Pakistan starts work to rationalise gas tariffs

Petroleum Division engages in consultation to cut UFG level, return on assets for gas utilities

Zafar Bhutta March 18, 2020

ISLAMABAD: Profits of public gas utilities were likely to face a hit as the Petroleum Division on Tuesday announced the start of a consultation process to cut the benchmark unaccounted-for-gas (UFG) level and return on assets allowed to the utilities in a bid to rationalise gas tariffs.

At present, the Oil and Gas Regulatory Authority (Ogra) has allowed the gas companies 6.3% UFG and 17.34% return on assets. However, the UFG stands at 13% due to gas theft and inefficiency in systems of gas companies.

Consumers pay for the 6.3% UFG whereas the remaining loss is borne by the gas utilities. If the government lowers the UFG level by 1%, the gas companies would face a hit of Rs4 billion on their profitability.

Gas companies have been allowed 17.34% return on assets, which means that expansion of their pipeline networks will lead to a higher return and gas tariffs will also go up for the consumers.

If the return is slashed, the gas consumers will enjoy lower tariffs, say officials, adding that the real issue is not the rate of return on assets. “The real issue is the expansion of pipeline networks on political considerations, which is causing gas shortage and leading to higher gas tariffs,” said an official.

He added that the government should immediately put a ban on politically motivated new gas supply schemes.

Meanwhile, the Petroleum Division, in a statement, said it had initiated a process of consultation to consider reduction in the UFG benchmarks along with reduction in the return on assets and rationalisation of transmission and distribution costs to create some fiscal space for the companies instead of tariffs.

The current government at the outset faced a big challenge in the form of a financial deficit of over Rs150 billion incurred by the two Sui gas companies over a period of five years. Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL) had been forced by the successive governments to maintain low tariffs, especially for domestic consumers, to gain maximum political mileage.

A spokesperson for the Petroleum Division said the division had actively engaged with all key stakeholders - Ogra, board of directors and management of both Sui companies, to come-up with out-of-the-box solutions to reduce the burden of high gas prices on the most vulnerable section of society.

Both Sui companies are incurring gas losses (UFG) in double digits, which far exceed the best international practices. The UFG loss of 1% for the two companies in monetary terms exceeds Rs4 billion. Hence, the government has asked the gas utilities to curtail UFG losses or reduce the UFG level to ensure efficient use of gas.

The Petroleum Division aims to create some fiscal space for the companies instead of simply resorting to increase in tariffs.

The spokesperson added that the Petroleum Division was working to create a new thinking in the way the companies’ business was being run.

Published in The Express Tribune, March 18th, 2020.

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