The government continues to struggle with ensuring a seamless supply chain for imported liquefied natural gas (LNG) for the third winter in a row.

The Petroleum Division is again under fire this year for delaying LNG import orders resulting in higher prices. This caused a loss to the exchequer and made gas less affordable to consumers.

While the peak winter season is still weeks away, complaints about gas shortages and low pressure have become widespread particularly in Punjab. But such grumblings have become almost a routine owing to continuously expanding gas pipeline networks and equally declining gas production.

In the past, governments allowed network expansion that burnt scarce resources for cooking in a few urban centres. The current PTI government is no different. It is illogical to pump into pipelines gas purchased at the rate of Rs1,500-1,700 per MMBTU (in foreign exchange) for consumers almost 80 per cent of whom do not even pay Rs500-600 per MMBTU cost of locally produced gas. The resultant Rs80 billion gap for the last winter is to be recovered from consumers who did not actually use it.

Under such political compulsions, Lahore-based Sui Northern Gas Pipelines Ltd (SNGPL) is planning to add 700,000 new such connections this year while it is already facing over 1,000 million cubic feet (mmcfd) of gas shortage. Reason: gas companies get up to 17.43pc guaranteed return on assets instead of the return on sale of gas business.

Working under one energy minister, Petroleum Division can’t blame Power Division for disrupting supply chain for imported gas

Surprisingly, however, the public debate this year has missed the root cause: the unabated inability of the Power Division to place firm orders for LNG needs. This is one of the key constants. This is despite the fact the basic premise for LNG import and over $7bn investment in associated paraphernalia have always been the power sector. Over a period of time, the LNG market depth has to cater to the needs of other sectors.

Working under one energy minister who sits in the Power Division, the Petroleum Division is handicapped. It can’t publicly name the power companies/Power Division for moving the goalposts. Record shows the Power Division made about six changes to its LNG demand between June and September 21, 2020 for LNG deliveries between August and February.

However, because of similar changes in the last year’s summer season, the Petroleum Division and its companies remained overcautious in ordering LNG vessels this year and invited tenders with a two-month gap instead of the last year’s three-month gap.

Last year too, the power system placed orders for the import of LNG for power plants in summers but failed to consume even half of the 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.

Interestingly, this year when the import orders should have been placed for winter months, the stakeholders were fighting at the level of the Cabinet Committee on Energy to absolve power sector plants in Punjab from 66pc mandatory LNG off-take in the future. It is another matter that prospective bidders of LNG power plants in Punjab put on hold their bids to take part in privatisation.

On its part, the Petroleum Division at the same time remained too engaged with private parties for future LNG terminals pondering how best to accommodate the interests of various parties in the supply chain. On the other hand, the National Electric Power Regulatory Authority (Nepra) publicly criticised power companies for utilising expensive furnace oil instead of cheaper coal and LNG-based power generation for almost three months. It rejected claims for furnace oil consumptions in monthly fuel price adjustments.

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 for diverting expensive imports to cooking and heating in winter months.

The Petroleum Division concedes that it could order more LNG imports “when confirmed buyers are available who will pay the full price”. Otherwise, it would create an LNG circular debt, it said. This is because it has been unable over the past 30 months to legally define LNG as gas as it remains a petroleum product by law. Interestingly, the law governing petroleum products does not allow system losses in the pricing of petroleum products. But until now, the government is allowing up to 11pc system losses in the LNG price.

A recent majority determination by the Oil and Gas Regulatory Authority (Ogra) has tried to address the challenge to some extent but the Petroleum Division is talking about “legal lacunae” and may block its implementation.

According to the Petroleum Division, all LNG under contracts are take-or-pay and when a spot cargo is procured, it also becomes take-or-pay.

Each cargo is approximately $25 million in value. It claims financial prudence in buying additional volumes, above 800mmcfd of prior contracts, based on demand from consumers who are prepared to pay the full price.

This includes power, CNG and a portion of industrial demand. “Buying more without the ability to recover the full cost would be reckless,” the Petroleum Division says. But this recklessness has become a routine in winter months when substantial quantities are pumped into the subsidised residential sector where pipelines incur up to 17pc system losses. No wonder then that the gas sector’s circular debt has already gone beyond Rs350bn.

Published in Dawn, The Business and Finance Weekly, December 7th, 2020