No free lunch: Natural gas and the need for price rationalisation
In the presence of incorrect pricing structure, supply-side measures are likely to meet with failure.
Every time there is a gas shortage, the government resorts to restricting supply through quotas and outages. Instead of correcting the incentive structure intelligently, it resorts to artificial controls. Public sector entities follow by announcing ill-designed conservation campaigns. Moreover, the import of gas and its substitutes treats only the symptom: shortage, but not the problem itself: incorrect pricing.
The share of natural gas in primary fuel supplies during 2008-09 was 48.3 per cent, according to the Pakistan Energy Yearbook 2009, making it the largest energy source in the country. In comparison, coal currently supplies over 38 per cent of the world’s electricity and 23 per cent of global primary energy needs.
Pakistan’s energy mix sharply contradicts global trends and an explanation can be found in the flawed price structure. Policymakers, since the discovery of Sui gas fields in 1952, have continued to believe that this indigenously occurring natural resource should be supplied cheap — irrespective of global trends in pricing. It is vital to note that at present, the international rate of natural gas is higher than $4 per 1,000 cubic feet. When the costs of import, transportation and distribution are added, it will cost five times higher than the current price of gas in the country.
By keeping prices low, the government has actually facilitated fast depletion. So far, about 54 TCF (trillion cubic feet) of gas reserves have been discovered, of which around 25 TCF have already been produced.
Pakistan’s total remaining gas reserves are estimated at 29.8 TCF (2008) which are adequate for meeting requirements for six years at the current rate of production, according to Atco consultant Manaullah Khan.
Consider an average household of six persons paying a monthly bill of Rs150 for eight months a year for complete kitchen requirements. The same household would pay a few thousand rupees in the remaining four months (winter). These extraordinary spikes in gas expenses can be normalised around an average by adopting more intelligent pricing.
Another example of the poor pricing structure is the massive difference between tariffs of ‘indigenous’ gas and ‘imported’ oil. On average, the owner of a 1,00cc car can save around 50 per cent by converting from fuel to natural gas. This has resulted in an avoidable burden on natural gas reserves.
Meanwhile, the major brunt of gas load management is taken by the power and fertiliser sectors and industry in general. Industrial producers and large consumers are punished in a bid to protect small consumers.
But it does not end there. When power, fertiliser and general industry have to pay extraordinarily high amounts, the costs are ultimately transferred to end consumers. Here too the price structure requires rationalisation.
The structure is not just flawed at the consumption end: the government has induced inefficiencies while awarding tariffs. The government is required under covenants with international lending agencies to ensure a minimum guaranteed rate of return between 17 and 17.5 per cent to Sui Northern Gas Pipeline (SNGL) and Sui Southern Gas Company Limited (SSGCL).
Also, as per regulations, the Oil and Gas Regulatory Authority (Ogra) determines consumer prices, while distribution companies are entitled to claim any shortfalls in revenue, including differences in gas purchase prices from exploration and producing companies and a pre-defined operating margin.
The above two examples suggest that the government has provided artificial oxygen to the two public-sector entities. When it has provided guarantees on rates of return, why would an enterprise worry about efficiency?
The best evidence of a complete ignorance about the need for price rationalisation is provided in the policy statement by the government.
The ministry of petroleum and natural resources states that “to fill the growing energy supply deficit, the government is implementing a multi-pronged strategy which includes: increasing domestic oil and gas exploration and production, fast-tracking utilisation of hydro power potential, expediting the development of vast local coal reserves, importing piped natural gas from neighbouring countries, importing liquefied natural gas (LNG), setting up new nuclear power plants, and exploiting affordable alternate energy resources.”
Read again. This ‘multi-pronged strategy’ actually has no bite: it does not mention price rationalisation anywhere. In the presence of an incorrect pricing structure, supply-side measures such as exploration and conservation are likely to meet with failure.
Prices constitute the most fundamental structure for a market economy. If they do not convey the right message, the economy may still grow like the production-centric Communist regimes or even stifle, but it will remain on the wrong path.
