November 11, 2008	Tuesday	Ziqa'ad 12, 1429

KARACHI, Nov 10: The Sui Southern Gas Company on Monday presented its request before the Oil and Gas Regulatory Authority (Ogra) for an increase in gas price on what has been described as a speculative projection of rupee-dollar parity in the first half of 2009.

The SSGC made its submissions in this regard in a review petition seeking an increase of Rs97.73 MMBTU in prescribed price from Dec 1 to overcome the shortfall of Rs22,262 million in the estimated revenue requirement for 2008-09.

The SSGC plea was strongly opposed by representatives of industry, who also rejected the projected rupee-dollar parity and maintained that allowing the SSGC’s plea, based on presumptions, would ruin the country’s industry and force many to go out of business.

The SSGC’s review petition came up for hearing before Ogra on Monday. Ogra’s member (Finance) M.H. Asif presided over the proceedings, from which most of the interveners stayed away to show their lack of confidence in the outcome.

The review petition was filed consequent upon changes in wellhead prices and estimates of gas offsince Ogra determination of May 20 in which the estimated revenue requirement for the said year was determined at Rs114,768 million, as against Rs117,151 million claimed by the petitioner, thereby decreasing the estimated revenue requirement by Rs2,383 million.

The deputy managing director of the SSGC, Azim Iqbal, made an impassioned appeal for allowing his plea because these were “desperate times” for the SSGC because the “cost of borrowing is not passed through to the customers” and has eaten into the company’s profit.

He claimed that the shortof Rs22,262 million in the estimated revenue requirement (ERR) for 2008has been worked out consequent upon an enhanced cost of gas mainly due to sharp increase in oil prices and continuous devaluation of the rupee against the dollar.

He also talked about the “severe liquidity crunch” the SSGC is facing consequent upon already increased cost of gas even in the first half of the year under review, mainly due to unprecedented rupee devaluation. He therefore pleaded before Ogra to grant interim relief under Rule 5(7) of the Natural Gas Tariff Rules, 2002 to compensate for a sharp increase in the cost of gas and approve an increase of Rs97.73 per MMBTU in SSGC’s prescribed prices effective Dec 1 urgently.

The estimated wellhead prices for the period from January 2009 to June 2009 have been projected on actual/ estimated average C&F prices of crude oil and HSFO. The prices of crude oil and HSFO at $70.98 per barrel and $411.83 per ton, respectively, are taken for estimates of October and November; as a result the average rates for June to November 2008 are worked out at $103.59 per barrel and $567.84 per ton, respectively, which are applicable to the next half of the financial year under review.

Mr Azim and his GM, Regulatory Affairs, maintained that there had been a sharp increase in the rupee-dollar parity, which was Rs68.20 in June and had reached Rs80.60 on October 16, 2008. However, the SSGC expected that in future this rising trend might somehow ease and therefore exchange rates had been worked out at Rs82 for December 2008 and Rs83.50 for June 2009.

This calculation was strongly criticized and termed “dangerously speculative” and reflecting lack of faith in the country’s economy. The main thrust of the company’s contention was the rupee-dollar parity.

Zubair Motiwala, member of the Karachi Chamber of Commerce and Industry, strongly criticized Ogra for its role and cross subsidy allowed by the government to the fertilizer industry and claimed that the policy of cross subsidization had taken a heavy toll on international competitiveness of export- oriented productive sector due to an unanswered increase in their cost of production. He alleged that Ogra was responsible for the trade deficit and current account deficits. He questioned the SSGS’s higher dollar projection and said that if that was being done for gas why the similar projection was not made for a lower oil price.

He also cited examples from Bangladesh, which has provided incentives to keep its industries competitive through low cost of inputs. Mr Motiwala also called for some sort of capping mechanism for gas which is one of the major indigenous sources of generating electricity, so that international oil prices might not affect the industry in a significant manner and automatically control the gas price.

He also demanded that subsidy for use of gas as fertilizer feed-stock, at the cost of the industry, should be abolished. The government should give direct subsidy to domestic and fertilizer consumers, through budgetary allocation, instead of the prevalent cross-subsidy mechanism of gas pricing.

“An increase in gas prices will further increase the already very high cost of production of goods, reducing the industry’s competitiveness in the international market. The frequent increases in gas price have adversely affected the industries and many of the industrial units have already closed down, increasing unemployment in the country. Any further increase will completely destroy the industry and serve as the proverbial last nail in the coffin,” he said.

Muhammad Nisar Shekhani, chairman of the SITE Association of Industry, Karachi, chose not to appear as intervener because his members felt that this “authority does not enjoy the powers that a regulating authority should and at the end of these exercises, the rates are enhanced anyway, irrespective of the arguments and / or the prevailing ground realities”.While discussing the various Ogra rules and criterions, he pointed out that for notification of the prices, Ogra website showed the prices of Marri, Quadirpur and Salsabil in the column of “Field-wise wellhead gas prices” table for July 1, 2008. Yet the petitioner had shown the price of Marri gas as Rs55.94 per MMBTU . This is the price (Rs55.94) shown in Ogra’s “Field-wise wellhead gas price” of July 1, 2007. Is it by default?”

With regard to SSGC’s contention with regard to “Exchange Parity Rs per US$ (ii) for payment in US$ average” at Rs83.17 for the period January – June 09, Mr Shaikhani said it showed a total lack of confidence in the national economy or perhaps he was aware of the havoc the steep increase in gas prices was going to cause to the economy. “The assumptions and presumptions are totally off target because the sharp increase in the dollar was prompted by speculations and as the “run for the green buck” has faded, so has the parity with the rupee gaining grounds. The petitioner needs to adopt a more pragmatic approach,” he said.

He maintained that an increase in gas prices would further increase the already very high cost of production of goods, reducing the industry’s competitiveness in the international market.

He also suggested that the well-head pricing formula and petroleum policy must be immediately reviewed to bring down the cost to bearable level. The linkage of indigenous gas with international oil prices is irrational and unjustified. An increase in oil prices is resulting in windfall gains for gas exploration companies as there is no increase in their cost structure, their fields having been in production for quite some time. The annual accounts of the gas exploration companies are showing phenomenal growth in profits mainly due to lacunae in the well-head pricing formula, he said, asking the authority to intervene in public interest, and reduce the well-head prices to provide relief to consumers at large.

He said the government had failed to renegotiate the wellhead price discounts in respect of Quadirpur field, and emphasized that the government should urgently renegotiate the gas pricing agreement (GPA) of Quadirpur and also Kadanwari gas fields, as was done in the case of HUBCO, “since these producers are making windfall profits by supplying gas at extraordinarily high rates, resulting in a sharp increase in the cost of gas.”

He also alerted the government to the dangers of privatisation of the Quadirpur gas field. “The policy of disposing our silverware to meet our expenses is a policy full of pitfalls and can only be termed dangerous,” he said.

“We are at a critical juncture; our exports are falling, 30 per cent of our industry is closed or on the verge of closure. And textiles, once the most lucrative business that earned 65 per cent of our foreign exchange, is no longer viable,” he added.

Muhammad Arif Bilwani, in his submissions maintained that the request by the petitioner had arisen due to failed economic and monetary policies of the government, which was solely responsible for the maintaining of rupee value against other currencies. Therefore, the consumer must not be penalised for the negligence, apathy, lethargy and loathsome attitude of the government, he added.

Representative of the AKD Securities as shareholders also expressed concerns over the erosion in the value of their investment. He also termed the response of the authority in this regard “unclear”.

The chair assured that a decision would be given in about 10 days and after giving due consideration to all the points raised in the hearing.