China quits $1.5bn Pakistan coal project
By Syed Fazl-e-Haider

QUETTA, Pakistan - The Shenhua Group Corp of China is quitting the US$1.5 billion Thar coal project in Pakistan. The Chinese firm has decided to roll back its plan for setting up coal-fired power plants at Thar in the Pakistani province of Sindh. The decision is considered a major setback for the South Asian country, which is facing a serious power shortage. The project was expected to add 1,000 megawatts to the national power grid in three years.

The decision to withdraw power generation at Thar coal sites was made by the firm in a recent meeting in China with a Pakistani delegation. The main reason for the company's withdrawal is the power tariff rate offered by Pakistan, which the Chinese side deemed insufficient to continue power generation. Security and domestic workload have reportedly been cited as the other reasons that forced the company to drop its plan.

The talks on the project, which involves mining coal from one block at Thar coupled with power production, had been in progress with Beijing. Last October, Islamabad re-established contact with the Shenhua Group, a Chinese state-run company, after three years to discuss starting work at Thar coal sites and offered increased prices for power. Pakistan had previously turned down Shenhua's demand for a tariff of 5.7 US cents per unit for the Thar project.

The Chinese group later expressed its willingness to install the power plant at a generation price of up to 6.5 cents per unit, but the government had not yet made a final decision on the tariff, which was more than what the Chinese company had previously sought. The company had also sought the government's assurance to allow the use of water from underground aquifers and guarantees of a return on its investment for setting up a coal-based power plant in Sindh province.

Some circles in Islamabad were inclined to accept the Chinese group's demand for 6.5 cents per unit, given the fact that the tariff from other competing fuels was quite a bit higher, with the exception of hydro-electricity. Since then it was made compulsory that the tariff, once agreed, would not change for 30 years.

Pakistan had also invited China to become an equity partner in the setting up of the $500 million Thar Coal Mining Co, which would develop the remaining five blocks of the huge coal deposits at Thar. Its management had been planned in the private sector, but the federal government also pledged to provide more than $100 million equity and sovereign guarantees to the partners.

The withdrawal decision is likely to affect adversely other Chinese projects, particularly in the coal-mining and power-generation sectors.

Shenhua has vast experience in generating electricity with coal-fired power plants. With registered capital of 2.58 billion yuan ($336 million), Shenhua Group Corp ranks among the top state enterprises. It is separately listed in the state plan and is endowed with the privilege of international financing, trading, and the import and export of coal. The group is responsible for the overall planning, development and operation of the massive Shenfu Dongsheng coalfield, as well as the related railway, power station, coal terminal and shipping fleet. The Shenhua Coal Trading Co is a wholly owned subsidiary of Shenhua Group Corp, specialized in the domestic and overseas sales of Shenhua coal products.

Shenhua had already moved all machinery to another company, China Machinery Import and Export Corp (CMC), working at Thatta in Sindh province. Last November, the Sindh Coal Authority, Mines and Mineral Development Department and CMC signed an agreement for a detailed coal geological investigation in the Sondha-Jheruk coalfield area in Thatta district. A preliminary geological survey has identified a large lignite-coal reserve at Sondha-Jheruk.

To develop the identified coalfield for commercial exploitation, CMC will undertake further exploration and seek international investment. CMC also plans to set up two power-generation plants of 300MW each. Under the agreement, CMC has to send its engineering technicians, management personnel, drill rigs, etc to Pakistan.

In 1992, the Geological Survey of Pakistan (GSP) discovered more than 185 billion tons of lignite reserves in Thar coalfield. The GSP completed coal-resources evaluation in the four specific blocks of the coalfield. On the basis of GSP studies, the required coal potential of a minimum of 500 million tons in each block has been established. Thar coalfield extends over 9,000 square kilometers, of which 356 square kilometers has been studied in detail by the GSP, indicating the presence of 9 billion tonnes of coal in four blocks. The main coal-bed thickness ranges from 12 to 21 meters at an average depth of 170 meters. The quality of the coal has been determined on the basis of the chemical analysis of more than 2,000 samples. The grade of the coal ranges from lignite-B to sub-bituminous- A.

The Shenhua Group had completed mechanized drilling work by the end of 2002. Of 54 square kilometers, the Chinese firm had drilled 125 holes over 9 square kilometers. About 200 million tonnes of coal reserves were estimated to be available within 54 square kilometers, which is enough for power generation for the next 30 years. In view of the rapidly mounting Pakistani energy deficit, there is an urgent need to exploit the country's huge indigenous coal resources, turning the coal-mining sector into a modern mechanized industry.

Several foreign and local companies prepared feasibility reports in the past and confirmed availability of coal deposits, but they were reluctant to start power generation because of an unfair pricing formula for coal-fired power generation. Pakistan needs to increase its share of coal in the energy mix to at least 19% by 2030 and 50% by 2050. Experts in Pakistan stress the need for developing a uniform pricing formula for electricity purchase to ensure that foreign investors will set up coal-fired power plants in the country.

This month, the Private Power and Infrastructure Board of Pakistan approved issuance of a letter of interest to Hassan Associates Ltd, a local company, for establishing a 1,000MW power plant based on Thar coal worth $1.2 billion. The Sindh government has reportedly awarded an exploration license covering 64 square kilometers at the Thar coalfield to the local investors. This is officially considered a major decision to use indigenous resources for power generation and boosting economic activities in the area.

Hassan Associates, which has deposited a bank guarantee of $7 million, has agreed to provide 1,000MW in 38 months and plans to increase its output to 1,800MW in the future. The Sindh government has provided all required infrastructure at coal-mine sites and says it is ready to provide the necessary support for companies setting up coal-mining and power-generation operations.

Syed Fazl-e-Haider, sfazlehaider05@ yahoo.com, is a Quetta-based development analyst in Pakistan. He is the author of six books, including The Economic Development of Balochistan, published in May 2004.

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