latin America and the Caribbean (English and Spanish) 06/98 203/98 Bolivia Energy Assessment (English) 04/83 4213-BO National Energy Plan (English) 12/87 -- La Paz Private Power Technical Assistance (English) 11/90 111/90 Prefeasibility Evaluation Rural Electrification and Demand Assessment (English and Spanish) 04/91 129/91 National Energy Plan (Spanish) 08/91 131/91 Private Power Generation and Transrmission (English) 01/92 137/91 Natural Gas Distribution: Economnics and Regulation (English) 03/92 125/92 Natural Gas Sector Policies and Issues (English and Spanish) 12/93 164/93 Household Rural Energy Strategy (English and Spanish) 01/94 162/94 Preparation of Capitalization of the Hydrocarbon Sector 12/96 191/96 Introducing Comnpetition into the Electricity Supply Industry in Developing Countries: Lessons from Bolivia 08/00 233/00 Final Report on Operational Activities Rural Energy and Energy Efficiency 08/00 235/00 Oil Industry Training for Indigenous People: The Bolivian Experience (English and Spanish) 09/01 244/01 Brazil Energy Efficiency & Conservation: Strategic Partnership for Energy Efficiency in Brazil (English) 01/95 170/95 Hydro and Thermnal Power Sector Study 09/97 197/97 Rural Electrification with Renewable Energy Systems in the Northeast: A Preinvestment Study 07/00 232/00 Chile Energy Sector Review (English) 08/88 7129-CH Colombia Energy Strategy Paper (English) 12/86 -- Power Sector Restructuring (English) 11/94 169/94 Energy Efficiency Report for the Commercial and Public Sector (English) 06/96 184/96 Costa Rica Energy Assessment (English and Spanish) 01/84 4655-CR Recommended Technical Assistance Projects (English) 11/84 027/84 Forest Residues Utilization Study (English and Spanish) 02/90 108/90 Donunican Republic Energy Assessment (English) 05/91 8234-DO Ecuador Energy Assessment (Spanish) 12/85 5865-EC Energy Strategy Phase I (Spanish) 07/88 -- Energy Strategy (English) 04/91 -- Private Minihydropower Development Study (English) 11/92 -- Energy Pricing Subsidies and Interfuel Substitution (English) 08/94 11798-EC Energy Pricing, Poverty and Social Mitigation (English) 08/94 12831-EC Guatemala Issues and Options in the Energy Sector (English) 09/93 12160-GU Haiti Energy Assessment (English and French) 06/82 3672-HA Status Report (English and French) 08/85 041/85 Household Energy Strategy (English and French) 12/91 143/91 Honduras Energy Assessment (English) 08/87 6476-HO Petroleum Supply Management (English) 03/91 128191 Jamaica Energy Assessment (English) 04/85 5466-JM -9- Region/Country Activity/Report Title Date Number Jamaica Petroleum Procurement, Refining, and Distribution Study (English) 11/86 061/86 Energy Efficiency Building Code Phase I (English) 03/88 - Energy Efficiency Standards and Labels Phase I (English) 03/88 -- Management Information System Phase I (English) 03/88 -- Charcoal Production Project (English) 09/88 090/88 FIDCO Sawmill Residues Utilization Study (English) 09/88 088/88 Energy Sector Strategy and Investment Planning Study (English) 07/92 135/92 Mexico Improved Charcoal Production Within Forest Management for the State of Veracruz (English and Spanish) 08/91 138/91 Energy Efficiency Management Technical Assistance to the Comision Nacional para el Ahorro de Energia (CONAE) (English) 04/96 180/96 Energy Environment Review 05/01 241/01 Panama Power System Efficiency Study (English) 06/83 004/83 Paraguay Energy Assessment (English) 10/84 5145-PA Recommended Technical Assistance Projects (English) 09/85 -- Status Report (English and Spanish) 09/85 043/85 Peru Energy Assessment (English) 01/84 4677-PE Status Report (English) 08/85 040/85 Proposal for a Stove Dissemination Program in the Sierra (English and Spanish) 02/87 064/87 Energy Strategy (English and Spanish) 12/90 - Study of Energy Taxation and Liberalization of the Hydrocarbons Sector (English and Spanish) 120/93 159/93 Reform and Privatization in the Hydrocarbon Sector (English and Spanish) 07/99 216/99 Rural Electrification 02/01 238/01 Saint Lucia Energy Assessment (English) 09/84 5111-SLU St. Vincent and the Grenadines Energy Assessment (English) 09/84 5103-STV Sub Andean Environmental and Social Regulation of Oil and Gas Operations in Sensitive Areas of the Sub-Andean Basin (English and Spanish) 07/99 217/99 Trinidad and Tobago Energy Assessment (English) 12/85 5930-TR GLOBAL Energy End Use Efficiency: Research and Strategy (English) 11/89 -- Women and Energy--A Resource Guide The International Network: Policies and Experience (English) 04/90 -- Guidelines for Utility Customer Management and Metering (English and Spanish) 07/91 -- Assessment of Personal Computer Models for Energy Planning in Developing Countries (English) 10/91 -- Long-Term Gas Contracts Principles and Applications (English) 02/93 152/93 Comparative Behavior of Firms Under Public and Private Ownership (English) 05/93 155/93 Development of Regional Electric Power Networks (English) 10/94 -- Roundtable on Energy Efficiency (English) 02/95 171/95 Region/Country Activity/Report Title Date Number Global Assessing Pollution Abatement Policies with a Case Study of Ankara (English) 11/95 177/95 A Synopsis of the Third Annual Roundtable on Independent Power Projects: Rhetoric and Reality (English) 08/96 187/96 Rural Energy and Development Roundtable (English) 05/98 202/98 A Synopsis of the Second Roundtable on Energy Efficiency: Institutional and Financial Delivery Mechanisms (English) 09/98 207/98 The Effect of a Shadow Price on Carbon Emission in the Energy Portfolio of the World Bank: A Carbon Backcasting Exercise (English) 02/99 212/99 Increasing the Efficiency of Gas Distribution Phase 1: Case Studies and Thematic Data Sheets 07/99 218/99 Global Energy Sector Reform in Developing Countries: A Scorecard 07/99 219/99 Global Lighting Services for the Poor Phase II: Text Marketing of Small "Solar" Batteries for Rural Electrification Purposes 08/99 220/99 A Review of the Renewable Energy Activities of the UNDP/ World Bank Energy Sector Management Assistance Progranmme 1993 to 1998 11/99 223/99 Energy, Transportation and Environment: Policy Options for Environmental Improvement 12/99 224/99 Privatization, Competition and Regulation in the British Electricity Industry, With Implications for Developing Countries 02/00 226/00 Reducing the Cost of Grid Extension for Rural Electrification 02/00 227/00 Undeveloped Oil and Gas Fields in the Industrializing World 02/01 239/01 10/24/01 LESM AD1 sEhl ,ILI 'L1 The World Bank 1818 H Street, NW Washington, DC 20433 USA Tel.: 1.202.458.2321 Fax.: 1.202.522.3018 Internet: www.esmap.org Email: esmap@worldbank.org 4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ A joint UNDP/World Bank Programme