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THE petroleum minister has described as a game changer an initiative to import Liquefied Natural Gas to fuel cars with CNG. Under the proposal the CNG pump operators can set up one or more special purpose vehicles (SPV) to import LNG, which would be re-gasified on arrival at the Port Qasim terminal facility presently under construction. It will then be piped to CNG stations countrywide through the leaky pipelines’ infrastructure of the two gas utility companies.
The minister has claimed this would shave $2.5 billion off the oil import bill, make available a 35pc cheaper fuel for consumers and also save the sagging CNG industry.
That the initiative also proposes to exempt LNG imports from GST and the gas infrastructure development cess (GIDC) suggests that the rate differential between the landed costs of crude oil and LNG may not be very much. That in fact if these are applied, it may squeeze the profit margins of the CNG pump operators down to the bone. This also potentially belies the $2.5bn saving claim.
This is akin to providing a subsidy to a scheme that may not otherwise be viable. The petroleum ministry’s argument that the imported LNG would free up gas that the CNG sector presently receives and this would then be diverted to the textile sector and independent power producers (IPP) where it would continue to yield taxes and the cess is fallacious and a distortion of competition.
Exempting LNG imports from GST would violate the principle of neutrality in taxation.
While the measure may simultaneously placate PML-N’s traditional constituencies — the textile lobby, IPP owners, CNG station owners and millions of vehicle owners — it violates the principle of neutrality of broad-based taxation. The principle states that GST is a tax on consumption, irrespective of the product being consumed, and is to be paid by the final consumer.
Similarly the cess is meant to be used on developing future gas infrastructure and it makes little sense to exempt LNG because at some stage, if demand picks up, more pipeline capacity would need to be built.
At least transparency and national accounting practices would be better served if the government were to levy the tax and cess with one hand and with the other give a direct cash subsidy to vehicle drivers buying CNG at the stations.
So why have the CNG pump operators, with their SPV and the best of intentions, been unable to make this scheme commercially viable? To comprehend this we need to understand that the international LNG trade is carried on between a closed club, where the buyers and sellers are blue chip entities with A or AA credit ratings. As such, entities with lower ratings should expect to receive less favourable terms.
There are 19 exporting countries, Qatar accounting for a third of global production; and 25 importing countries led by Japan, South Korea and Europe. A limited 400 special LNG tankers ply cargo, spanning the globe from Alaska to Australia, the typical cargo value being $200 million. Among these, smaller size vessels of cargo worth $30m to $80m are also available but buying in smaller lots pushes up the landed cost per unit.
Vessel charter rates are also highly volatile. A good part of the cost in this business is in the supply chain and the handling. Importantly, Qatar with its predisposition for larger cargoes, would mean the SPV will have to pick up cargo from more distant destinations which would further drive up its per unit landed cost.
Even once it arrives, a further 10pc of the gas will be lost (and become part of the unaccounted for gas losses) during distribution. The final price at the CNG pumps, including profit, may well be only a fraction lower than petrol — hence the proposal to exempt it from GST and cess.
A better option may be to capacitate PSO, the country’s largest fuel importer, to handle LNG imports. PSO has a more robust financial position than any SPV the CNG pump operators will be able to come up with. It also has better experience of negotiating contracts, procurement procedures and can source much better deals. PSO will be able to achieve an economies effect and land the product at lower per unit prices.
It makes more sense for PSO to spin off a division to handle LNG requirements of all industrial sectors than for individual sectors to go it alone. The petroleum ministry must ask PSO to conduct a feasibility study on the opportunity.
Utmost, of course, systemic gas losses need to be plugged before piping expensive gas into it. This issue should be addressed head on rather than glossing over it by extending tax subsidies and distorting markets.
The writer is a business strategist and entrepreneur.
Twitter: @moazzamhusain
Published in Dawn, September 30th, 2014
