Natural gas losses

Published March 13, 2017

Around 400m cubic feet of natural gas is going to waste every day, accounting for almost 14-15pc of total supplies to the country’s integrated transmission and distribution network.

This much of gas is sufficient to run up to 2,400megawatt of power plants at an average fuel cost of just Rs5 per unit (kwh) compared to Rs12 or so of furnace oil-based generation, or Rs8 per unit on imported liquefied natural gas.

If diverted to the fertiliser sector, this quantity of gas is enough to operate about four plants of the size of Engro Fertiliser — that earns around Rs20bn profit per year.

Almost the same amount of gas is currently being imported at the expense of foreign exchange losses on furnace oil imports.

Commonly known in industry jargon as Unaccounted for Gas (UFG), the loss is caused by theft, leakage and measurement errors. Utilities have also coined terms like ‘losses arising out of an overwhelmingly larger chunk going to retail consumers than bulk’, and ‘losses to law and order affected areas where companies fail to ensure normal operations’.

The amount of un-metered or unpaid for gas at the current rate could lead to the virtual collapse of the two companies in three years, according to independent consultants

Despite this, there does not appear to be any urgency to address the growing problem. UFG losses have increased from 120bn cubic feet (BCF) a year in 2011 to 145 BCF in 2015. The utilities’ have focused more on building these losses into consumer tariff than seeking technical remedies.

No wonder then, UFG losses increased from 7-8pc in 2001-02 to 15.2pc (in the Sui Southern network) and 13.5pc (in the Sui Northern network), in 2015.

Accounting for various heads, almost 9pc of the loss is built into the SSGC tariff and 8.3pc in the SNGPL tariff. The amount of un-metered or unpaid for gas at the current rate could lead to the virtual collapse of the two companies in three years, according to independent consultants.

Hired by the Oil and Gas Regulatory Authority (Ogra), consultant KPMG has revealed that only 73pc of the gas is supplied to 5m consumers in SNGPL and 67pc to 2.9m consumers in the SSGCL network with proper metering and billing. This means almost 28-33pc, or one-third, of gas is consumed unmetered or unbilled.

Successive governments, on the other hand, continue to use this scarce commodity for political bribes — mostly hiding behind so-called ‘socio-economic’ responsibility.

This is evident from the retail network for domestic consumers expanding in Multan and Gujjar Khan — tenures of Yousaf Raza Gilani and Raja Pervez Ashraf — and in Captain Safdar’s Mansehra constituency and Shahid Khaqan Abbasi’s Murree Hills, and so on, under Nawaz Sharif rule.

While expanding the network to secure fresh votes, political leaders seldom realise that they keep adding to the number of protesters for the next winter when utilities struggle to ensure gas pressure. There is hardly any policy direction to utilise a precious natural resource on the basis of economic output.

A prudent approach could be to assess economic output among various industrial sectors to decide where the gas should flow based on an all-encompassing study of competitive fuels and competing consumer classes.

Such a vision should rise above the narrow approach of meeting revenue requirements of the gas utilities and winning few votes for the next elections.

This approach may not suit private shareholders in gas utilities who are now demanding the cost of 9-10pc losses be built in the gas tariff, with retrospective effect from 2011-12, to inflate revenue and profitability of the gas companies.

The consultants have suggested allowing five per cent unaccounted for gas (UFG-losses) allowance to gas utilities in consumer tariff for the next five years, with targets for their gradual decline.

While suggesting this, they conceded that the proposed UFG benchmark was the highest in comparable gas markets. This is slightly higher than the 4.5pc currently being allowed by the regulator.

UFG benchmarks were as low as 0.5pc in Australia and one per cent in the United Kingdom. Loss benchmarks in Canada, Germany, Ukraine and New Zealand ranged between 2.16pc to 2.65pc.

Under the directives of the Economic Coordination Committee (ECC) of the cabinet, the Ogra had allowed, last year, various losses in tariff in the name of losses due to law and order, minimum billing and theft. The ECC had called for these losses till such time that an independent study was completed.

The KPMG study nevertheless created a new way out for the higher system losses in the name of ‘local conditions component’ and said that about 4pc of additional relief be given to gas companies which should be linked to achievement of key performance indicators and key monitoring indicators to Sui companies.

This is also in line with current losses allowed by the regulator in the name of law and order, non-consumers, theft and shift in bulk to retail consumers.

These were added on the request of the gas utilities arguing the shift in bulk to retail consumers, losses due to law and order, etc, were beyond their control and were resulting in higher losses due to greater theft and lower recoveries.

The study deplored that while gas distribution companies in other countries had a measured and managed approach to gauge UFG with robust distribution networks — where gas being transported was fully measured end-to-end — the existing measurement mechanism at the Sui Companies are not adequate enough to provide UFG details appropriately at a contributing factors level.

Published in Dawn, Economic & Business, March 13th, 2017



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