The gas circular debt is growing (read “Gas Circular Debt” published on 10th Feb 2021). The gas circular debt is around Rs600 billion today and if nothing is done, it can double in a few years. This is fast becoming another headache like power sector debt which is currently hovering around Rs2.5 trillion. The gas circular debt is in addition to the power sector debt and is purely based on the difference between cost and revenues of two gas companies – SNGP and SSGC.
Here the attempt is to explain economic and political issues pertaining to gas circular debt in simple words. The first realization that needs to be sink in is that the country is fast moving from a gas producing country to a gas importing one, and the pricing must reflect that fundamental change. Yet, that is not happening. The sooner that is done, the better it would be.
In 2015, before the country started importing LNG, the system gas annual supply (from SNGP and SSGC) was around 2.7 billion cubic feet (BCF) with zero imports. Today, the number is at 3.2 bcf but with 1.2 bcf of imported RLNG. This implies that domestic supply has reduced from 2.7 bcf to 2 bcf.
Domestic gas production is falling (as old fields are depleting and new are hard to come by) and the imported component is increasing. The constraint demand (at the existing pricing) is high, but the supply is less. If the pricing is not changed, at given supply rate, the gas circular debt could easily double in five years.
The problem is bigger for SNGP where the difference between cost and what the company charges from domestic consumers is standing at approximately Rs400 billion. Out of this, Rs300 billion is gas differential margin (or tariff adjustment) – difference between the cost and revenues of domestic gas production. Add another Rs100 billion of RLNG diversion cost to domestic consumers. Since RLNG in law is termed as petroleum product, the recovery mechanism is different.
One may ask, since domestic gas cost has not increased much, how would the tariff adjustment grow to Rs 300 billion. For that, one needs to understand that non-domestic consumers in SNGP used to cross subsidize the domestic consumers. The average cost of production (domestic gas) is Rs660/mmcfd while the average revenue charged from domestic consumer is Rs300-350/mmcfd.
Prior to 2015, power and other consumers’ higher tariff was enough to compensate for low charge on domestic. Since the domestic supply pie is declining and high paying costumer is moving away to RLNG, the cross subsidy is not enough to cover the differential. For example, in 2013, on SNGP network, domestic user consumption was 175 million MMBTU which was 34 percent of total sales. In 2019, the overall sales fell by 24 percent to 387 million MMBTU, but domestic consumption increased to 219 million MMBTU while the share increased to 56 percent.
The higher share of domestic is creating a greater need for cross subsidy. But the consumer to pay for it is vanishing. That is increasing the differential margin or tariff adjustment. This is growing at an average of Rs50-60 billion a year, and the toll is at Rs300 billion today. The other debt is due to RLNG diversion cost. This happens in the winter months when domestic demand peaks and expensive LNG is mixed in it without any recovery. This number in the last couple of years reached at Rs100 billion and may add another Rs40 billion these winters. The number is growing at an increasing rate.
The problem in SSGC is a little less worrying as the company doesn’t supply imported gas to domestic. But their other customers are facing problems as gas supply is falling. Its circular debt number is likely to grow as well in the years to come.
The solution is economically simple and intuitive. Use the weighted average cost of gas (WACOG) and charge customers based on it. But provinces – Sindh and KP, are not agreeing to it. They say that under article 158, gas is the right of the province producing it. Since Punjab does not produce enough gas and consumes the highest amount, why should Sindh and KP pay for it? The solution is to increase the price in Punjab. But this (or any) federal government would want the same domestic price across the country.
Since RLNG consumers -like power, CNG etc., are paying the actual cost of import, one solution is to take them out of the mix and have WACOG on remaining gas supply. In this case, domestic gas price increase would be less. But provinces are not agreeing to this solution as well. The reality is syncing in Sindh as its own supply is declining as well. But KP is not agreeing at all.
The solution is nothing but to charge consumers on the actual cost. The government is playing with fire by ignoring the gap. This is dangerous. For the past five decades, the country has wasted the precious natural resource by selling gas dirt cheap to domestic consumers. And due to increasing circular debt, majority of the foreign gas producers have left the country. That is why it is falling. Now government is wasting precious foreign exchange for inefficient domestic gas consumption. That is bad for the country.
Interestingly, not all the domestic consumers are getting pipeline gas. There are nearly 11 million domestic gas connections (including both SNGP and SSGC). That is around one third of country’s population. The rest is relying on LPG and other expensive resources. It is best for all – federal and provincial governments—to get their act together. Otherwise, the whole country will pay a heavy cost. There is no free lunch. If you are producing that lunch on cheap gas, your kids will have to pay for it eventually.