Gas politics

The government has finally increased the gas prices across the board. This is in line with the IMF, in order to bridge the gap between cost and revenues generated by the Sui gas companies. The increase in prices will end the growth in the ‘flow’ of the gas circular debt. Meanwhile, the ‘stock’ which is approximately Rs1,300 billion (SNGP: Rs 800 bn and SSGC: Rs500 bn) will have to be dealt separately through some other mechanism.

With currency depreciation and increase in crude prices, the proscribed gas price by OGRA stands around Rs950/mmbtu and that calculation is done at PKR/USD parity of 260. The increase in prices is to recover that cost which is growing with currency depreciation. The highest increase is at 112 percent and the weighted average increase is around 40-45 percent.

Within the domestic consumers, a new category of ‘protected consumers’ is added where the tariffs are in fact lowered in two out of four slabs and that category is based on the average consumption in the winter months (Nov to Feb). That is good – especially for those in the north; while some rich may keep on having lower bills in the south (especially in Karachi) where winters are mild.

In the case of non-protected domestic consumers, the price increase is staggered with lowest slab to pay Rs200/mmbtu (65% increase) and the highest to pay Rs3,100/mmbtu (112% increase). Then the increase in bulk consumers is at 105 percent to Rs1,600/mmbtu, and the rate of commercial consumers would increase by 29 percent to Rs1,650/mmbtu. And in the case of standalone Tandoors, there is no change in price – the previous tariff is maintained at Rs697/mmbtu.

In the case of fertilizer, the feed gas price (barring Engro) is increased by 69 percent to Rs510/mmbtu. This is still less than the cost and much less than what the global prices. But that is fine so there is low-cost supply of fertilizer (mainly Urea) to the farmers; at a steep discount to the global prices.

The real disparity and confusing elements are in industrial tariffs where there is a clear discrimination between Punjab based industries and those which are in KP and Sindh. With falling natural gas supply, there is no availability of natural gas to Punjab where exporting industry gets a blended tariff of $9/ mmbtu which comes around Rs2,400/mmbtu at the current currency parity. On other hand, supply to export and non-export industrial consumers in Sindh and KP are at Rs1,100/mmbtu and Rs1,200/mmbtu. That is less than half of the price of what Punjab is paying and even around half the price what exporters in Bangladesh are paying.

Such gaps should not have existed. A better way to deal with all the gas issues is to have blended price of RLNG and natural gas through implementing WACOG. The Bill for WACOG is being passed; but it’s not implemented by the government, as this might have antagonized its partners in Sindh (PPP) and in KP (JUI-F). Hence, there are political considerations for keeping this disparity intact.

No one is supporting this disparity. Sources in Sui companies have the view that there should be a levelized price for industrial exporting consumers at $9/MMBTU and non-exporters should be charged at LNG rate. An APTMA representative calls this a death warrant for the Punjab industry while a politician and industrialist from Punjab is of the view that in Sindh indigenous gas is exploited to reward select few while in Punjab indigenous gas is used to exploit industries. As per him, solution is simply to ban indigenous gas for captive plants across Pakistan.

Anyhow, it is happening. There might be a case of shift in industries from Punjab to Sindh. Back in days when Karachi’s law and order situation was bad, many industries moved from Sindh to Punjab and later when the local gas supply started becoming dearer in Punjab, some industrial production shifted back to Karachi and now that shifting to south is only going to accelerate. There is a cost to this shift. The bankruptcy laws in Pakistan are weak and any industry going bankrupt likely will sell its plant and machinery in scrap while the new plant and machinery will be imported to replace it by some other industrialist. In this way, the total country’s industrial capacity will not have enhanced; but the imported cost would increase and precious capital would be wasted.

The funny thing is that the lower industrial tariffs in Sindh are not going to be sustained as domestic gas is depleting and it’s not far when Sindh industry would move to other fuel sources as well. A better mechanism could have been to divert the remaining gas to the power sector for better use, and efforts should be put on clearing the stock of the gas circular debt to unlock the cashflow of E&P companies indirectly and that will help these companies to explore and have new discoveries to generate much needed indigenous gas.