ISLAMABAD: The prices of natural gas are being raised on the advice of a US-based contractor who has carried out a detailed study on the economic value of the commodity in the country’s various sectors.

The contractor has also proposed that under a new strategy the industrial sector switch over from natural gas to oil and instead of locally produced fertiliser imported fertiliser be used in the country.

“The government should gradually increase the price of natural gas to equate it to the economic cost of natural gas delivered to the customers,” says the contractor’s report.

This indicates that the prices may be increased four-fold over the next five to seven years. The existing price of gas is about $4 per MMBTU while its economic value works out to between $17 and $29.

Funded by USAID, the report was formulated by Advanced Engineering Associates International Inc (AEAI) and submitted to the government on June 6. The authorities have swung into action and plan to implement the report’s recommendations within a month of its submission. (The AEAI has fully fledged offices in the US, Afghanistan, Pakistan, Armenia and Ireland.)

The AEAI report proposes a gradual increase in prices to allow the consumers to adjust to the changes and to provide time for construction of infrastructure for delivery and use of alternative fuels.

According to the report, in the short term (up to two years) priority should be given to the supply of natural gas to power sector, followed by cooking, water heating and space heating in commercial sector and then cooking in households. This order of priority is based on the argument that the economic cost of replacement fuel is higher than the economic cost of natural gas delivered to these end-users.

In the long term, the fertiliser manufacturing units, power plants, other industrial units and vehicles should switch over from natural gas to alternative fuels. The report says “the imported fertiliser should replace domestic production of fertiliser as the cost of imports ($17.26 per MMBTU) is less than the economic cost of delivered natural gas ($20.3 per MMBTU) for the fertiliser sector”.

No new fertiliser plant should be set up in the country. That’s why the report proposes a price increase of 96 per cent for the gas supplied to the fertiliser sector in one go.

The report says that furnace oil should continue to be used as fuel in the steam turbine-based power plants because the economic cost of oil ($17.42/MMBTU) is lower than the economic cost of delivered natural gas for the power sector ($20.33/MMBTU).

The industry should also adopt furnace oil for use in captive generation plants and boilers and furnaces because the economic cost of the oil is lower than the economic cost of delivered natural gas.

According to the AEAI report, vehicles should be consuming motor gasoline instead of natural gas because gasoline is more economical than natural gas delivered to CNG stations.

The economic value of natural gas in the transport sector is $24.37 per MMBTU compared to $29.21 per MMBTU for natural gas delivered and compressed for use as CNG. “In the long term, no new CNG plant should be set up in the country,” says the report.

Instead of using natural gas the domestic consumers should use solar energy to heat water. “Thus, solar water heaters should be installed in houses to replace natural gas water heaters, as cost of water heating on solar energy is $17.12 per MMBTU of natural gas replaced incomparison to $20.33, which is economic cost of delivered natural gas for residential sector”.

As a mater of principle, the AEAI has proposed that in sectors where natural gas is to be replaced by alternative fuels, such as furnace oil in the industry and solar water heating appliances in houses, the price of natural gas should be set higher than the long-term economic value to encourage switching over to replacement fuels. In areas where gas is not supplied, the government should facilitate supply of LPG.

The price slabs should, however, remain in place for the existing residential consumers to subsidise use of gas for cooking through a cross-subsidy mechanism by charging higher rates from other sectors, says the report.