Gas price reform

October 12, 2019

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IT has been apparent for a number of years now that gas pricing in Pakistan is in need of urgent reform. The recent news that a Rs55bn bill is being prepared by the two gas distribution companies, known as ‘the Sui sisters’, in order to ensure continuous winter supplies for domestic consumers in the northern distribution zone that includes Punjab and KP, illustrates the cost of inaction on this front. Since last year, the government has been relying on diverting imported LNG towards domestic consumers to ensure continuous supplies. Last year, that decision cost Rs29bn in subsidies because imported LNG is almost five times as expensive as domestically produced gas. This year, that bill will be almost double — Rs55bn — because the volume of gas needed for the domestic sector is larger, given the ongoing declines in domestic fields. And no doubt, next year the bill will be larger still.

It is no secret that Pakistan’s fields are in decline and the supply of domestic gas is decreasing. About a decade ago, domestic gas accounted for slightly more than half of Pakistan’s primary energy supply, while today, that figure has dropped to around 35pc. Meanwhile, imported LNG is posting impressive gains year after year as it fills the vacuum left behind, rising from zero per cent of total primary energy supplies in 2014 to 0.7pc in 2015, 3.3pc the next year, and 5.6pc the year after. More recent data will show this percentage rising even faster. A time is fast approaching when the quantity of imported LNG in the system will be equal to that of domestic gas. At that point, continuing to administer the price of gas through cost-plus pricing formulas that seek to protect unrealistic returns on assets for the aging ‘Sui sisters’ will no longer be possible. And that point is less than a few years away, given the pace of the increase of LNG. It is becoming very urgent to move on pricing reform in the gas sector, and the focus must be on a greater role for the market in this process. This needs to be the principle with which the government approaches the problems presented by the gas utilities and their mounting losses, and not revenue considerations. Further delay in this process will only lead us towards a costly and disorderly resolution which will be forced by the hand of necessity.

Published in Dawn, October 12th, 2019