The Federal Budget 2012-13 as expected had room for Gas Infrastructure Development Cess for which a provision of Rs.30 billion was made in non-tax revenue. That largely went unnoticed from the ever vigilant media eyes, as it was discussed in greater detail in the Finance Bill and not in the budget document.
The impact of newly imposed cess, applicable from July 1, 2012, will be most felt in fertiliser feedstock cost, as the new feedstock is all set to be raised by a minimum 33 percent to Rs.416/mmbtu. But, in all likelihood, the feedstock prices will be increased even more as OGRA will also announce revised prices at the beginning of FY13, which could see the new feedstock gas price near Rs.500/mmbtu.
Interestingly, fertiliser feedstock gas has the distinction of having a rather unique price composition, 72 percent of which comprises of infrastructure cess, which will be collected by the government. This is the highest proportion of cess in any gas user category and the gradual phasing out of the long criticised feedstock subsidy is a right step in the right direction.
As a result, the ureas prices are expected to rise by another Rs.130-150 per bag come July 1, 2012. Although, that will be a tough call for the local urea players as Pakistan currently faces a supply glut due to the presence of cheap imported urea. It appears likely that the impact of increased feedstock gas cost would be difficult to be entirely passed on to the end consumer -and a hit on primary urea margins seems the most likely outcome.
The CNG sector is also set to take a heavy toll of the increased infrastructure cess, as the new cess is four and seven times higher, respectively, for regions I and II. The CNG retail prices as a result are expected to surge by a minimum of 29 and 22 percent, respectively, for region I and II. This is a welcome move from the government and would be a step forward in discouraging the usage of natural gas in private transport.
That said, CNG prices still enjoy a significant discount on petrol, but this step will certainly narrow the differential. The government should now fasten its efforts of incentive giving LPG as a substitute fuel for the transport sector, which will free the 12 percent gas consumed by the CNG sector, for other industries, which should ideally be prioritised higher.
While, the budgeted Rs.30 billion collection from infrastructure cess would provide another avenue of revenues collection to the government, it could have been much better, had the gas price been rationalised from the downstream.
The E&P companies have long been asking for more competitive wellhead prices, that could attract foreign investment and increase the drilling and exploration activities. Should this happen, it will go a long way in addressing the energy crisis in the country as higher wellhead price for E&P companies will serve as a major incentive and will provide the required premium that the security situation in the affected areas demands.
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