Gas challenge

July 21, 2015


The writer is a business strategist and entrepreneur.
The writer is a business strategist and entrepreneur.

NEWS of Iran reaching a landmark agreement with the big powers has once again invigorated talk of the Iran-Pakistan gas pipeline. The adviser to the prime minister on foreign affairs, Sartaj Aziz, has been reported as saying that once sanctions are lifted, Pakistan would move quickly to implement the agreement. On his part, the petroleum minister says that as soon as the sanctions are lifted, the pipeline would be built and Pakistan would receive gas from Iran. Now, if only the real world was that simple.

As I have mentioned in these columns before, the gas shortage and crisis in Pakistan is the cause of bad economics and not logistical difficulties or sanctions. And no matter how much gas is available at our doorstep, our domestic market will not be able to absorb it at international prices. We already have an LNG terminal which was intended to be importing gas at full capacity but is instead languishing.

All our gas-consuming sectors are addicted to low prices. These prices are centrally administered and do not reflect the true economic value of this scarce resource. Natural gas is used for both consumptive and productive purposes. Decades of economic decisions made on the basis of these centrally administered prices have resulted in a wasteful, inefficient and poor allocation of a valuable resource and discouraged fresh exploration activity. To redress this situation requires a radical shift away from administered prices to those based on fair economic value.

In that sense the impending inflow of gas at global prices represents an opportunity to rationalise gas prices. The recent sharp fall in world petroleum prices means this can be done less painfully. Still, domestic gas prices are a fraction of international prices. And incremental increases like the government seems to be doing will not do the trick.

Whatever the plans for the IP pipeline, the issue is bad economics.

A quick and dirty solution would be to simply mix the imported gas with the local and then calculate a weighted average basket price. That would exacerbate, not address the existing economic distortions. Hopefully, the government does not want to go down that road and this was made apparent last year when in a highly publicised press conference, the petroleum minister had announced that the CNG sector would take up some of the imported LNG. The CNG sector has not had much success with this. The overarching reason may be because the price of imported gas is roughly twice the administered price of $6.5 per mmbtu at which this sector has been receiving domestic gas. This was not something that was too difficult to foresee. In the absence of fair value pricing, the government is unable to arrive at the conclusion that CNG may not after all, be a viable fuel to substitute motor petrol.

The domestic sector gets its gas at even less, a tiny fraction of the international price. And each time gas prices have been raised, so the rate of theft has also gone up. In some distribution regions half the gas is stolen as consumers chisel clumsy holes in the pipeline and use rubber pipes to run stoves and heaters. And even as they siphon off the required three or four units per day, the larger rupture often leads to perhaps another 97 units leaking into the atmosphere. Both the gas utility companies are unable and unwilling to plug the losses.

The remedial measure in this situation would be to turn off natural gas supply in high-theft areas and instead shift to providing LPG cylinders which is a main cooking and heating fuel in many developing coun­tries. Cheap gas is also serving as a deterrent to the uptake of solar water heating and one wonders if subsidy can be given on gas then why it cannot be given for the one-time installation of solar water heating apparatus to low-income households.

Fertiliser production is another problematic area where according to some estimates the government is giving away more in gas subsidy to fertiliser manufacturers than if it were to simply subsidise imported fertiliser. An added irony is that Pakistani farmers pay more for urea fertiliser than farmers in neighbouring countries.

In the final analysis, power generation may be the only sector that uses gas productively. (Though even here there have been reports of K-Electric, under its present management, pilfering gas in running its Bin Qasim plant.) At any rate, the government must immediately develop and present its future gas road map which then it must implement in the two-year lead time it takes to construct the IP pipeline. That is if another LNG terminal story is to be avoided. Indeed, without that road map the government may have trouble raising finance for the pipeline.

The writer is a business strategist and entrepreneur.

Published in Dawn, July 21st, 2015

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