Production, consumption: Everything in gas policy appears flawed

State bank suggests revisiting policy, giving priority to power plants.

KARACHI: When it comes to the economy, Pakistan has played with fire far too long. Ironically, much of the fuel in that fire was natural gas. As much of it was used in unproductive ways, time has come to revamp the gas policy framework altogether before it is too late.

The State Bank of Pakistan (SBP) made this assessment in clear terms in its recently released Annual Report 2013-14, one of the key official documents that remains unbiased in its review of economic indicators.



From the way the country allows households to burn cheap gas to distortions in the allocation method, everything in the policy appears flawed.

But the problem starts from producers, the petroleum exploration and drilling companies that are not getting the right price. The wellhead gas price, which the producers get, is still half than what they could earn if oil is found instead.

The SBP said the price being offered to the producers was above the international rate benchmark Henry Hub International Price Index (HH). “Perhaps investors are looking for an additional security premium to invest in Pakistan.”

Industry experts told The Express Tribune that the domestic price appears more than HH due to recent turmoil in the hydrocarbon market. Otherwise, the industry continues to complain about low producer prices.

The report too added that inadequate wellhead price explains low gas discovery rate in the recent past, leading to a steep decline in existing reserves to 24.74 trillion cubic feet in 2013 from the initial estimate of 55.66 trillion cubic feet.

Subsidy

Indirect subsidy incorporated in the consumer price structure undermines efficient utilisation of gas reserves, which have depleted over the years. The subsidy is basically the difference between the domestic price and the cost of gas import.



Worryingly, the SBP said, Pakistan pays more in subsidies than regional gas exporters. The most disturbing aspect being that its subsidy bill is comparable to Uzbekistan, which is a significant gas exporter.

Households get subsidised gas at the cost of CNG users whereas the commercial sector pays a much higher price. “Households also get preference when it comes to distribution of the resource.”

This has led to an increase in household consumption since 2005 whereas other sectors like CNG, power and industry saw a decline.

“In our view, it makes more sense to give higher priority to power or industry, which have extensive economic linkages, and contribute directly to employment generation.”

A large number of cottage industries based in Sindh and Punjab that are registered as household consumers add to the pressure on the system. “Informal economic activity not only increase household consumption but also extends gas subsidy to the informal sector.”

Guaranteed return

The report said there is actually an incentive for SSGC and SNGPL to extend connections to households. The gas pricing policy promises a 17% guaranteed return on fixed assets to the utilities, which in turn encourages them to increase the fixed cost especially by expanding connections to domestic consumers.

This flaw in the gas pricing framework also inadvertently relegates maintenance of existing pipelines to a low priority. “As a consequence, the loss of gas has been increasing over the past several years.”

The report said gas utilities can save up to 52.6 billion cubic feet by reducing the gas loss in the pipelines, which is savings of billions of rupees.

Better off without fertiliser firms

For the right use of the depleting resource, the SBP suggested that fertiliser plants should be shut and gas be diverted to power plants.

It calculates that $1.41 billion could have been saved in 2013-14 if gas was diverted to the power sector from fertiliser plants. The savings being the result of lower import bill of furnace oil.

This change in the gas allocation policy would have yielded net fiscal savings of Rs163 billion primarily due to the reduction in power subsidy, it said.

Almost 70% of gas-based power plants remained idle last year because of shortages.

“This simple analysis proves the need to revisit the existing gas allocation policy. It also states that higher priority should be given to the power sector, which is the backbone of the economy.”

The writer is a staff correspondent

Published in The Express Tribune, December 15^th,  2014.

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