ISLAMABAD, Sept 18: Plans to set up a competitive gas market, similar to a stock market, are likely to fail due to a variety of reasons including distorted consumer tariffs, unrealistic gas production prices and proposed gas import mechanisms.

These are the findings of a study conducted by RG-Consulatores of Argentina.

The Argentinean consultants were appointed by the government of Pakistan and the World Bank to pave way for the establishment of a gas market of public-sector producers and distribution companies to trade natural gas as a commodity.

The consultants were appointed under the Public Private Infrastructure Facility, a multi-donor arrangement, to propose how to restructure the gas sector after a review of the existing policies, legal framework and barriers to investment.

According to well-placed sources, the government plans to create a totally private central gas transmission system. All gas producers would enter their production figures in the central system from where small distributors and bulk amount purchasers would purchase gas for sale in their areas.

However, the sources said, the problem lay in managing the consumer gas prices in case of short-term supply contracts when both the existing concession agreements and gas import pipelines would have long-term (25-30 year) supply contracts and the prices would vary from gas-field to gas-field and from one source to another.

The consultants said the situation was causing concern for policy-makers and identified following four major problems:

-The pricing of energy, including gas, should not promote inefficient use of natural gas as currently prevailing in the country;

-Any distortions reflected in an inadequate, well-head pricing system could lower incentives to develop indigenous gas reserves, and at the same time exacerbate inefficient gas demand growth;

-Gas imports are carried through long-term contracts of 20-25 years, and similarly its transportation contracts. Both types of contracts have the potential of carrying provisions that could delay the development of a competitive market; and

-If the market performs as projected in the 25-year energy plan, the negotiated imported gas price will significantly impact the gas price formation.

These issues, as well as those related to the import pipelines and the LNG re-gasification plant, should be tackled taking into account the long-term competition objectives, suggested the consultants.

They said the natural gas consumption in Pakistan steadily increased at a remarkably high rate of 8.5 per cent from 1999 to 2005. Thus, the market share in the primary energy supply increased from 40.5 per cent in 2000 to 50 per cent in 2005.

Pakistan is among the countries with a greater use of gas, compared with 26 per cent in Canada, 41 per cent in the Netherlands, 55 per cent in Argentina and 10.3 per cent in the Asia-Pacific region, they said.

According to energy development plan 2005-30, natural gas is still expected to have a vital share of the primary energy supply at 48-50 per cent, while power, industries and domestic sectors will, altogether, account for 82 per cent of the demand increase.

The study conducted by the Argentinean consultants found that notwithstanding the successful petroleum policy in the 1990’s, gas reserves reached 32.8 trillion cubic feet (TCF) enough for 27 years, but domestic production was unlikely to grow substantially.

The demand for gas would develop in two to four years, requiring to be met through imports, it said.

According to the study, since each exploration and development concession contract is related to a specific petroleum policy, the contract prices vary significantly from one gas-field to another. Moreover, the absence of a spot market for gas transactions will not allow the gas scarcity to be reflected in gas market prices.

The new situation emerges as the government plans to privatise the Pakistan Petroleum Limited (PPL) and the Oil and Gas Development Company Limited (OGDCL), besides the SNGPL and the SSGCL on the distribution side.

In case of privatisation, the degree of supply diversification is likely to increase, depending on how the sale is structured as regards the participation of existing producers in the equity at stake.

The PPL and the OGDCL together sell nearly 62 per cent of the commodity through merchant pipelines of the SNGPL and the SSGCL. The share of the PPL and the OGDCL has fallen to 44 per cent for the national market, served by these two companies.