Compelling need for implementing WACOG Law

For years, Pakistan has grappled with an energy crisis, with natural gas being a crucial component of the country’s energy portfolio. With rapid economic growth, the demand for gas has surged. However, the known recoverable indigenous gas reserves are insufficient to meet this growing demand.

To bridge this gap, the government explored various options, including the initiation of mega projects like TAPI (Turkmenistan-Afghanistan-Pakistan-India) and IPI (Iran-Pakistan-India) for importing gas. These projects, while promising, faced numerous geopolitical and economic challenges that hindered their progress.

Recognizing the urgency of addressing the energy crisis and ensuring a stable energy supply for its citizens and industries, Pakistan embarked on the path of importing Liquefied Natural Gas (LNG) in 2014. This approach involved the importation of LNG, its re-gasification, and its injection into the existing pipeline network, thereby integrating imported LNG into the country’s gas infrastructure.

To facilitate this ambitious endeavour, Pakistan took several crucial measures, including the installation of LNG receiving facilities, storage infrastructure, and re-gasification terminals. These investments were essential to ensuring the smooth flow of imported LNG into the domestic market.

The challenge of RLNG pricing: However, one challenge loomed large – the pricing of imported LNG, specifically Re-Gasified Liquefied Natural Gas (RLNG). Given that the price of imported RLNG was significantly higher than that of locally produced gas, the government had to strike a balance between making RLNG available to those who could afford it and addressing the concerns of gas-producing provinces that feared the higher RLNG prices would be passed on to their consumers. To navigate these challenges, the government introduced several amendments to existing laws and regulations.

One notable development was the classification of RLNG as a petroleum product, subjecting it to pricing provisions outlined in the OGRA Ordinance 2002, similar to other petroleum products. This approach allowed for monthly price adjustments in line with other petroleum products.

While these measures were necessary to gain the support of gas-producing provinces and overcome political and legal obstacles, they led to a ring-fencing arrangement for RLNG pricing. This effectively restricted the use of RLNG to the power sector, where the price could be justified by the revenue generated.

The dilemma of RLNG diversion: The decision to ring-fence RLNG pricing was not without its consequences. In recent years, the government faced the challenge of balancing RLNG allocation between power generation and domestic consumers and others.

The ever-declining supply of local gas and the imperative to reduce gas load shedding in the winters led to the diversion of RLNG to domestic consumers, despite the significant price differential.

As the cost of imported RLNG remained substantially higher than the gas tariff for domestic consumers, this diversion resulted in the accumulation of circular debt. As of March 31, 2023, this circular debt had swollen to over Rs 320 billion.

Despite this mounting financial burden, the Federal Government provided subsidies amounting to Rs 85.9 billion during FY 2021-22 and FY 2022-23 to settle accumulated receivables. Nevertheless, a substantial balance of Rs 234 billion remains outstanding, placing significant strain on SNGPL (Sui Northern Gas Pipelines Limited) and jeopardizing its ability to meet its obligations to LNG/RLNG suppliers, including PSO (Pakistan State Oil) and PLL (Pakistan LNG Limited).

The looming default by PSO and PLL, driven by their inability to pay their suppliers, carries the potential for disastrous consequences for Pakistan’s energy security and economy. This situation underscores the urgent need for a comprehensive solution.

The birth of the WACOG law: In response to these pressing challenges, the OGRA Ordinance 2002 was amended in February 2022. This amendment authorized OGRA (Oil and Gas Regulatory Authority) to treat RLNG as natural gas and to determine the prescribed price of gas companies, incorporating it into the revenue requirements of the Sui companies, rather than determining RLNG prices on a ringfenced basis. This critical amendment is commonly referred to as the WACOG Law (Weighted Average Cost of Gas).

The WACOG Law represents a pivotal moment in Pakistan’s energy landscape. It seeks to establish a uniform rate of supply for gas consumers, taking into account the weights of imported Re-Gasified Liquefied Natural Gas (RLNG) and indigenous gas. The primary objective is to prevent the diversion of RLNG from its intended use, ensuring a reliable energy supply, and addressing the financial crisis arising from circular debt accumulation.

The urgent need for WACOG implementation: While the passage of the WACOG Law was a significant milestone, its true potential remains untapped until it is implemented. The urgency of this implementation cannot be overstated. Several factors underscore the need for immediate action:

Dwindling indigenous gas reserves: Pakistan’s indigenous gas reserves are depleting at an annual rate of 9%. This depletion, combined with increasing demand, has led to a widening gap between supply and demand for natural gas. To bridge this gap, Pakistan has increasingly relied on the import of RLNG, which is priced significantly higher than system gas.

Energy security: A stable and affordable energy supply is essential for any nation’s security and economic stability. The RLNG diversion, driven by the price differential, has disrupted the energy supply chain, making the country vulnerable to supply shortages and increasing the risk of energy crises.

Economic stability: The energy sector is a cornerstone of Pakistan’s economy. Delaying the implementation of WACOG jeopardizes the stability of the energy sector, leading to economic instability. Investors closely monitor the regulatory environment, and a lack of implementation could deter much-needed investments.

Consumer welfare: The RLNG diversion and circular debt accumulation have had a direct impact on consumers. Domestic consumers have faced the brunt of this crisis, with rising gas tariffs and uncertainty in energy supply. Implementing WACOG can alleviate these issues, ensuring that consumers receive a more stable and fair supply of gas.

International standing: Pakistan’s commitment to energy reforms and regulatory transparency is closely watched by international bodies like the IMF and trading partners. Delaying the implementation of WACOG could harm the country’s international reputation and affect trade agreements.

Benefits of WACOG implementation: The implementation of the WACOG Law holds several potential benefits for Pakistan:

Stable energy supply: By preventing RLNG diversion and establishing a uniform rate of supply, WACOG ensures a stable and reliable energy supply for all sectors.

Investor confidence: Swift implementation of the law can restore investor confidence in Pakistan’s energy sector, attracting much-needed investments for infrastructure development and exploration.

Reduced circular debt: The law can effectively address the issue of circular debt, ensuring that gas companies can meet their obligations to suppliers, thereby safeguarding the energy supply chain.

Energy sector stability: A stable energy sector is essential for economic growth. Implementing WACOG can help Pakistan achieve this stability, fostering economic development and job creation.

Fair consumer pricing: WACOG aims to establish fair pricing mechanisms, benefiting both domestic and industrial consumers by ensuring that they are not burdened with inflated gas prices.

Conclusion: The WACOG Law represents a turning point in Pakistan’s energy sector, offering a pathway to stability, transparency, and economic growth. However, the clock is ticking, and the urgency of its implementation cannot be overstated. Delaying this crucial step not only hampers the resolution of pressing energy challenges but also puts the nation’s economy at risk.

The government’s swift action in issuing necessary policy guidelines and instructions to OGRA is paramount to unleashing the full potential of WACOG. Failure to do so could exacerbate Pakistan’s energy crisis, compromise economic stability, and deter much-needed investments.

WACOG-priced gas must be offered to all consumers including the domestic sector without offering any cross-subsidized tariffs. The government may financially support the poor and vulnerable sections through NSER/BISP based targeted subsidies.

The time for action is now. Pakistan must seize this opportunity to unlock its energy potential, ensuring a stable, secure, and prosperous future for its citizens and industries. The implementation of the WACOG Law is not just a legal obligation; it is a lifeline for the nation’s energy sector and a great opportunity to clear the distortions and disparities prevailing in the gas pricing regime in the country.

Copyright Business Recorder, 2023