Political consensus’ urged for average gas pricing

Amid system challenges, the Petroleum Division is seeking an average national basket price for natural gas — both local and imported — through a distant ‘political consensus’ even though it has fixed price commitments with various consumer groups.

This comes at a time when the energy sector is facing serious gas and electricity shortages and both gas and power companies are struggling with their financials to ensure smooth supplies. The federal government has been asking the provinces for introduction of weighted average cost of gas (WACOG) by moving away from ring-fenced pricing and supply of local gas and imported liquefied natural gas (LNG) to various consumer categories.

“To remove anomaly between the prices of indigenous and imported gas, and the associated adverse impact on the sector’s financial stability, the long-awaited ‘political consensus’ on WACOG must be reached as soon as possible, ideally before the end of this year,” Special Assistant to the Prime Minister on Petroleum and Power Tabish Gohar had said early this month.

The major contradictory policy situation is that the government itself has committed fixed prices for the mix of both imported and local gas for some categories like significantly cheaper rates for some other categories. For example, the government has committed a fixed rate of $6.5 per unit of for the mix of local and imported gas for export sectors while the imported cost at times — like these days — goes beyond $13 per unit.

On the other hand, the fertiliser sector has long-term subsidised price commitments while majority of residential consumers are entitled to gas prices that are as low as Rs130 per unit and are politically sensitive for the Imran Khan government even though WACOG works out around Rs1000 per unit. Such rates are politically unacceptable, particularly to Sindh, Khyber Pakhtunkhwa and Balochistan — the gas producers.

That would mean the entire burden of WACOG to be billed to three sectors like general industry to increase the cost of production and suffer the brunt of hike and compressed natural gas (CNG) that would no more remain cheaper than the competing fuel — petrol.

In a recent report, the Petroleum Division’s directorate general of liquid gases has said that erratic RLNG demand patterns were jeopardising the LNG supply chain by increasing line pack to dangerous limits, resulting in high pressure and curtailment of domestic gas. In other cases, such erratic demands were suddenly exhausting line pack, resulting in low system pressure.

“Lack of adequate storage of gas/LNG exposed the gas transmission network to huge risks of ‘take or pay’ (term contracts) resulting from frequent demand/supply mismatches due to huge variations in power sector’s projected demand and actual consumption for RLNG,” said the report, adding that four new RLNG-based power plants of about 5000MW will not get dispatched on economic merit order beyond 2023. The merit order dispatch of these four plants will be very little over the next two years and if transmission constraints are resolved, dispatch may be negligible.

The report said the Power Division had already moved away from RLNG to nuclear, coal and variable renewable energy, jeopardising the whole LNG supply chain. In Qatar gas legacy deals of 900 million cubic feet per day and two long-term deals with ENI and Gunvor of 200mmcfd, it is very likely that Pakistan will run out of cash “if urgent gas sector reforms were not taken” as 1100mmcfd has been arranged on a government-to-government basis on firm ‘take or pay’.

The report noted that at present total receivables of Pakistan State Oil from Sui Northern Gas Pipelines Limited reached Rs130 billion, including late payment surcharge of Rs27bn, with 500mmcfd of firm ‘take or pay’ with Qatar Petroleum.

In near future, receivables may increase exponentially for 900mmcfd as there is negligible RLNG offtake from the power sector which is the main consumer of RLNG and resultantly encashment of sovereign guarantee may lead to GoP default, the report warned. It said there were structural problems in the gas sector as LNG was declared as petroleum product as opposed to natural gas and its supply was ring-fenced from the regular distribution business.

The report advised that gas utility companies and the government should develop political consensus on WACOG between indigenous natural gas and imported RLNG to create a national basket price for the whole country to create appetite for RLNG as rationalisation of consumer gas prices in the country was one of the biggest hurdles in the sale of RLNG.

The report said state-owned companies in the LNG supply chain were facing legal, operational, commercial and financial challenges, increased ‘take or pay’ risks and challenges in management of gas demand swings. LNG was envisaged to replace expensive oil products like furnace oil and high speed diesel, but due to ring-fencing there was shortage of gas, and not RLNG. “So cannibalisation will occur” if third party access or new terminals were allowed without gas sector reforms such as deregulation of gas prices, removal of untargeted gas subsidies, unbundling of sales and loss control, the report warned.

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