Time for a fresh energy model

Updated January 13, 2020

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Pakistan may have to move out of existing contradictory policy stances and legal vagaries. — Photo courtesy Creative Commons/File
Pakistan may have to move out of existing contradictory policy stances and legal vagaries. — Photo courtesy Creative Commons/File

NO winter in the recent past has passed without controversies and allegations of injustices over a gas shortage with varied degree of public outcry. This year has been no different, even though the debate has shifted more towards its affordability thanks to the induction of imported liquefied natural gas (LNG).

In fact, the storm started to develop much before winter when the gas companies cried for help to address oversupply, threatening the safety of their pipeline network.

The power system placed orders for the import of LNG for power plants in summers but failed to consume even half of its ordered quantities, as economic activities dwindled and power consumption plunged. In fact, the power system went to the extent of absolving its power plants from guaranteed LNG offtake.

For starters, the LNG import was justified over more than a decade for running power plants instead of the “expensive” furnace oil at the time.

As would have happened with any impromptu planning, poor forecasting and governance challenges, gas companies were reluctant to place future LNG orders unless the government took responsibility for financing and appropriate pricing coupled with an additional subsidy of Rs50bn for diverting expensive imports to cooking and heating in winter months.

Sindh interprets Article 158 of the Constitution as a source of monopoly over almost 68pc of domestic gas that it produces

Power companies on the other side, kept their generation capacities of LNG-based power plants unutilised. The two divisions — power and petroleum — appeared poles apart under one ministry, the Ministry of Energy, and one federal minister. Local oil refineries, on the other hand, dropped their capacity utilisation as their furnace oil stocks filled storages to capacity and its prices dropped by almost a third.

Meanwhile, the winter arrived with a bang — the harshest in 47 years, according to government functionaries. A five per cent increase in demand and a 7pc decline in domestic gas production were partly covered with an additional diversion of expensive LNG into a subsidised domestic sector. Its cost would now jump to over Rs32bn this year when compared to about Rs19bn in last winter.

As gas pressures dropped in various parts of the country including Karachi, the debate resurfaced over the application or otherwise of the Article 158 of the Constitution and its interpretation. Gas supplies to general industry and CNG came to a naught in Punjab and affected CNG in Sindh.

Article 158 reads: “The province in which a wellhead of natural gas is situated shall have precedence over other parts of Pakistan in meeting the requirements from that wellhead, subject to the commitments and obligations as on the commencing day.”

Sindh interprets Article 158 as a source of monopoly over almost 68pc of domestic gas that it produces, irrespective of residential, industrial or any other category of consumers. The Federal Ministry of Energy has a different interpretation and claims to have it authenticated by the Attorney General for Pakistan: “Citizens of Pakistan (residential consumers) — and not of any particular province — have the first right of use over natural gas use as they are its ultimate owners” and that citizens of each province could not be dealt with differently. Another explanation is that a citizen using gas since, for example, 1990 has the existing commitment for gas for all times to come under 158.

In fact, it interprets the said article in three parts. First, royalties on wellhead belong to the province where it is located; second, policymaking about these wellheads belongs jointly to the federation and the provinces through the Council of Common Interests (CCI); and third, the operations and management of supplies rest with the Centre that it implements through federally owned gas companies, i.e. SSGC and SNGPL.

Like in the past, the issue came up for discussion again at a CCI meeting held on Dec 23, 2019. While the minutes of that meeting were delayed, Sindh’s chief minister wrote a letter of appreciation to the prime minister on Dec 25 for recognising that Article 158 was a specific article in the Constitution that accepted that “the people of province in which a wellhead is located will have precedence over other citizens of the country”.

Days later, the federal energy minister and prime minister’s special assistant on petroleum reported to the media that they had secured during the CCI meeting a broad agreement with the Sindh government for introducing a weighted average cost of local natural gas and imported LNG in future to streamline supplies.

At the same time, they blamed the Sindh government for prevailing gas shortfall in various parts of the country due to delayed or non-issuance of right of way for gas pipelines at three points in Sindh — one connecting a few new fields, another (17km) at Pakland near Dhabeji and the third one 125km inside interior Sindh. These pipelines could have increased LNG supply to 1,300 million cubic feet per day (mmcfd) — the maximum processing capacity of two LNG terminals — and added another 55 to 60 mmcfd to the national grid.

“We have to go for weighted average cost of gas because LNG is also a source of gas and not a petroleum product,” announced Special Assistant to the Prime Minister on Petroleum Nadeem Babar. He added that this would end the dispute surrounding the application of Article 158 of the Constitution. It may be kept in mind that the lowest slab of domestic consumers (36pc) is charged a subsidised rate of Rs121 per unit against the actual average domestic gas price of Rs780 and the LNG cost of Rs1,700 per unit.

The petroleum division claims Sindh currently produces about 2,243 mmcfd. Out of this, 1,200-1,300 mmcfd is being put in the SSGC system while around 700-800 mmcfd is provided directly to power and fertiliser sectors in the province. “After netting out gas supplied by SSGC in Balochistan, there remains 400-500 mmcfd of gas that goes out of Sindh,” it says.

Sindh rejects such moves and believes that the Centre’s attempt to work out natural gas tariff by including regasified LNG into the existing weighted average cost of gas of indigenously produced natural gas was gravely disturbing, upsetting and illegal and being largest producer of local gas at Rs580 per unit, it could not be expected to pay Rs1,690 per unit for imported product.

Pakistan may have to move out of existing contradictory policy stances and legal vagaries. A shift to a single energy basket comprising gas, LNG, LPG, hydropower, wind, solar, coal, oil and nuclear, etc. into power generation could be a way out. Electricity by all means has the largest outreach to over 70pc population across the country.

This could increase to 100pc for all purposes like heating, lighting, cooking, etc. at a uniform rate when compared to all other sources having limited accessibility and affordability. Different provinces have different energy sources that could be synergised to the benefit of all with comprehensive planning and accommodation. It may take time but it is worth consideration.

Published in Dawn, The Business and Finance Weekly, January 13th, 2020