End of gas subsidies to help develop an efficient LNG market: SBP

The State Bank of Pakistan (SBP) has recommended to the government to eliminate gas subsidies to ward off formation of circular debt and encourage greater participation of the private sector in LNG trade to develop an efficient LNG market to cope with the growing gas shortages in the country.

In a special section on LNG sector inserted in its quarterly report on the state of the economy, the central bank pointed out that the procedural bottlenecks causing delay at the import, transmission and distribution stages not only lead to recurring supply shortages but also result in cost escalation, which ultimately feeds into consumer tariffs or accumulation of arrears. It said imports of LNG by the private sector largely depend on construction of transmission and distribution infrastructure.

According to the report, nearly 23pc of the country’s natural gas consumption is being met through imported LNG at present. The import of LNG has also helped reduce the overall electricity generation cost in the country by around Rs234bn during FY2017-20, it said.

But, it says, private participation alone will not solve the sector’s broad operational and financial problems. “Specifically, without addressing the fundamental issues associated with natural gas pricing, governance in distribution companies, and uncertainties at the end of the gas supply-chain, the domestic LNG market and the overall gas sector would continue to operate sub-optimally.

“While addressing bottlenecks in the existing import, re-gasification and pipeline infrastructure is necessary, it is equally important to expand the LNG user-base to reduce the per unit terminal capacity charges. Yet this expansion appears challenging, given the prevailing mindset of cheap/subsidised access to natural gas, which has seen users (especially industries) vying for a greater share in the indigenous natural gas pie instead of shifting to LNG.”

“The magnitude of future LNG requirements, if natural gas exploration levels and the pricing policy remain unchanged, would remain high over the short- to-medium-term. Pakistan’s indigenous supplies would only fulfill 22.3pc of the estimated demand by 2030. If the long-delayed Iran-Pakistan (IP) and Turkmenistan-Afghan­istan-Pakistan-India (TAPI) gas pipeline projects do not become operational, the average annual net gas shortfall during 2021-30 is projected to be 2,593mmcfd. To put this deficit in context, it is 2.7 times the volume of LNG the country imported in 2020,” the report said.

The bank said it is crucial to devise ways to address the mindset of cheap availability of natural gas in the country in view of the country’s growing reliance on imported gas, which is set to rise substantially over the coming years. Due to the prevalence of extensive cross subsidies, it said, various segments of the economy, particularly fertilisers and household sectors, have taken availability of subsidised natural gas for granted. In hindsight, the policy of subsidised natural gas has entailed significant economic cost for the country, with the indigenous reserves deteriorating at a rapid pace as excessive consumption of the fuel was encouraged.

“Therefore, the government has to start passing on the impact of higher LNG prices to the consumers through an appropriate price pooling mechanism… An increase in prices would help cut down extravagant household consumption, which would in turn help reallocate the cheaper fuel to the power and industrial sectors to decrease the cost of energy generation and increase the fuel’s usage in value-addition segments. The impact of subsidy rationalisation on the low-income quintile can be compensated via targeted cash transfers, which is a more efficient way of providing social protection,” the report reads.

In addition, it says, the relevant authorities need to develop a long-term strategy that, among other aspects, also focuses on expanding the indigenous reserves base of natural gas. “… Pakistan’s shale gas geological resources amounted to 95Tcf recoverable reserves. However, the exploration companies face many challenges in developing these resources because of complex geography, environmental constraints, and low natural gas prices in the country. Thus, the country needs to develop preferential policies (increasing the wellhead prices to begin with) and conduct pilot projects as early as possible, to encourage domestic and foreign oil and gas companies to plan investments.”

It also stressed the need for taking an all-inclusive view of the energy mix, given that renewables, especially solar, have appeared as low-cost and crucial alternatives in the midst of a worsening climate change situation. “At present, renewables’ share is only 4pc in Pakistan’s installed power generation capacity and 2pc in power generation. However, the incentive to switch to these sources is significant.”

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