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Digging for more

October 06, 2012

It was a fantastic idea at the beginning to promote cleaner fuel given the stable gas supplies in the early 1990s. Compressed Natural Gas (CNG) was introduced by the Hydrocarbon Development Institute of Pakistan (HDIP) — an attached department of the Ministry of Petroleum — in 1992 to provide a cheaper alternate for motorists amid the growing consumption of expensive imported fuels.

Two decades down the road, the increased natural gas consumption and almost static production coupled with the conversion of too many vehicles to CNG has brought forth a major challenge to the country’s economic sustainability.

Unlike a nominal consumption growth averaging 2.8 per cent in the power, fertiliser and cement sectors and between five to eight per cent in household, commercial and industrial sectors in the last 10 years, the CNG consumption posted an unusual annual growth of an average 40 per cent, touching in some cases to 67 per cent a year. Its phenomenal growth was driven chiefly by almost half the price it was offering as compared to its major competing fuel — motor gasoline.

As a result thereof, Pakistan became a global leader in the CNG industry. Today, more than 3.5 million vehicles are run on CNG fuelled by a countrywide network of about 3,500 CNG stations. The combined consumption of natural gas by the CNG vehicles, ranging from small cars to mid-sized public transport and even luxury vehicles like Prados and Range Rovers, stands at about 450 million cubic feet per day (MMCFD). This accounts for about 12 per cent of the country’s total gas consumption.

With a 50 per cent price difference attracting so many motorists, it was a sort of goldmine for investors who recovered their investments in 12 to 16 months even though their feasibility studies on an assumption of 200 cars per day envisaged a minimum of 20 months to cover the investment and repay loans. Returns on investment in many cases touched 70 per cent.

About 450 MMCFD (or 12 per cent) of natural gas can produce about 2500-28000mw of electricity at a unit cost of Rs5. Compared to this, generation of furnace oil-based power costs around Rs22 and above. This simply explains why the government is paying over Rs400 billion per year as tariff differential subsidy.

CNG was such a success story that the government at one stage considered awarding a pride of performance award to Hilal A. Reza, the former director general of HDIP, who initially came up with the CNG concept in Pakistan. He missed the award because of some internal politics but the proposal in the first place validated the success of a business idea that spread to almost every nook and corner of the country.

“It was a great idea to protect environment, contain oil imports and provide investment and job opportunities to the thousands and millions of people,” Reza recently told Dawn, but said it did not attract the quality and kind of regulation required by a growing sector. He has a point when he suggests that when growth was phenomenal in the heat of constant gas supplies and the increasing fight to grab every extra molecule by the competing sectors, the government should have intervened to stop its expansion.

The interim government did intervene in 2008 by putting a ban on setting up of new CNG stations and disallowing resitement (shifting of licenses from one place to another) unless forced by the government for security reasons, road expansion or related infrastructure development.

Then came the PPP government with altered political targets and objectives. The induction of a PPP-loyalist and a close relative of Senator Jehangir Badar, Tauqir Sadiq as chairman of the Oil and Gas Regulatory Authority (OGRA) and a politically-motivated decision of former PPP Prime Minister Syed Yousaf Raza Gilani changed the scenario. Gilani’s allowing resitement of one Riaz Hussain Pirzada’s CNG license from one place to another opened a floodgate of sale of provisional licenses in the open market that enabled many PPP leaders and even cabinet members to purchase provisional CNG licenses from less-influential people who could not make investments within the given deadlines.

As Sadiq started allowing resitement of licences on one reason or the other, two members, including a vice chairman of OGRA, opposed the move on the basis of a ban put in place through a cabinet decision of March 2008. They were stripped off their powers as members by Sadiq, who had the political support of the ruling party and eventually the cabinet division allowed Sadiq to use his casting vote in favour of shifting of the CNG licenses from their approved locations.

This forced OGRA’s members for gas and oil to resign in protest. As a result, ORGA allowed a total of 462 new CNG stations to come into operation, some of them still in the completion phase. On the directives of the apex court, the National Accountability Bureau has now filed cases against Sadiq and his aides.

The combined gas requirement of these stations has now been estimated at about 100 MMCFD — equal to the requirement of a power plant of 600mw. This means that the total gas consumption by the CNG would touch a whopping 550mw — equivalent to about 3,300mw of power generation capacity.

Despite this, Prime Minister’s Advisor on Petroleum and Natural Resources Dr Asim Hussain now wants an end to the CNG licenses. He has asked OGRA not to renew licenses to those CNG stations that have completed their initial 15 years license period. About 800 CNG stations between now and June 2013 coming up for renewal would be affected by this decision that is yet to be approved by a competent forum like the Economic Coordination Committee of the cabinet or the federal cabinet.

In the absence of such an approval, the decision remains questionable in the eyes of the law and subject to challenge in the courts of law. But more questionable is the opportunity cost of non-provision of gas to the electricity, industry and fertiliser sectors.