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WACOG details: Pakistan's move towards gas pricing reform

  • Business Recorder dissects the bill that looks to address country's gas shortage and unify pricing across the country
Updated 21 Feb, 2022

In a significant development for Pakistan’s energy sector, the Senate last week passed two new bills, a step towards reform that, the government says, would address gas shortage and unify its pricing in the country.

Included in the two bills, yet to be enacted, was the reform for weighted average cost of gas (WACOG). The WACOG bill envisages allowing Oil & Gas Regulatory Authority (OGRA) to charge weighted average on cost of indigenous gas and imported RLNG (re-gasified liquid natural gas) to consumers.

Previously, OGRA determined separate tariffs for indigenous gas and RLNG customers and the ratio of indigenous gas and RLNG usage was around 70:30. In order to increase the share of imported RLNG due to shortage in indigenous gas, the government introduced the WACOG bill with Hammad Azhar, Pakistan’s Energy Minister, saying that the ratio between indigenous gas and imported RLNG will be 50:50 in the next two years.

EDITORIALS: Cross-subsidy on gas

His statement came as the country spent the winter season facing acute shortage, running from pillar to post to arrange alternatives to address energy needs.

Many say that the government's inability to pass on the price impact of imported gas to consumers is aggravating the situation.

They argue that the WACOG will address the issue. Others say it will raise inflationary burden at a time when prices are already high. Similarly, Sindh has reportedly objected to the bill, arguing that gas-producing provinces should not bear the burden of imported gas.

Experts weigh in

Head of Research at Business Recorder Ali Khizar said the bill is trying to address the energy shortage from the demand-side, but it may also enable companies to address supply-side issues.

"The bill will enable Sui companies to generate more cash, reducing circular debt, and hence, enable them to invest in their infrastructure," Khizar told Business Recorder.

OPINION: WACOG: about time!

Meanwhile, in its report, brokerage house Arif Habib Limited (AHL) said that while gas prices are expected to increase, the legislation would curb gas circular debt.

The government has authorised OGRA to determine the final consumer gas sale prices under the Oil and Gas Regulatory Authority (Amendment) Bill, 2022. Under the bill, if the incumbent government fails to advise new gas sale prices, the authority within the time specified i.e. 40 days of its determination, can effectively notify the new sale price.

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“As per the new bill, OGRA no longer requires another permission to determine new prices,” said AHL in its report.

“Therefore, if the prescribed prices are higher than the last notified sale prices for any category of consumers, the former will effectively be established as the new sale price by the power vested to the regulator. Moreover, the same will be applicable in case of a potential decrease in prices attributable to a change in well-head gas prices,” the report added.

Meanwhile, under the other WACOG bill, gas prices will also reflect the augmenting share of RLNG in the total sales mix.

“Despite the system using a mix of natural gas and RLNG, ever since indigenous natural gas reserves started depleting, and import of RLNG commenced in 2015, gas sold to most consumers does not reflect the higher tariff of imported LNG,” the report added.

“Consequently, it makes sense to assign a weighted average percentage to both RLNG and natural gas in the pricing mix,” it said.

Impact

Coming to the impact of the said bills, especially WACOG, the report said that it foresees a surge in end-consumer gas prices.

“Perhaps, the most impacted would be the residential consumers who form 44% of the total gas sales mix of the country. However, we believe the lowest tariff bracket (which makes up 40% of the residential demand and has a current tariff of Rs121/mmbtu) will continue to be shielded through a targeted subsidy,” it said.

In a positive development, the new amendments “will put a lid on the growing quantum of gas circular debt, and make the provision of RLNG feasible, as its price will now be accounted for in the cost charged to gas consumers, having a positive impact for SNGPL and SSGC”, the report added.

Sale of Liquefied Natural Gas: Bill on weighted average cost on the cards

Coming to the national economy, the expected surge in local gas prices would put the already high inflation outlook in more jeopardy. “We believe a 10% increase in the gas charges under the CPI basket will have a 10bps impact on headline inflation,” it said.

On the industrial front, the report said higher gas prices can put pressure on industrial profitability.

“We estimate that every Rs50/mmbtu increase in gas tariff (captive power usage) will require Rs3/bag jump in cement prices, while long steel prices will have to be hiked by Rs120/ton... Whereas urea prices would have to be increased by Rs57/bag.”

Meanwhile, Topline Securities said that the WACOG bill “will help reduce cross-subsidies being provided to domestic and industrial customers and thus, lower circular debt pile-up”.

“We believe that Punjab-based companies, which have a major share in RLNG consumption due to ingenious gas shortage, will be the beneficiary of this development. On the other hand, Sindh-based sectors may see a rise in gas prices and will be negatively affected,” Topline said.

On the industrial front, Topline Securities that the WACOG bill “could be cash flow positive for Sui companies as government’s inability to increase gas prices in line with rising cost of gas has significantly hurt cashflows of the companies”.

It added that "due to the government’s priority to incentivise export-based sectors, textile and fertiliser may be exempted".

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