Unified tariff: Removal of cross-subsidy on gas proposed

Lifeline consumers, fertiliser plants may be offered direct subsidy.

ISLAMABAD:

In a bid to end cross-subsidy, a proposal is under study to pay direct subsidy to special gas consumers including lifeline consumers and fertiliser plants and charge unified rates from other consumers.

“Cross-subsidies should be minimised by enforcing unified sale prices except for lifeline consumers and direct subsidies be paid to special consumers including fertiliser sector to ensure transparency in subsidy,” says a policy document submitted by the Planning Commission to the petroleum and other ministries concerned.

It also proposes charging full cost of supply from local and import sources.

The Planning Commission says a transparent mechanism should be introduced for gas pricing in order to encourage consumption efficiency and switch to least-cost alternative fuels as an economic consumer’s choice.

It observes that the gas sector suffers from cross-subsidies and low prices being charged from fertiliser plants.

“Consumer prices recover full supply costs but have remained low compared to alternative liquefied fuels owing to low wellhead gas prices that encourage inefficient use,” says the policy document.

It points out that average wellhead price of gas is $3.5 per million British thermal unit (mmbtu), accounting for 20 per cent of furnace oil price.

According to a comparison of the cost of gas for different consumers, the general industry pays the cost of natural gas at 25 per cent of furnace oil price, cement plants at 35 per cent of furnace oil price, fertiliser feedstock at 7 per cent of oil price, gas used as fuel in fertiliser manufacturing at 25 per cent of oil price and power companies at 25 per cent of oil price.

In addition to these, compressed natural gas (CNG) dealers pay the gas price equivalent to 55 per cent of petrol price while domestic consumers pay at the rate of 12 per cent of liquefied petroleum gas (LPG) price and commercial consumers at 30 per cent of LPG price.

The government has imposed a gas development cess this year to minimise the price differential among different consumers.

The commission is of the view that a long-term decline in gas production is a serious threat to energy security and if no action is taken, the current production of around 4,000 million cubic feet of gas per day (mmcfd) will decline sharply to around 2,500 mmcfd by 2020 and 400 mmcfd by 2030.

Current gas shortage exceeds 2,000 mmcfd and main reasons often cited for lack of exploration activities are security concerns and inaccessible areas. The commission points out that oil and gas production does not stop due to security concerns provided right policies and incentives are in place.

It proposes incentives and proactive policies and says upstream policy and regulatory framework requires immediate attention of the petroleum ministry to exploit the huge gas reserves.

Pakistan still has 29 trillion cubic feet of conventional gas reserves, 40 to 50 trillion cubic feet of tight gas and over 50 trillion cubic feet of shale gas in lower Indus basin. Around 150 trillion cubic feet of reserves are estimated to be in the whole Indus basin, excluding Balochistan and Khyber-Pakhtunkhwa.

Published in The Express Tribune, January 28^th, 2012.