The author, an economic consultant, is Director Programme and Development at the Alternate Solutions Institute, Lahore. He can be contacted at ali@asinstitute.org
Published in The Express Tribune, December 27th, 2010.
The share of natural gas in primary fuel supplies during 2008-09 was 48.3 per cent, according to the Pakistan Energy Yearbook 2009, making it the largest energy source in the country. In comparison, coal currently supplies over 38 per cent of the world’s electricity and 23 per cent of global primary energy needs.
Pakistan’s energy mix sharply contradicts global trends and an explanation can be found in the flawed price structure. Policymakers, since the discovery of Sui gas fields in 1952, have continued to believe that this indigenously occurring natural resource should be supplied cheap — irrespective of global trends in pricing. It is vital to note that at present, the international rate of natural gas is higher than $4 per 1,000 cubic feet. When the costs of import, transportation and distribution are added, it will cost five times higher than the current price of gas in the country.
By keeping prices low, the government has actually facilitated fast depletion. So far, about 54 TCF (trillion cubic feet) of gas reserves have been discovered, of which around 25 TCF have already been produced.
Pakistan’s total remaining gas reserves are estimated at 29.8 TCF (2008) which are adequate for meeting requirements for six years at the current rate of production, according to Atco consultant Manaullah Khan.
Consider an average household of six persons paying a monthly bill of Rs150 for eight months a year for complete kitchen requirements. The same household would pay a few thousand rupees in the remaining four months (winter). These extraordinary spikes in gas expenses can be normalised around an average by adopting more intelligent pricing.
Another example of the poor pricing structure is the massive difference between tariffs of ‘indigenous’ gas and ‘imported’ oil. On average, the owner of a 1,00cc car can save around 50 per cent by converting from fuel to natural gas. This has resulted in an avoidable burden on natural gas reserves.
Meanwhile, the major brunt of gas load management is taken by the power and fertiliser sectors and industry in general. Industrial producers and large consumers are punished in a bid to protect small consumers.
But it does not end there. When power, fertiliser and general industry have to pay extraordinarily high amounts, the costs are ultimately transferred to end consumers. Here too the price structure requires rationalisation.
The structure is not just flawed at the consumption end: the government has induced inefficiencies while awarding tariffs. The government is required under covenants with international lending agencies to ensure a minimum guaranteed rate of return between 17 and 17.5 per cent to Sui Northern Gas Pipeline (SNGL) and Sui Southern Gas Company Limited (SSGCL).
Also, as per regulations, the Oil and Gas Regulatory Authority (Ogra) determines consumer prices, while distribution companies are entitled to claim any shortfalls in revenue, including differences in gas purchase prices from exploration and producing companies and a pre-defined operating margin.
The above two examples suggest that the government has provided artificial oxygen to the two public-sector entities. When it has provided guarantees on rates of return, why would an enterprise worry about efficiency?
The best evidence of a complete ignorance about the need for price rationalisation is provided in the policy statement by the government.
The ministry of petroleum and natural resources states that “to fill the growing energy supply deficit, the government is implementing a multi-pronged strategy which includes: increasing domestic oil and gas exploration and production, fast-tracking utilisation of hydro power potential, expediting the development of vast local coal reserves, importing piped natural gas from neighbouring countries, importing liquefied natural gas (LNG), setting up new nuclear power plants, and exploiting affordable alternate energy resources.”
Read again. This ‘multi-pronged strategy’ actually has no bite: it does not mention price rationalisation anywhere. In the presence of an incorrect pricing structure, supply-side measures such as exploration and conservation are likely to meet with failure.
Prices constitute the most fundamental structure for a market economy. If they do not convey the right message, the economy may still grow like the production-centric Communist regimes or even stifle, but it will remain on the wrong path.
The author, an economic consultant, is Director Programme and Development at the Alternate Solutions Institute, Lahore. He can be contacted at ali@asinstitute.org
Published in The Express Tribune, December 27th, 2010.