AFTER 16 years of deregulation, the government has decided to regulate liquefied petroleum gas pricing and expand through a pipeline network the product market, hitherto limited to tankers and cylinders.

Consumers on the network of SNGPL and SSGCL would bear part of LPG price as cross subsidy.

The recent meeting of the Council of Common Interests (CCI) is reported to have approved ‘in principle’ the LPG Policy 2016 subject to resolution of a few provincial objections at the forum of the Ministry of Petroleum.

This comes at a time when the government is pushing forward further deregulation of the oil, gas and power sector under its overarching agenda of privatisation, deregulation and liberalisation.

The move appears to be innovative and yet needs careful consideration.

Approved on the basis of a presentation by the CCI, it promised LPG pricing and notification by Ogra at all levels of its supply chain. Petroleum levy would be charged as permissible under Petroleum Levy Ordinance of 1961 as to be specified from time to time.

“Initially, the consumer price will be fixed at Rs895 per cylinder of 11.8kg,” the petroleum ministry said. The regulator says this price is ridiculous given the fact that its current market price was 25pc lower.

State-run gas utility — SNGPL — has selected contractors to set up three LPG air mix plants at Company Bagh, Tret and Kurbagla Dewal around Murree — the constituency of Petroleum Minister Shahid Khaqan Abbasi — with a cost of Rs514m.

Around 60 similar plants, 30 each by SNGPL and SSGCL, would be subsequently set up in Murree, Galliat, northern hilly areas and Azad Kashmir with an estimated cost of Rs11bn.

Mr Abbasi concedes that the three plants in his constituency would have a negligible additional impact of 32 paisas per unit in weighted average cost of natural gas (WACOG) being paid by natural gas consumers in urban areas.

The entire cost of LPG Airmix would be included in the ‘uniform cost of gas formula in order to compute the WACOG’ on a monthly basis and then recovered from the consumers. The petroleum ministry is pushing the plan for ‘provision of LPG through airmix plants to the areas where the piped gas is economically not feasible’.

The Economic Coordination Committee (ECC) of the Cabinet has abstained from giving ‘a blanket approval of 30 air mix plants each on SSGCL and SNGPL system’ or their operations by the third party, saying it was for Ogra to implement the CCI decisions.

Ogra said “these plants are economically unfeasible, constitutionally discriminative and legally inconsistent with the existing framework and the federal government’s earlier decisions”. It said the petroleum ministry computed the cost of LPG Air Mix at Rs5,383 per million British thermal units (mmBtu) including the cost of LPG at Rs1,261 per mmBtu. “There is no rationale to provide a product at high rates which, otherwise, is easily available at far less price in the form of cylinder gas”.

Resultantly, the proposed projects are uneconomical and will involve significant subsidy to the tune of Rs4,783 per mmBtu which will be contributed by the natural gas consumers. The LPG airmix policy was initially introduced to establish stand-alone ring-fenced projects for supply to far-flung areas where effectively no viable/feasible option was available. However, in the instant case, LPG cylinder easily available, as per the regular reports of LPG marketing companies.

Ogra said the “consumers of LPG air mix shall get subsidy at the cost of natural gas consumers while in the rest of country, the same LPG consumers at the same time will be paying a higher cost. Thus, it will indulge discrimination and impair the interests of existing natural gas consumers”.

Also, fixing the LPG price as per the recent CCI decision was federal government’s domain and Ogra could not fix its price. “Further, inclusion of LPG cost in the WACOG is contradictory to the existing legal framework for natural gas sector because LPG cannot technically and legally be categorised as natural gas. Therefore, cost of LPG cannot be included as part of WACOG”.

It said even in the case of liquefied natural gas (LNG), the WACOG was protected for gas consumers and LNG costs were ring-fenced to its specific LNG bulk consumers. It proposed that instead the amount of proposed subsidy could be used for increasing the number of LPG cylinders.

Ogra said the LPG airmix plants are capital-intensive and economically unfeasible and hence LPG supply should be increased through cylinders all over the country as was being done by producers like Saudi Arabia, Kuwait, the UAE and importers like India.

Under a previous decision, the minister for law and justice was to come up with a report on legal and financial changes required in the Ogra law and rules on the subject, but the report was still awaited.

Nevertheless, Ogra argued that there was a dire need to rationalise the tariff of natural gas and alternative fuels as the price of natural gas for domestic consumers was much less than that of LPG consumers.

“LPG is poor man’s fuel and it needed to be subsidised through tax relief to keep it on a par with the substitute product”.

It further questioned that the price break-up given by the ministry, LPG base stock price had been taken at Rs41,000 per tonne its current market price quoted by local LPG producers, stood at Rs34,935 and Saudi Aramco CPO (contract price offer) at Rs35,433 per tonne.

Published in Dawn, Business & Finance weekly, April 18th, 2016