Concluding a tough year (2022) in terms of record energy prices, the people of Pakistan are unlikely to see any noticeable relief over the next 12 months, except maybe some election-related tinkering with pricing that would, at best, be short-lived.
Unfortunately, the fundamentals for affordable energy on a sustainable basis are not yet right.
The gas regulator — Oil & Gas Regulatory Authority (Ogra)— increased the prescribed price of natural gas by 45 per cent for two gas utilities — Sui Southern Gas Company Limited and Sui Northern Gas Pipelines Limited (SNGPL) — in the first week of June. The resultant increase in consumer-end prices has still not been issued despite a mandatory 40-day deadline. This was on top of a price freeze maintained by the former PTI government.
The double-dose backlog had to come back with a vengeance. Five months later, the two gas utilities demanded up to 237pc increase in natural gas rates to generate about Rs660 billion in additional funds in 2022-23.
To be precise, the Lahore-based SNGPL has sought an increase of Rs1,294 per million British thermal units (mmBtu) or 237pc while Karachi-based SSGCL has demanded an increase of Rs668 per unit or 96pc to meet their revenue requirements for 2022-23. On top of that, SNGPL has also sought another Rs1,016 per unit as cost of services for RLNG, including Rs762 per mmBtu on account of the differential impact of diversion of RLNG to the residential consumers at cheap rates in winters.
Both companies have claimed that the major reason for the higher revenue requirement was linked to the international price of crude oil and furnace oil in line with agreements signed by the government with gas producers. The regulator has already conducted public hearings on the subject and is yet to come up with its determination. There can be a delay but no escape.
The gas circular debt is already hovering higher than Rs1.5 trillion and needs to be settled. SNGPL alone has to clear almost Rs300bn by March 2023 to Pakistan State Oil (PSO) on account of LNG payables. PSO’s total receivables including those from other entities, including the power sector, are now close to Rs650bn. The situation is such that PSO is pushing to take over SNGPL’s share on prevailing subdued share prices in the stock market. Ironically, despite this unprecedented price in international oil and gas prices and the resultant increase in the import bill of two essential commodities, the two gas utilities have failed to control their unsustainable system losses against regulatory targets approved by the government.
Over the last three years (2019-22), both the gas utilities have not been able to achieve loss — commonly described as unaccounted for gas (UFG) — reduction targets set by the Ogra and approved by the federal cabinet, according to a 3-year performance report released by the petroleum division.
Simply put, the two companies’ UFG account for almost 600-650 million acre feet per day (mmcfd) that could easily produce more than 1,200MW of cheap electricity at Rs8-9 per unit and is more than half of the total LNG imports of about 800-900mmcfd and account for almost one-third of the total domestic gas production.
Paradoxically, the cheaper LNG options are not available to Pakistan, at least not during the current calendar year, except for those already contracted from Qatar. Therefore, a substantial chunk of power supplies would be dependent on furnace oil and coal — both local and imported.
The induction of about 2,600MW of Thar coal-based power generation is a valuable contribution but net addition during the current year would be about 1,300MW in addition to another mega 1,200MW plus LNG-based 4th project at Trimmu for which LNG availability would remain a challenge. The existing three such projects — contracted as must-run — are hardly functioning at full capacity due to fuel challenges.
Likewise, there will be an almost negligible additional contribution from fresh renewable energy (RE) plants. Their contribution to a reduction in electricity prices will be minimal given the continuously rising impact of capacity payments that, on average, cost about Rs10 per unit (ranging between Rs6 to Rs20 per unit for various plants).
Most power purchase agreements with base load thermal power plants are capacity based under ‘Take or Pay’ contracts. Capacity payments must be paid against available generation capacity irrespective of whether it is utilised or not.
The financial impact of capacity payments increased from about Rs600bn in 2020-21 to more than Rs720bn. It will gain pace as new China-Pakistan Economic Corridor based plants come into the system. Thar coal-based plants are no exception, although their fuel cost would be significantly lower.
As a pointer towards how the electricity prices will behave during 2023, it will suffice to recall that the finance and power divisions came up with recommendations in December 2022. These were to impose a special surcharge on consumers ranging between Rs12 to 40 per unit to cover a Rs706-800bn gap arising out of unbudgeted subsidies, system losses of around 17-18pc and 10-17pc less recoveries against billing. The financial gap will only keep growing unless drastic governance steps are introduced — an unlikely event, at least during the year ahead. The US Energy Information Administration (EIA), Goldman Sachs and JP Morgan have forecast international crude prices between $90 to 110 per barrel in most of the first half of the year, almost 8-9pc higher than less than $80 per barrel at present.
Yet there are many uncertainties about the global oil and LNG prices, including those related to Russian supplies and US-EU sanctions against Russia. That means oil-importing countries like Pakistan are unlikely to get any major relief from abroad.
Islamabad’s efforts to arrange energy imports from Moscow also remain uncertain. The two sides have re-engaged for energy cooperation, and a Russian delegation led by the energy minister is expected to be in Islamabad by the third week of January for cheaper oil supplies to Pakistan.
How quickly negotiations progress towards reality will have to be seen, more importantly in the context of the latest ban imposed by President Putin on oil supplies to countries and entities that abide by the 30pc lower price cap imposed by US-EU allies on Russian supplies. While President Putin can exempt such bans under special cases — as maybe the case of Pakistan — the end situation is still very murky.
But that is not all. Irrespective of the international price trend, Pakistanis still have to brave additional taxes on petroleum products under the International Monetary Fund programme that has to expire in the third quarter of the year. While about a Rs20 per litre increase in petroleum development levy on high-speed diesel before March is a foregone conclusion, the introduction of GST on all major oil products will soon be another bitter reality.
The sad part is that political leadership in the government and the opposition appears poles apart on addressing governance challenges in the energy sector and, by extension, towards reform that help contain energy costs and improve the energy mix.
Published in Dawn, The Business and Finance Weekly, January 2nd, 2023