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Lately, there is a rift between Federal and Sindh governments on natural gas supply and pricing. The Centre's desire is to have weighted average gas price formula of natural gas in Sindh by inclusion of RLNG in supply, whereas the Sindh government is asking for the constitutional right to use the domestic gas produced within the province.

The problem is that domestic gas supply is falling whilst the demand is increasing. Without any fresh major gas discovery (not in sight), the gap is to be widened and the province-Centre tussle will increase unless Sindh agrees on the weighted average price formula (RLNG and indigenous gas). At this point, RLNG supply is under ring-fenced tariff arrangement i.e. RLNG consumers are paying high for imported gas. In December, the RLNG price was three times of indigenous gas weighted average cost.

Historically, Pakistan (due to low pricing) has inefficiently consumed its indigenous gas (mainly Sui). There was no incentive for consumers to use energy efficient heating methods. The other issue is that gas is supplied through pipeline to households. Not many countries do so. There are high losses (technical and theft). Laying down pipelines is a costly affair. The capex is amortized and gas supply companies face difficulties in recovering the cost.

There is a misnomer that pipeline gas is supplied to poor (common man). Only one fourth of 32 million household have access to pipeline gas. The poor is mostly using LPG or relying on kerosene oil for heating. There is an old joke that ladies at home used to save on match sticks by letting the stoves run on cheap gas continuously. Most stoves and geysers at home are of low efficiency.

Now with falling domestic supply, rationalization in consumption is warranted. Total reserves of domestic gas are around 21 trillion cubic feet (tcf). With annual consumption of 1.5tcf, the domestic gas will finish in 15 years. The reserve replacement ration is falling fast. There is no major new discovery for many years. The pricing incentive for new discovery is low. It's another issue to be discussed later.

The current consumption of indigenous natural gas is around 3.5- 4 billion cubic feet per day (bcfd) - not enough to meet demand. The gap is met by imported RLNG - 0.9 -1 bcfd. The price of RLNG is higher and ring-fenced. There is no uniform pricing within domestic gas supply. It varies in domestic, commercial and industrial sectors. The formulae are different for transportation, power generation and fertilizer production.

Not all of the domestic gas is of same quality. The heating value varies. Around 35 percent of production is of low heating value- not fit for pipeline quality. That gas is mainly used in fertilizer production and some other sectors. The pipeline quality is shared by domestic, commercial, industrial, transportation and power producers.

The price disparity is high. The lowest slab of domestic consumers is Rs141 per mmbtu. The weighted average price prescribed by Ogra is Rs 850 per mmbtu. There is a cross subsidy mechanism. Some sectors are compensating for others. There is no incentive for lower slab consumers to switch to efficient methods.

Then there are industrial gas users (mainly in Sindh) and export-oriented sectors in Punjab. They run captive power plants (CPPs) on gas. Since the domestic gas is supplied at lower price in Sindh, the industrial consumers prefer it over grid electricity. The exporters in Punjab are having RLNG at subsidized rates.

In days of rising electricity (power) tariffs, industrial gas demand is growing. It is a sub-optimal solution. Policymakers have to see country's energy needs holistically, and prioritize energy use according to efficiencies. The electricity production in NTDC grid is in excess. Fixed capacity charge is to be paid to IPPs irrespective of electricity production. To lower the power tariffs, electricity consumption on the grid needs to grow.

Karachi's public transport is relying on cheap domestic gas. In winters CNG is dearer. The metropolis anyways need a modern public transport system. China is big in electric buses with over 400,000 units operating in the country. Pakistan shall import these buses from China for Karachi mass transit system. There are multiple advantages. Less direct load on domestic gas, new consumption avenue for excess electricity production capacity and lower carbon emission.

Pipeline gas and RLNG's efficient use is in power production. Household and commercial consumers should be diverted to LPG or electricity for burning stoves, geysers and heaters. Nothing but right pricing can align the interests. It's a tough political sell, though.

Copyright Business Recorder, 2020

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Ali Khizar

Ali Khizar is the Head of Research at Business Recorder. His Twitter handle is @AliKhizar


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