ISLAMABAD, Nov 19: The World Bank has advised Pakistan to reduce subsidies and increase gas rates for domestic consumers to be able to absorb the much higher cost of proposed gas imports and remain in competition with other overseas gas sources, it is learnt.
Pakistan is currently working simultaneously on importing gas through pipeline and in the form of liquefied natural gas (LNG) through ships, and their landed cost would be higher by a minimum of 80 per cent when compared with prevailing consumer tariff. Pakistan’s demand growth is forecast at seven per cent. It is estimated that the domestic production will peak in fiscal year 2010 and start declining rapidly after fiscal 2013.
Supply shortfall, according to the bank, is expected to be between four and 10 per cent of the demand by 2010 and would thereafter increase rapidly to 20 per cent of the demand.
The bank is of the opinion that the tariff, for example, for lowest household consumer slab applicable to almost 82 per cent of gas consumption in winter and fertiliser factories were heavily subsidised and “did not cover even the commodity cost of gas, let alone the transmission and distribution margins.”
In fiscal year 2003, the total subsidy for these two categories amounted to Rs23 billion ($397 million).
The tariffs per million BTU (British thermal unit) for the lowest block (100 cubic metres per month) and highest block (above 300 cubic metres per month) of household consumption stood at $1.35 and $51.3, respectively.
The tariffs for commercial and general industries, including power, were at $4.53 and $4.03 respectively, while that of fertiliser industry stood at $0/61 to $1.48.
“In the context of need for expensive import of piped gas and LNG, further domestic price corrections would be necessary,” said the World Bank on the ground that the landed cost of gas imports from Iran at Pakistan-Iran border would not be lower than $5 per million BTU provided international oil price falls below $70 a barrel.
Pakistan and Iran are nearing signing of gas sales and purchase agreement for which Iran has already commenced construction of a 56-inch diametre gas pipeline from the Assaluyeh gas field, located about 80 kilometre north of South Pars field to Iran Shehr and would be completed by 2010.
Pakistan will construct pipeline on its side of the border and extend it to Indian border provided India joins the project and agrees to pay transit and transportation cost to Pakistan.
The World Bank says that the project seems to be poised for implementation on a priority basis but some issues that may be difficult to be resolved include “implications of the US law which bars transaction with Iran valued at $20 million or more, and the UN sanctions regime, as these might discourage the participation by international contractors.”
Talking about the Turkmenistan-Afghanistan-Pakistan pipeline, the World Bank says that a number of issues would need to be sorted out to make substantial progress on the project.
These include robustness of the reserves data in Turkmenistan and the need to have it properly certified and the possible need to associate Uzbekistan and Kazakhstan to provide supplemental gas resources.
The ability and willingness of Turkmenistan to feed this pipeline while fully honouring its earlier commitments to Gazprom for the European and former Soviet Union markets and the extent of possible private sector interest would also remain a challenge while the sharp increase in gas prices delivered to the European markets could make the option of exporting to South Asia less attractive to Turkmenistan and thus the export price could also become a major issue.
Challenges in the TAP project also include mitigation of the security risk in Afghanistan, improvement in India-Pakistan relations, and programmes to minimise or phase out fuel subsidies in both countries and finally the ability of the pipeline options to withstand competition from LNG in the long run.
