Govt suggests using telecom model
CCOE directed the Petroleum Division to revisit proposed reforms in a holistic manner instead of looking at unbundling of gas utilities only. PHOTO: FILE
Policymakers have expressed the desire that gas companies should follow the model of telecom sector in an effort to operate in a competitive market, improve efficiency and reduce losses.
At present, the two public gas utilities are posting high losses, which have worried policymakers, who are considering splitting the companies to control revenue bleeding.
Losses of the gas utilities range from 11-17%. According to the Petroleum Division, the monopoly of the gas companies is causing an annual loss of Rs50 billion.
These companies are in deep financial trouble because of their failure to recover the cost of liquefied natural gas (LNG) supply to domestic consumers.
Recently, the government has allowed the private sector to import and market LNG in a bid to reduce financial risk to the national exchequer, utilise full capacity of LNG terminals and avoid capacity payments.
Competition in the gas sector will not only push down tariffs but it will also bring improvement and efficiency. It will help attract more investment due to entry of new players in the gas market.
According to sources, Adviser to Prime Minister on Finance and Revenue Dr Abdul Hafeez Shaikh, in a recent meeting of the Cabinet Committee on Energy (CCOE), emphasised that specific reform measures should be outlined in order to make meaningful progress.
Finance Division’s senior joint secretary stated that for introducing reforms in the gas sector, the telecom sector’s reform model could be followed. CCOE chairman endorsed the view with observation that effective reforms would come through a commercial competitive market along with an appropriate regulatory framework.
However, the ultimate objective was the overall reform of the gas sector with a view to enhancing its efficiency and reducing losses to provide maximum relief for end-users.
The Petroleum Division told the meeting that two integrated midstream and downstream gas utilities - Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC) - were engaged in purchase of gas from exploration and production companies as well as re-gasified LNG.
They transmit, distribute and sell gas to various categories of consumers and operate on a cost-plus return formula with major shareholding of the government of Pakistan.
The Economic Coordination Committee (ECC), in its meeting held on March 8, 2013, had, in principle, approved unbundling of the gas companies subject to the condition that provincial governments would be consulted and the matter would be placed before the Council of Common Interests (CCI).
As a first step, services of international consultants were secured through the World Bank, which held detailed consultations with all stakeholders including the gas utilities as well as provinces.
There was general consensus on the unbundling of the two companies. However, they had some legacy issues. With the passage of time and induction of imported gas, these issues became complicated.
Article 158 of the Constitution provides first right of gas use to the gas producing province over other parts of the country. Gas producing provinces are now demanding uninterrupted supplies on the basis of surplus production.
Growing gas demand in the country and depleting production is widening the demand-supply gap. To fill the gap, gas imports began in 2016.
The Petroleum Division was of the view that for sustainability of the gas sector, it had become imperative to actively pursue a reform agenda. In that regard, it submitted a way forward.
The division suggested that a transaction adviser may be immediately appointed through a competitive process. Draft terms of reference for the adviser, developed earlier, will be reviewed and finalised.
It proposed that the cost to be incurred during the process would be equally shared by the two gas utilities and the regulator should allow the same in revenue requirement of the two companies.
Alternatively, the option of financing from international donors may be explored to accomplish the task.
According to the Petroleum Division, an independent firm called National Gas Transmission Company may be established. It will operate as a common carrier for the existing and new gas distribution companies, and under the third-party access rules promulgated by the Oil and Gas Regulatory Authority (Ogra). The company will not be engaged in the purchase or sale of gas and will only be mandated to transport gas.
According to the unbundling plan, multiple gas distribution companies will be created with unified principles by SNGPL and SSGC within their jurisdictions. These companies will be set up on a technical and economical basis including population, network density, gas demand, workload, management and efficiency.
A mechanism of weighted average sale price or any other suitable formula will be developed for gas sale pricing, which will be implemented simultaneously.
The meeting discussed the matter threadbare. Special Assistant to Prime Minister on Petroleum Nadeem Babar stated that the matter was earlier sent to the ECC, which it approved on March 8, 2013.
However, due to changed circumstances in the policy domain and operational environment, the reform process could not be pressed ahead. Therefore, an instant summary was prepared with the objective of starting the reform process again.
The CCOE considered the summary submitted by the Petroleum Division for gas sector reforms and unbundling of gas utilities, and directed the division to revisit the proposed reforms in a holistic manner instead of looking at unbundling only.
The CCOE told the division to consult all the stakeholders concerned and come up with viable recommendations for the cabinet body’s consideration.
Published in The Express Tribune, November 26th, 2020.
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