Gas sector conundrum

EDITORIAL: The gas supply management is totally messed up. The imported RLNG is in surplus; domestic gas production is curtailed while the households across the country are facing severe load-shedding. On the surface, this situation appears illogical.

However, there is a method underlying the madness. With successive upward revisions in the gas prices, the demand fell in the last few years. The power sector’s demand for RLNG has also decreased as a result of a decline in grid demand.

The overall demand for gas during non-winter months is lower than both the production of local gas and the import of RLNG. There is no storage available in the country, while the capacity of the pipeline system is woefully limited. Thus, the supply must be cut — either by reducing local production or curtailing imports.

The logical solution is to import fewer RLNG cargoes. However, the government is reducing domestic production due to long-term commitments made with the LNG supplier (Qatar). This unfortunate situation is a result of flawed planning and poor decision-making.

The installation of more than needed number of power plants led to the import of RLNG. However, concurrently, low marginal cost power plants are being installed as well. The overall demand has decreased, and there is less demand for gas in the power sector. And most of the time, expensive RLNG-based power is produced while use of low-cost coal is curtailed.

That explains half of the problem. The question still remains as to why households experience gas load-shedding during the winter months. That is by design. Household tariffs are lower and being cross-subsidised by others — including industrial captive consumers.

There isn’t enough additional demand from other sources during the winter months to offset the increased supply. Thus, to curb losses, Sui companies — especially in the north — supply less in winters to low-paying consumers.

This means if the gas is not being fully supplied to households as they pay less, and additional supply means more losses for Sui companies, it would add to the gas circular debt. The other reason is to curtail high system line losses. The pipeline infrastructure is old outdated and has high leakage rates. As the supply increases, so does the leakage rate. There is no fiscal space to upgrade infrastructure.

Thus, supply is reduced in winters. The problem is likely to exacerbate from January 2025 if the gas supply to the captive power plants is to be completely abolished, as per the IMF condition. This would result in a significant reduction of 200-250 mmcfd in domestic gas production. The gas companies would struggle to cover the revenue shortfall, leading to further increases in tariffs for other consumers, primarily households. The recent increase of 8.7 percent would not be enough.

Last but not least, the government is taking credit for lowering RLNG supply from January, as the minister claims to cut five cargoes per year from Qatar and Eni each. Thus, out of 120 cargoes, the supply would be reduced to 110 cargoes, or nearly nine cargoes per month. That is to slash 100 mmcfd. This might partially address the current high supply, but it won’t be sufficient to cover the gas being supplied to the captive power plants.

Copyright Business Recorder, 2024