NationalVOLUME 16 ISSUE # 05

Rising prices and declining production of gas

It seems that gas prices are up for revision again. This is what transpired in the last meeting of the Economic Coordination Committee (ECC). According to a press statement issued after the meeting, the weighted average tariff will be charged at Rs 930/mmbtu till February 2021.

However, there is some ambiguity in it and it is not clear whether the weighted average being talked about also includes domestic consumers. If so, then it is anomalous, as the weighted average prices determined by the Oil and Gas Regulator Authority (OGRA) in July, for both distribution companies, comes at around Rs812/mmbtu. Even if one takes out the domestic share of 20 percent, the weighted average price would still be at Rs930/mmbtu, as per OGRA’s determined rates.

As per the EEC decision, domestic and tandoor users will be exempted from the price increase. This is a good decision and was expected. The weighted average consumer gas price for FY20 for both SNGPL and SSGC combined was Rs738/mmbtu. As per OGRA’s determination of Rs813/mmbtu, the weighted average consumer price (WACP) would have increased by a very reasonable 10 percent – and the impact even after taking out the domestic consumers would not have been more than 15 percent.

But the mention of Rs930/mmbtu as the weighted average price till February 2021 is confusing. This is because not only does it lead to an increase of 26 percent from last year, but it is also inexplicably higher by 14 percent from the regulator’s determined price. For Rs930/mmbtu to be the case, prices for the industrial sector will have to go considerably higher, and not by Rs40-50/mmbtu, as quoted by some quarters.

Now the question is: What will become of the textile and other export-oriented sectors in case the weighted average consumer price does indeed go up to Rs930/mmbtu. Earlier, the gas price for the textile sector was set at Rs786/mmbtu for FY20 – the lowest amongst non-domestic users. With more RLNG being allowed to be pumped into the system, the higher weighted average consumer price makes sense, but it can still not be possibly higher than the prescribed price by the regulator. To remove any confusion, experts have suggested that the detailed consumer price by category be shared with the public.

Along with the prices, another issue is that of shortage. Already reports of impending gas loadshedding are coming as the winter season approaches. It is said that this time, the gas shortage is likely to be much grimmer than the previous years because the time has come when provinces other than the Punjab too will become gas deficient and face shortages. The current natural gas shortfall is expected to exacerbate in the coming months. It may be added here that the recent loadshedding in the K-Electric system because of gas shortages was an indicator of the situation to come.

According to the Oil and Gas Regulatory Authority, the gas demand and supply gap during FY2019 was 1.4 billion cubic feet per day (bcfd), which is expected to rise to 3.7 bcfd by FY2025 and 5.4 bcfd by FY2030. Predictions for the upcoming winters are as high as 1.5 bcfd by industry experts and stakeholders, while government officials have been foretelling close to 800mmcfd shortages in the gas network. Special Assistant to Prime Minister (SAPM) on Energy, Nadeem Babar, has repeatedly said that the SSGC network, that serves Sindh and Balochistan, is likely to face a higher shortfall this year than the SNGPL network serving the Punjab and Khyber Pakhtunkhwa. The SSGC network shortfall could touch 400mmcfd while the SNGPL network will face a demand and supply gap of 350mmcfd.

The supply-demand gap in the gas sector has been widening over the years. The current gas demand in the country stands at around 7.5 bcfd, while the indigenous production has come down to 3.5 bcfd. Gas production is declining at a rate of 9.5 percent annually, and the circular debt has also affected the gas sector, touching Rs250 billion. This means that to increase the supply side, the country will have to rely on imported RLNG. But, here the federal government and the Sindh government are at loggerheads as the latter is not ready to consume LNG and hence does not agree to the weighted average gas pricing proposal by the federal government as it will increase the price. On the other hand, the federal government has proposed an additional 150 mmcfd in the form of RLNG to Sindh if it issues the right of way for an additional gas pipeline.

Reportedly, the government is planning to build underground gas storage to avert a gas shortage in the future. For this, the Asian Development Bank has agreed to complete a study on the methodology of underground gas storages till May 2021. This will call for a consensus between provinces and the federation to jointly address gas shortfall issues. Of vital importance in this connection is 100 percent utilization of the two RLNG terminals, and increased LPG production and lowering its cost for those without piped gas (28 percent of gas consumers) as well as those with piped gas but facing a shortage in winter months. All said, the ultimate solution lies in boosting the indigenous production of gas.