Circular debt to haunt new govt

ISLAMABAD:

The worsening circular debt in the energy chain will continue to haunt the new government along with the challenge of dealing with the rising crude oil prices in the global market following the Russia-Ukraine war, officials say.

At present, energy companies are facing financial constraints and are struggling to get their outstanding dues cleared. Oil and gas sectors are reeling from Rs1.6 trillion worth of circular debt whereas the power sector has a circular debt close to Rs2.5 trillion, they say.

When the Pakistan Muslim League-Nawaz (PML-N) government left office in 2018, the circular debt of power sector had been calculated at Rs1.6 trillion.

The PML-N administration started a pilot liquefied natural gas (LNG) supply project, which put Pakistan on the global LNG map.

However, LNG deals were struck without conducting due diligence regarding price increase in future and growth in gas demand from the domestic sector in winter.

The rising gas demand forced the Pakistan Tehreek-e-Insaf (PTI) government, which ran the country from August 2018 to early April 2022, to divert expensive LNG to the residential consumers in winter.

However, there was no mechanism in place to recover dues from the domestic sector. Now, LNG has become a major contributor to the circular debt, leading to deterioration in the financial health of Pakistan State Oil (PSO) and Sui Northern Gas Pipelines Limited (SNGPL).

PSO has to receive over Rs270 billion from SNGPL on account of LNG supplies whereas SNGPL has to recover around Rs100 billion from the domestic sector, industry players say. The Petroleum Division is set to seek approval of the new government for the provision of Rs26 billion, out of a total of Rs41 billion, to SNGPL to cover the subsidy on LNG supplies to the export-oriented sectors, officials say.

Apart from the circular debt woes, price differential claims of billions of rupees are emerging because of the freeze on oil price revision while in the international market crude oil has risen to multi-year highs.

Already, the consumers in Pakistan are paying record high prices of petroleum products. Former prime minister Imran Khan announced a relief package on February 28, 2022 including a reduction of Rs10 per litre in the consumer prices of motor spirit (petrol) and diesel and a promise to keep prices unchanged by the end of current fiscal year in June 2022.

The decision included payment of subsidy to oil marketing companies (OMCs) and refineries in the form of price differential claims.

Subsequently, allocation of Rs20 billion and Rs11.73 billion through a supplementary grant was approved by the Economic Coordination Committee (ECC) on March 7 and 15, 2022 for the payment of price differential claims for the period November 1 to 4, 2021 and March 1 to 31, 2022. These decisions were ratified by the federal cabinet.

As per assessment of the Oil and Gas Regulatory Authority (Ogra), the allocated amount will be sufficient to cover the price differential claims for March 19 to 31, 2022.

Later, Ogra pointed out that due to the rising oil prices in the international market, the price differential claims for the first fortnight of April 2022 was projected at Rs26.47 billion and for the whole month they were estimated at Rs53-55 billion.

Consequently, the Petroleum Division sent a summary to the ECC, dated April 1, 2022, seeking an additional allocation of Rs55 billion through a supplementary grant for the disbursement of price differential claims for April 2022. The ECC has not yet considered the matter.

International energy markets have remained volatile and motor spirit and diesel premiums remain high. As a result, the liquidity position of OMCs and refineries is under stress. Subsidised prices of petroleum products add to the stress as the full cost recovery is made only when price differential claims are processed after a lag of almost one month.

The availability of petroleum products may be impacted due to this stress. The Oil Companies Advisory Council (OCAC) has expressed concern over the situation through a letter and Ogra has also voiced similar concerns.

If the energy markets continue to behave in a similar fashion, the estimated price differential claims for the period covering April 16 to June 30, 2022 will soar to Rs136 billion.

This is in addition to the already allocated amount of Rs31.73 billion for March 2022 and yet to be allocated amount of Rs26.47 billion for the first fortnight of April.

The demand for motor spirit and diesel stands very high, which is not only making the petroleum market vulnerable to supply disruptions and placing a heavy burden on the sector’s liquidity, but is also inflating the import bill.

OCAC, in a letter to the Petroleum Division, said that the situation remained complex and stressful with the price differential claims soaring due to the rising crude oil prices on the back of Russia-Ukraine conflict and the strengthening US dollar.

Now, the question arises whether the new government will be able to tackle these issues. The answer may be difficult as oil prices stay high in the global market.

If the new government maintains the freeze on petroleum prices, another circular debt crisis may erupt in the country. However, if it raises oil prices, the decision will immediately hurt the popularity of new government.

 

Published in The Express Tribune, April 12^th, 2022.

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