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Gas reforms will impact households

September 18, 2017

Residential gas consumers are likely to be affected by gas sector reforms — spearheaded by Prime Minister Shahid Khaqan Abbasi — notwithstanding the government’s assertions to put in place two different tiers of gas supplies and pricing.

The erstwhile Ministry of Petroleum and Natural Resources under Mr Abbasi as federal minister engaged the World Bank for the way forward on gas sector reforms. The World Bank has proposed a power sector-like unbundling that was introduced in 1992 and is not even half way through after 25 years.

And yet Prime Minister Abbasi has mobilised the Council of Common Interests (CCI) and its sub-ordinate forums to take forward gas policy reforms, so far opposed by the provinces on one pretext or the other.

It was against this backdrop that an independent consultant — KPMG Taseer Hadi & Co — has concluded that average cost of gas for end consumers (mostly residential and commercial) would increase by 170 to 330 per cent under four different reform models in the next 10 years, ie by 2026, and yet the prices would be cheaper than imported regasified liquefied natural gas (RLNG).

The uncontrolled expansion of the gas network on political considerations but without economic sustainability parameters have come to hound both gas consumers and the political leadership, with far-reaching social, political and economic consequences.

The transmission and distribution system in Pakistan has become one of the world’s largest integrated networks, going beyond 141,000 kilometres. This has made demand more than double the supply, leaving consumers helpless, industries unable to operate and suppliers struggling to meet financing costs as system losses balloon.

In the absence of a fair pricing policy across various competing fuels, a short cut has been found in the induction of imported liquefied natural gas (LNG) that is double the price of average domestic gas. The problem, however, is that domestic gas production is forecast to decline by 60pc in the next 15 years, while gas demand is forecast to grow by 35pc.

The proposed reform model seeks to dismantle Sui Northern Gas Pipeline Ltd (SNGP) and Sui Southern Gas Company Ltd (SSGC) into five.

The transmission network — to be combined from two Sui companies — would be named as Transmission Company (Transco) to provide open access to four provincial distribution companies (proposed to be named Punjab Disco, KP Disco, Sindh Disco and Balochistan Disco).

In addition, there will be tier-2 operators arising out of increasing imports of LNG. As a consequence, these tier-2 operators could import LNG and sell it to their consumers anywhere.

That is where the Discos would need to stand on their own with more than 30pc losses in Balochistan, 10-13pc in Punjab, 20-25pc in Khyber Pakhtunkhwa, less than 10pc in Sindh.

The consultant considered four options proposed by the World Bank. First, existing arrangement without unbundling that is estimated to increase gas price from Rs595 per unit to Rs1,735 per unit, up 190pc in 10 years.

Option two: one transmission company (Transco) and four provincial companies. In this case, the gas price in Punjab will increase from Rs624 per unit to Rs1,711 per unit, up 174pc but KP’s gas price would jump from Rs480 to Rs1,940 per unit in 10 years, up more than 300pc.

Option three seeks one Transco and two north and south distribution companies. This is estimated to push up gas cost from Rs607 per unit to Rs1,738 per unit, up 186 pc in both Punjab and KP.

Option four seeks four transmission and distribution companies on provincial lines, with gas cost expected to go up by 175pc in Punjab and 331pc in KP in 10 years.

The consultant has concluded that continuing a ring-fenced tariff in the long term may not be sustainable, especially when domestic consumers would also be supplied with RLNG. This is expected to become reality in Punjab within three to four years.

Under the current structure, consumers across the country are being charged on a uniform basis and any deficit from the actual approved tariff is being adjusted in the form of differential margin adjustment. Due to change in supply mix and the impact of RLNG, average input gas prices will increase and will have a significant impact on consumer end pricing across all options, the consultant said.

Currently, price for domestic consumers is uniform across Pakistan but there could be a possibility that in an unbundled scenario more subsidy is required in KP and Balochistan than in Punjab and Sindh due to difference in unaccounted-for gas (UFG) losses.

The ring-fenced structure of RLNG or imported gas tariff would not be sustainable or remain viable when subject to domestic consumers, or when majority of gas supply is from imported gas, according to the consultant.

The current tariff for domestic consumers is heavily subsidised by way of cross-subsidy from higher industrial consumer tariff on indigenous gas. However, subsequent to declining indigenous gas supplies, (from fiscal year 2021 onwards in Punjab and 2023 onwards in KP) all indigenous gas supplies are projected to be made to domestic consumers.

This effectively means no cross-subsidy from within the system gas tariff can be possible.

Published in Dawn, The Business and Finance Weekly, September 18th, 2017