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Focusing on the gas sector
By: Dr. Waqar Ahmed

Economic Coordination Committee’s decisions on gas sector allocation and pricing should be brought for approval to the Council of Common Interest.

There is now credible data to suggest that Pakistan will run out of domestic natural gas within the next 15 years. Already, a 2.5 billion cubic feet gap between demand and local supply of gas is costing Pakistan approximately 2 per cent of the country’s national income.

Unfortunately, our energy mix today is heavily dependent on gas. Currently, gas accounts for 41 per cent of all energy consumed in the country. Around 7.3 million domestic gas users now account for 25 per cent of overall gas usage. There are 77,000 commercial and 10,000 industrial consumers. Almost 51 per cent of energy used by Pakistan’s industrial sector comes from gas.

While 35 per cent of the population gets piped natural gas, 65 per cent end up using relatively more expensive fuels. As natural gas runs out with no deeper reserves in sight any time soon, a move towards re-gasified liquid natural gas will lead to 30 per cent increase in energy expenditure by the industrial sector.

So, what exactly is wrong with the supply of natural gas? During 2013-14, around 100 wells were successfully drilled. However, they were found to be shallow and can only provide one-third of the fast-depleting gas reserves.
The exploration and production (E&P) sector urgently requires us to put in place: real time data on gas wells and their production, improvement in regulatory processes and oversight, expedite regulatory approvals, and taking strict action against companies not delivering as per their contractual obligations.

The existing E&P policy has been found lucrative by foreign investors. However, security threats to the assets of such investors still remain. Sindh province is the largest provider of gas contributing over 70 per cent in total supply in Pakistan; however, the attacks on the installations and staff of United Energy Group (China) in Badin have made the company nervous about their existing and future programmes.

The Oil and Gas Development Company Limited (OGDCL) — the largest E&P enterprise in the country — has to undergo governance reforms. Slower than desired divestment of OGDCL shares negatively impacted company’s performance. The government had started with a weak pitch and only half of the shares offered by the government were subscribed by the investors.

The recent Sinjhoro plant scam has cast doubts on the integrity of some company officials who are allegedly involved in corruption. The company’s financial position remains under pressure as the management struggles to bring down the high operating costs. The high receivables of OGDCL (and Pakistan Petroleum Limited) due from distribution companies is fuelling the circular debt.

A case was made to collect Gas Infrastructure Development Cess (GIDC) from the private sector to finance expenditures towards Iran-Pakistan pipeline and Turkmenistan–Afghanistan–Pakistan–India pipeline. Until mid-January 2016, the government had collected PKR 184 billion which cannot be touched as GIDC utilisation rules were never finalised.

Let us now turn to the demand side. The Gas Utilisation Priority Policy 2013 follows a priority allocation where gas is provided to (in same order) domestic & commercial users, power sector, fertilizer, cement and CNG (transport) sectors. For domestic users, despite increased shortages, Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC) have continued to give new gas connections at an average annual growth of 5.6 per cent since 2009. The financial issues at these companies need immediate attention as both entities have posted high losses.

Adding to these constraints are the gas sector losses: 15 per cent in case of SSGC and 12 per cent in case of SNGPL. These are above the globally recognised 2 per cent commercial and technical losses or theft. In the case of Balochistan, the unaccounted for gas (UFG) losses stand around 51 per cent. Two-thirds of these losses have been due to theft while the remaining are attributed to poor state of pipelines and related infrastructure.
Will the LNG, now procured at expensive terms, also pass through these leaking pipelines? Ultimately, consumers will end up paying a higher price (base tariff) for gas to cover for such negligence. The circular debt comes into picture here as well given delayed and low levels of recovery by distribution companies from large consumers like Pakistan Steel Mills and K-Electric.

A possible way forward is to combine short to medium-term reform measures that are politically easy to deliver. First, the regulatory framework in the energy sector requires consolidation. The three regulators, i.e. petroleum concessions office (upstream) oil and gas regulatory authority (midstream and downstream), and National Electric Power Regulatory Authority may be merged.

Furthermore, the regulatory authorities need to be further capacitated with permanent positions of risk and controls analyst, upstream and downstream micro-economists. The regulatory authorities should build capacity to quickly conduct consumer welfare incidence analyses before suggesting any price revisions.

In order to bring competition in the gas market, Competition Commission of Pakistan (CCP) will need to play a more proactive role. Their battle with liquefied petroleum gas (LPG) continues as key players in LPG players need to be brought under a regulatory framework to avoid unjust price hikes and consumer exploitation.

Second, the regulation should also enforce product standards in the gas sector. A large quantity of inefficient gas appliances are manufactured and supplied by small scale producers without compliance with quality and safety standards. The low tariffs for household consumers vis-à-vis registered commercial users has helped the growth of informal sector in micro and small scale manufacturing.

Such low tariffs also encouraged inefficient usage and wastage of gas. The National Energy Conservation Centre had estimated that 20 percent energy could be saved in the country through timely conservation measures and appropriate pricing.

Third, the judiciary dealing with gas sector cases will also deliver their part. The growth in gas theft persists as those involved know that lengthy conviction processes and legal lacunas cannot bring about certainty of punishment.

Fourth, consumer welfare in gas market is directly linked to creating competition. In the upstream, prices are set up front without any price competition between E&P firms. These firms will not face a substantial risk as government, through a guarantee, will buy their gas through SNGPL or SSGC. In the downstream too, government is the largest shareholder in both these companies. The Oil and Gas Regulatory Authority (OGRA) and CCP will need to intervene here so that fair competition is nurtured and consumer exploitation is curtailed.

Fifth, a related point is to unbundle the transmission and distribution which should allow perhaps a single transmission company with several distribution companies having specific and time bound key performance indicators. In the medium term UFG losses can be curtailed through installation of smart meters network and prudent gas accounting.
Finally, several gas allocation and pricing decisions left to Economic Coordination Committee (ECC), require discussion with provinces. The provinces should have autonomy in sectoral gas allocation and management. It is, therefore, recommended that ECC decisions on gas sector allocation and pricing should be brought for approval of Council of Common Interest.
 

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The opinions expressed in this article are the author's own and do not necessarily reflect the viewpoint or stance of SDPI.