ISLAMABAD: The government has decided to keep increasing gas prices, limit expansion of gas consumption to domestic consumers and segregate gas distribution and transmission system by unbundling the existing gas utilities – SNGPL and SSGCL – for their failure to reduce system losses that are among the highest in the world.

These measures, envisaged in an agreement with the International Monetary Fund, are aimed at making natural gas prices internationally competitive to accommodate proposed imported gas through a pipeline or in liquefied form to encourage new investment and promote efficiency not only in gas use but also in its transmission and distribution system.

“We will gradually rationalise gas prices to encourage new investment, promote efficiency in gas use and assure that there will continue to be no fiscal cost from the gas sector,” wrote Finance Minister Ishaq Dar to IMF Managing Director Christine Lagarde.

On the exploration and development side, the minister told the IMF that the government had started implementing the Petroleum Exploration and Production Policy, 2012, with amendments for enhanced production from existing and new fields, and to improve producer incentives. With price increases ranging from $2.8–3 per MMBTU (Million British Thermal Units) to $6–10 per MMBTU, producers were being incentivised to enhance production from existing fields as well as initiate new exploratory efforts.

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Apart from awarding 43 new blocks for exploration in new fields last year and finalising seven concession agreements, the government plans to award another 10-15 blocks during the current year.

“As new production and additional gas supply from imports come on line, the cost of this gas will continue to be fully reflected in the base tariff on a semi-annual basis,” the letter said.

The finance minister also talked about adjustment in gas prices through gas infrastructure development cess (GIDC) in December last year and then a 0.55 per cent of GDP (Rs150 billion) increase in GIDC through the current year’s budget to better allocate gas consumption.

He said the government was evaluating the downstream gas business with the objective of bringing in efficiencies in the transmission and distribution segments for better operation of the market system. In this respect, consultants will be hired by the end of this year to conduct a study on the restructuring and unbundling of the two gas utility companies.

The study will help formulate recommendations based on international best practices, including segregating the gas network into single transmission and multiple distribution companies. The companies will be further internally segregated into independent profit and cost centres to ensure maximum efficiency.

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“A mechanism will be developed for determining separate transmission and distribution tariffs and a new pricing mechanism for sale of natural gas to various sectors of the economy will be devised to account for the higher cost of additional gas in the system, especially the imported gas,” wrote the finance minister.

Mr Dar also promised to improve the governance in the gas sector, particularly the ministry of petroleum and natural resources through capacity build-up will fully implement the 2012 policy, streamline approval processes, and complete the conversion to the new policy for those petroleum concession holders who wish to do so.

“We will further encourage bilateral contracting between producers and consumers and improve rules for third-party access to the gas transmission system,” he said.

Published in Dawn, July 9th, 2014