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Flawed natural gas policy

July 15, 2012


OVER time natural gas has become a vital energy source for Pakistan. In 2009-10, the country consumed about 1.5 trillion cubic feet of gas. All of this was produced from domestic fields.

At the current output forecasts the country is at or near its peak production.

Proven remaining gas reserves in 2010 were estimated at 27.5 tcf which means that, at the present rate of consumption, they will be exhausted in about 18 years.

The sector is already facing a supply gap, of 0.5 tcf in 2015 which is set to increase to 2.0 tcf by 2025. However, additional supplies could be generated by tapping what the industry calls ‘tight reservoirs’. These are more costly to bring to production but if they were exploited, domestic reserves could almost double.

The pattern of consumption that has emerged over the years was largely the consequence of government’s priorities and policies.

By 2010, the electricity sector with 29 per cent of the share in consumption was the largest consumer followed by general industry at 25 per cent, preferred industries (fertiliser, cement and steel) at 18 per cent, households at 17 per cent and transport at eight per cent. But this pattern began to change as a result of the government policies formulated under political pressure in recent years.

Over the six year period to 2010, although gas consumption increased at the rate of two per cent a year, about half the rate of increase in the gross domestic product, there were significant differences among different users. Consumption by industry increased by nine per cent a year. It grew by five per cent annually for domestic users, and at more than 30 per cent for the transport sector. The last increase was the result of the government’s policy to switch automobiles from the use of diesel and gasoline to compressed natural gas, or CNG.

Increasing access to gas for both business and household consumption was a political priority. This expansion also made commercial sense for the two gas supply companies, the Sui Southern Gas Limited that serves Karachi, Sindh and Baluchistan and Sui Northern Gas Pipelines Limited serving Punjab and Khyber-Pakhtunkhwa provinces. The companies were comfortable with expansion since it increased the returns on their large fixed assets.

Severe shortages of natural gas caused almost as much damage to the national economy and as much discomfort to the citizenry as the shortage of electricity. In both cases it was the failure of public policy that caused these shortages to occur. The state failed not only after the assumption of power by a democratically elected government. Poor policies were in place for decades, even when the economy was relatively better managed.

The governments – those in the past as well as the one that took office in 2008 – should have adopted appropriate policies in the area of energy to ensure uninterrupted supply as well as the efficient use of available resources.

In 2005 the government headed by President Pervez Musharraf adopted the ‘Natural Gas Allocation and Management Policy’ which identified the priority users during periods of critical shortages. Domestic and commercial sectors were placed at the top followed by the fertilizer industry. The third priority was assigned to the independent power producers, or IPPs, which had firm gas purchase agreements.

The policy did not save the country from developing severe and highly disruptive shortages. The winter of 2011-12 witnessed severe gas load-shedding which led to the closure of several industries and CNG stations. There was also very low pressure for the household sector. As a consequence, rioting by a highly agitated citizenry broke out in several cities. Corruption within the system as well as several built-in inefficiencies contributed to the problem of gas shortage. One measure of this is what is termed ‘Unaccounted-for Gas’ (UFG) which is defined as the difference between the total volume of the metered gas received by a gas utility during a period of time and the volume of gas metered as having been delivered to the entity’s consumers. UFG is usually one to two per cent in well managed systems; in Pakistan it was recorded at 10.6 per cent. This was equivalent to a loss of $ 323 million in 2011.

There are a number of factors that contribute to high UFGs. These include dilapidated pipelines; meter-tempering resulting in gas theft; leakages because of the system operating at higher than required pressure; and poor quality of meters.

According to a study by the World Bank carried out to prepare a project, UFG in Pakistan remained unchanged for decades but there was an upswing by about one percentage point a year in 2010 and 2011. Taking note of this change, the Oil and Gas Regulatory Agency (OGRA) announced a regulatory regime that allowed it to impose large fines on the gas utilities for excessive UFG. The OGRA planned to move back to the original trajectory and was prepared to allow about 4.5 per cent of UFG in 2012.

However, the senior officials of the regulatory agency allegedly found an opportunity in this tightened regime for rent creation. This was one other indication of how corruption was seeping into so many different sectors of the economy. In 2012, the World Bank was invited by the government to get engaged with the Sui Southern Gas Limited to reduce the UFG. The bank agreed to provide a loan of $100 million for this purpose. According to the bank’s loan document “the reduction in the UFG would mean that more gas is potentially available for power generation and could displace expensive petroleum products being used for the same purpose.”

However, it will take more than one World Bank project to restore uninterrupted gas supplies. The entire system needs to be cleaned. Better management and regulation must accompany increased investments.