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Towards ‘creative’ destruction

July 30, 2012


The government directive to Oil and Gas Regulatory Authority (Ogra) clearly marks the beginning of the end of the use of the CNG sector. - File photo

The Raja government has decided that the economy cannot afford the luxury of using natural gas any longer as a transport fuel.

It has directed the gas regulator not to renew licences for CNG stations originally granted for a 15-year period.

The new policy aims to stop use of gas for transport in three years. Eyeing mounting pressure on gas supply, the democratic government applied brake on CNG sales and banned grant of new licences in three provinces in 2008, the year it assumed power.

Balochistan was exempted where new licences were issued over the past four years. Market reports confirmed that hardly 10 per cent of the licences were utilised in the troubled province.

The government directive to Oil and Gas Regulatory Authority (Ogra) clearly marks the beginning of the end of the use of the CNG sector.

The CNG station operators rejected the decision that, they felt, would help only a handful of large profit-making concerns.

“The government was misled and blackmailed by big guns in urea, cement, textiles and power sectors. They spent Rs350 million on projecting their case through media beside spending millions more to buy support in the government”, Ghiyas Abdullah Paracha, Chairman All Pakistan CNG Association, commented over telephone reacting to the decision.

A senior official in Islamabad said the decision was taken after detailed deliberations at the highest level in the government.

“The target is to optimise the benefits of gas for the people. Sometimes the objective conditions necessitate policy changes. The government has a pragmatic approach. We understand that everyone is not going to like it but we are doing what needs to be done”, he said.

“If gas reserves are depleting and there are other more crucial areas of demand for gas in the economy, adjustments become unavoidable”, he added.

The owners of CNG stations contested the government logic that, they felt, was betraying them and the people.

“The projection of total gas demand by CNG stations is highly inflated. Besides, the contribution of the successful CNG sector to the public revenue is under played”, another leader of the sector asserted.

“The CNG sector consumes seven per cent of the total gas consumption in the country and contributes 16 per cent of the total gas revenue. The sector pays highest tariff at Rs618 mmtbu against Rs460 mmtbu of industry. The gas stations pay sales tax at 25 per cent against 16 per cent by industry. The cess for CNG sector is Rs149 against Rs100 for industry”, Paracha pleaded.

Representatives of cement, power, textiles and fertiliser sectors suppor the government’s decision. “The government can possibly not delay the decision any more. When the economy is nearing a tipping point for the lack of investment it is apt for the government to heed the demand of industry”, a textile tycoon from Lahore commented. Similar sentiments were expressed by intended beneficiaries of the policy change.

Azhar Ahsan Thanvi, a leader of CNG operators in Karachi, lamented abrupt changes in the government policy that, he said, would lead to spike in oil import bill deepening the trade deficit crisis beside denting investors confidence.

“A gas station costs about Rs200-250 million. Who is going to compensate for our loss?”, he asked.

PM’s Advisor on Oil and Gas Dr Asim Hussain, who informed the Senate of the policy on July 13 meeting, was not available for comments.

Another well-placed source in Islamabad dismissed the notion that the change is sudden or abrupt.

“I think that twenty years is a fairly reasonable period for one policy. In a fast changing world brimming with ideas and information if the government reassesses a situation and tries to make necessary adjustments, I do not see anything wrong in it”, he said.

“The problem, if any, is with the private sector of Pakistan that lives twenty years behind our times. They lack dynamism and want to cling on to the government support. Besides there can never be an economic policy that pleases all conflicting interests at the same time”, he added.

The last Thursday report points to the complete reversal of the CNG policy announced twenty years ago. In 1992, the government introduced CNG as an alternative cheaper auto fuel. It announced a series of incentives to lure investors. These included price differential between motor gasoline and CNG, duty-free import of CNG kits, deregulated price mechanism, establishment of an independent regulator- Oil and Gas Regulatory Authority (OGRA), etc.

It took the process five years and the first batch of private CNG stations became operational in 1997. The licences were granted by the OGRA to the private operators for 15 years, extendable by another five years. The government then argued that it would reduce dependence on gasoline that was a constant strain on the country’s foreign reserves because of unpredictability in global prices.

The governments’ fears about oil price hike were not baseless. From around $15 per barrel in 1992 to $22 in 1997 the gasoline price crossed $90 by the end of 2007, breached the watershed of $100 in early 2008 and hit a record in July by touching $147 per barrel. After wide fluctuations, the oil prices have eased moderately. On Friday the crude oil was traded at $89.8 per barrel.

To capitalise on the price differential, the private vehicle owners were tempted to install CNG kit despite the cost it entailed. The car assemblers geared their projects to cater to public demand and started production of cars fitted with CNG kits. All these investments would go waste.