ISLAMABAD, July 11: The government on Thursday signed a formal agreement with Pakistan Petroleum Limited (PPL) that would allow the country’s largest gas producer to operate on a market based gas price formula.

This brings PPL pricing system at par with other local and foreign exploration and production companies and would replace the existing gas price agreement (GPA). Under the old agreement of 1982, PPL was operating on a fixed rate of return under a cost plus formula and was subsidising the gas sector.

This is part of a decision the federal cabinet took early March this year for gas tariff rationalization through elimination of cross subsidies in a phased period of three years and allowed dismantling of PPL’s 1982 gas price agreement.

The decision immediately pushed gas prices up by 8 to 20 per cent for all consumers with effect from March 1, 2002. The dismantling of 1982 agreement necessitated a new market based pricing agreement that became legally effective from July 11, 2002.

The agreement was signed by secretary petroleum M. Abdullah Yousaf on behalf of the government of Pakistan and PPL was represented by managing director PPL Munsif Raza.

The federal government is holding 93 per cent shares of PPL while remaining 7 per cent shares are jointly owned by international finance corporation and handful of private sector shareholders.

PPL is currently producing 800 million cubic feet of gas per day (mmcfd), which comes about 40 per cent of the total gas supplies to the main gas transmission network. The company has now been allowed to operate purely on commercial basis and take decisions independently.

The government is following a policy of deregulation of the petroleum sector under the guidelines from the World Bank and the International Monetary Fund under the structural adjustment credit (SAC).

Under the three-year phased programme, the natural gas tariff will go up by an estimated 70 to 130 per cent and remove an annual subsidy of around Rs46 billion.

This means that gas prices would increase on March 1 and September 1 every year till 2005 by an average 15 to 20 per cent. The next tariff revision would take place on September 1, 2002.

Balochistan has been protesting over decline in gas development surcharge and royalty payments to it and the revised GPA with PPL at higher rates would increase provincial share significantly because royalty is calculated on 12.5 per cent of the total well head price.

From now on, the gas prices would be based on well-head price plus transmission and distribution cost plus return to utilities and above all the 15 per cent taxation. The prices would revised every six months and cost of service will be the basis for tariff which means that bulk of consumers would be provided gas at cheaper rates.