January 9, 2006	Monday	Zilhaj 8, 1426

ENERGY moves men, machines and economies. Sustained and higher level of economic growth requires abundant and assured cheap energy. Gas is the prime source of energy in Pakistan as it provides 52 per cent of the national energy requirements. The share of gas in fuelling the economy is followed by oil which provides 29 per cent of which six per cent is indigenous and 23 per cent is imported. The other minor sources are hydro providing 11 per cent, coal six per cent and nuclear only one per cent.

Gas is a prime mover of Pakistan’s economy whose use, allocation and prices should be managed with great care, expertise and long-run vision.

The biggest consumer of gas is the power sector which uses it for generating electricity. Nearly 45 per cent of the gas fuels the power sector. Industry uses another 19 per cent. The next big consumer is the fertilizer industry which uses 16 per cent as feed stock for producing urea. Households or the domestic consumption is only 15 per cent followed by commercial use of two per cent and CNG for cars amounts to two per cent.

During FY 2004-05, the total gas consumption of gas was 1.3 trillion cubic feet (TCFT). Our current gas reserves are 32 TCFT. At present rate of consumption which is bound to rise with increasing growth, our reserves are adequate for only 24 years.

Despite all the hype about Indian economic growth, there is not a single city in India which has piped gas as in Pakistan. The comfort of gas supplies for cooking, water heating and space heating is not fully appreciated by Pakistanis. Pakistan has 10,000 kms of gas transmission lines and 80,000 kms of gas distribution lines. In fact, Pakistan has the best integrated gas supply system amongst the developing countries of the world.

Each year, about 40 to 50 wells are drilled, half by public sector(OGDC and PPL) and other half by the private sector. Half the number is for the exploration and other half is for development. Gas production has been increasing at a steady rate of 10 per cent per annum. Pakistan enjoys a very high success rate of one in three as compared to one in ten world-wide.

About 45 per cent of the gas is produced by two state-owned companies OGDC and PPL and the remaining by foreign companies-the major being the BHP of Australia, ENI of Italy, OMV, Pakistan Oil Field and British Petroleum.

Except for BP, the other international majors like Shell, Exxon-Mobil, Chevron Texaco and Total are not participating in exploration and production of gas. It is the smaller companies from Europe, Italy, Austria, and Hungary which are participating actively in gas sector. The gas produced by the earlier listed companies is distributed in northern Pakistan by SNGPL and in south by SSGPL. The earning per share of SNGPL was at Rs5.52 in 2005 was much better than that of SSGPL at Rs1.51.

The gas industry is faced with two issues pertaining to price level and load shedding of gas to industries in SNGPL areas. The government has increased the gas prices by 15.5 per cent for all slabs for domestic use except the 1st slab (where increase is 9.5 per cent), commercial consumers, industrial consumers, CNG stations and cement factories. Fertilizer has been exempted.

The decision to exempt fertilizer from the recommended increase is an excellent one as a spike in the price of feed stock for urea fertilizer would lead to pari-passu increase in price of urea with adverse implications for farmers and agricultural growth.

The government has fixed a formula for increasing the price of gas in relation to the price of crude oil and furnace oil. The reported increase in average price of crude oil fluctuated between $46.38 and $56.59 per barrel, a rise 28 per cent from June to November 2005. Price of furnace oil stood at $207 and $289 per ton showing an increase of 37 percent in the same period.

In the formula for indexing the price of gas on the price of crude oil, the price of gas increases proportionately in a linear function till the crude oil price reaches $20. Thereafter, price of gas increases as a percentage of the price of oil and after $36 only 20 percent of the increase in the price of crude oil is reflected in the spike of the price of gas.

This formula of indexing prices of gas to crude oil and furnace oil is based on the theoretical concept of opportunity cost which is favoured by World Bank and foreign players.

It simply states that if Pakistan was not producing gas it would have to import more oil for running its industry, generating electricity and running transport. Therefore the price of gas should reflect the opportunity cost of importing oil from abroad as far as possible. This formula may have some theoretically underpinning but in practice it is not followed by many countries.

If Pakistan was importing both gas and oil, then the prices of gas and oil in terms of their ‘British thermal unit’ (BTU) which measures the energy equivalence should be the same as in the international market. In short, domestic parity between gas and oil should correspond to international parity for these hydrocarbons. In almost every country of the world, natural resource like oil or gas is not sold at international prices.

In Saudi Arabia which has the largest reserves of oil, the price to local consumers is less than the fifth of the international price and in Iran it is less than one-tenth. Actually the price for motor gasoline remains unchanged in Iran since the Revolution in 1979.

Iran consumes about 10 per cent of its oil production and the populist government has decided to sell this essential commodity used by poor and rich alike at below the world market rates.

In Netherlands, gas which is locally produced is sold at cheaper rates than petrol which is imported and the domestic gas oil parity does not corresponds to the international parity.

The economic policy-makers in Pakistan who have always been the deep influence of donors especially World Bank, IMF and ADB have been pressured to raise domestic price in line with the spike in the crude oil and furnace oil prices. There was no point in increasing the rates of CNG for small car users when CNG used is only two per cent of total gas consumption.

Similarly, increasing rates for industry will make it uncompetitive in the world market and hurt the exports. Even in domestic use the lowest bracket which is using less than 100 units should have been exempted instead of concessional increase of 9.5 per cent.

Gas is a separate industry from oil. Its prices should be fixed according to its own parameters, for example, the cost of drilling and development wells for gas and the cost of transportation and supply to the users.

Sufficient rates of return above 20 per cent should be given to gas industry but there is no logic in indexing gas prices to oil prices especially when gas is Pakistan’s national resource while oil is imported at a rate of 85 per cent of our need. Hence, there is an immediate need to de-linking gas prices from crude oil and furnace oil prices fixed by the Ministry of Petroleum.

The electricity rates in Pakistan are the highest in Asia primarily because of high rates allowed to Independent Power Plants (IPPs). The IPPs provide one-third of Wapda’s electricity and take two-thirds of its revenue.

Many industries have there own electric generators based on gas. It does not require the nerdism of an erudite economist to state that increase in gas prices will adversely affect industry and exports, raise CPI which is already above eight per cent for the last 18 months and raising the cost of using CNG cars.

The government is planning to shift public transport to CNG for environmental reasons as gas is environmentally very friendly as compared to diesel presently being used in public transport. There will be negative impact across the country of any raise in the price of gas. The growth rate will slide and people at large will suffer from higher prices and polluted atmosphere.

The second issue at present is the closure of gas to over 200 industrial and other units due to winter upward swing in the domestic use of gas for heating. The winter swing is calculated at 300 mcft for two months (December and January) which is only 1.36 per cent of the daily gas consumption. An efficient system should have this small reserve for meeting the peak winter demand for gas.

If there has to be load-shedding of gas it should be in rich domestic areas and localities rather than in industries which lead to immediate fall in output and employment.

The government should therefore sit down with domestic and foreign gas companies and devise a new formula for determining the price of gas independent of the volatile movements in the international price of the crude oil. SNGPL should improve its operations so as to accommodate winter swing without closing down industries and putting people out of job.

(The author is a former secretary, planning)