Containment of fiscal deficit should be and is the first priority. In this respect extensive data released on Q1 deficit is encouraging transparency. Rs 962.801 billion deficit consists: Rs 1379 billion in markup payments, pensions – Rs 203.3 billion, running of civil government – Rs 131.917 billion and subsidies - Rs 2.488 billion.
This Q1 budget deficit of 0.9 percent of GDP was met through domestic net borrowing of Rs 537.631 billion. (1QFY 21/22 1.1%/0.8%)
1QFY24 results so far declared by FCMGs, banks, fertilizers, oil, refineries and chemicals do not reflect of an economy in crisis or experiencing demand reduction.
The silver lining is that restrictions on import LCs have initiated discussion towards export and a scramble to substitute imports; it is also triggering creativity cells to improvise, utilise local material, build R&D. To succeed it will require a collaborative approach that is driven not by pricing alone.
There is a need to incentivise exploration of new fields for oil and gas for reducing the current account deficit and fuel security of the country. This would require increasing royalties on oil/gas, windfall levy against crude oil, levy on LPG/petroleum and GIDC to Rs 1 billion from Rs 492.366 billion (1Q) over next 2 years till subsidies of Rs 2.488 billion reduce.
Pakistan has struggled with WACOG and delay in hiking gas tariff, now from November 2023, has resulted in Rs 65-78 billion loss that reportedly being recovered through the revised tariffs.
The target of containing and not reducing Rs 2.1 trillion gas circular debt (CD) and is to be achieved by tariff for export industry and industrial captive and process power generation based on blending with RLNG between 10-40%. Knowing that existing reserves of the country are depleting at ~9% annually and making gas available to domestic consumers during peak winter season for 8 hours is understandable, however, pricing for CNG at 80% of price of petrol price does not make sense as it will encourage wasteful utilization.
Urea production of 2.4m tonnes by FFC has enabled over $1.65bn saving via import substitution and is estimated to be $4.2bn for the industry. There is a case to be made for increase in gas price for the fertilizer industry with direct subsidy paid to farmers but this difficult decision has been delayed.
Energy pricing determination causes political despair every fortnight, every month, and every 6 months. For gas, it is being driven by impact on 5.7m consumers in a country whose 70% of population continues to use LPG and wood, etc.
Furthermore, according to the federal minister for energy, 57% of houses use 31% gas with billing of 11%: 3% use 17% gas with billing of 39%.
This metric suggests that gas should be used for power generation instead of homes and justifies the decision to ring-fence RLNG to power as a correct decision in 2015/16. There is also a realisation that domestic connections will have to move to LPG over next one to two years as the writing is on the wall and this transition will have to be made.
Pricing is an arduous struggle due to slab rates and cross subsidy. It is, therefore, desirable that gas pricing should be based on the LPG imported price notified every month by Ogra (Oil and Gas Regulatory Authority) with direct subsidy provided to households and to industry based on performance and revenue targets.
Blended gas being cheaper than LPG, the difference will provision subsidy amount. Fuel pricing should be based on 6-month future horizon and adjusted monthly like is being done for electricity by Nepra (National Electric Power Regulatory Authority).
Captive power plants need to be shut down and power delivered to them through the grid. Unit electricity pricing has also to be based on fuel oil generation cost and subsidy amount above a certain threshold directly credited to consumer. Fuel oil pricing will provide the subsidy buffer, given our effective current energy mix.
Pakistan should have shifted gas consumers to electric power years ago as per recommendations in earlier studies. Due to myopic focus of the decision makers, it has missed implementation plans to tackle reduction in gas production and it is baffling that laying of gas pipelines is still going on.
All of this requires that the Engineering Development Board in collaboration with The National Energy Efficiency & Conservation Authority should specify efficiency and safety standards without further delay and encourage use of LPG, electrical devices while Regulations by Building Authorities, DISCOs with Ogra and Nepra should ensure enforcement of safety standards to build consumer confidence.
As highlighted in an earlier article, WACOG is not an optimum solution unless the desired aim is to retain the GoP monopoly, not evolve a competitive energy market and be in denial of the situation in coming years. It is a first small step but actions are urgently required before we end up increasing LNG ratio to 100% in the next few years.
How are we ensuring our gas energy security and what is our strategy as price opener clause in our long-term LNG agreements is enabled in 2026/2027 when current tight supply situation ends in 2025? Obtaining 9 mtpa replacement requires action plan now and is not served by Pakistan signing a one year (0.7mtpa) contract without any price with Azerbaijan’s SOCAR to obtain distress cargoes or procuring spot cargoes (Dec 2023 @$ 15.97 vs contract price in October of USD $10.32 per mmbtu) and second one being “matched” by SOCAR in a non-transparent approach.
In the past 12 months, Eni (1mtpa), Netherlands through Shell and Italy through Total Energies (3.5 mtpa), Sinopec and China National Petroleum Corporation (8 mtpa) have signed long-term deals (27 years) and Germany (2mtpa) through Conoco Phillips (15 years) - all with Qatar. Are we holding back in expectation of a gas find?
Furthermore, are we to participate in Economic Corridor from India to Europe through IP and TAPI, source fuel out of North American Energy Platform, obtain LPG from Iraq, Central Asia, Saudi Arabia, Russia in addition to BRIC and Silk Road Rail Access to the Mediterranean Sea? Should Pakistan engage with Qatar, Australia, the USA, Saudi Arabia and Russia for LNG? These questions need determining whether Pakistan should only have long-term agreements with liquefaction facilities and refineries or continue on the expensive spot procurement mode.
Given our energy import dependency, enhanced productivity with increased export revenues is essential. Thus building a trading portfolio based on an evolving (1+ 3 years) home-grown energy strategy inclusive of regional cooperation and changing global political scenarios factored in with exemption from PPRA (Public Procurement Regulatory Authority) and non-interference of FIA/NAB is necessary for effective execution of an agreed approach. In parallel, immediate task now is to carry out deregulation of the fuel sector and reduction in losses of both power and gas sectors.
Copyright Business Recorder, 2023