Gas: A Painful Transition

Each government has shied away from necessary gas sector reforms due to populist pressures, writes Shahid Pracha

Gas: A Painful Transition
Energy is once again in the news for the wrong reasons. I recently spent some time in Lahore where there was a long spell of winter rain, a rarity and enjoyment for those like myself who now live permanently in Karachi. The cold snap that followed made network gas all but disappear and whilst this is a problem even in Karachi, it is felt ever more acutely in the colder parts of the country.

To add more pain to misery, gas has become punitively expensive; or so it seems as we were so used to paying paltry amounts in comparison to, say electricity and petrol or diesel for the car or generator. The fact that these are all merely different forms of energy which should realistically be priced competitively is not quite fully appreciated.

This became the topic of a dinner conversation at my cousin’s house in Lahore, who had just received a seriously large January gas bill of Rs93,000, courtesy of a self-indulgent decision to install a gas-based central heating system some years ago. While this led to some good-natured ribbing, I had some empathy as well, as many have been caught unawares by the increase in gas prices within the new slab structure announced by the government.

Post the implementation of price increases, the government’s nervous body language suggested that it was itself late in modelling the implications of its new policy, announced after due consideration, by no less than an Economic Coordination Committee (ECC) presided over by the prime minister. Certainly, not enough was done to communicate ways to better manage consumer expectations.

The minister concerned can conveniently hide his blushes behind the decision making collective and the Petroleum Division can heave a sigh of relief as no blood sport will be practiced this time around. However, now that the deed has been done, it should not be undone and if it is, it will setback the country’s energy transition. Let me explain why.

No one disputes that the government had little choice but to increase gas prices – it was merely a matter of now or later under IMF pressure. The price spurt is the inevitable and immediate consequence of the steep devaluation of the rupee, since all hydrocarbons are priced in USD even at the domestic producer level.

A deeper gas pricing crisis has been brewing for decades, originating with the mandarins who devised the intricate system of cross subsidies based on the perception that gas was cheap and plentiful (Sui Gas was famously forecast to last 100 years!). A pricing policy over the years which subsidised gas progressively over other fuel sources inevitably created demand distortions and huge political pressure to make it available to all and sundry.
If we continue without full cost recovery of gas from consumers, we will initiate a second equally humongous circular debt situation in the energy sector

Musharraf’s government is perhaps guilty of the most egregious policy error of encouraging CNG as an alternative fuel in private transportation. This was reinforced by a guaranteed return on net assets allowed to the two Sui Gas Companies of 17 and 17.5 percent, which incentivised them to keep expanding their networks willy-nilly (and hence their net asset values) without worrying about maintenance repairs, waste or efficiency. The domestic sector of gas consumers became the fastest growing. As the network expanded rapidly, it became more and more difficult to monitor theft and leakages. This incubated UFG or “Unaccounted For Gas,” a euphemism for gas losses of up to 13 percent for which there is no revenue.

Each government has shied away from necessary gas sector reforms due to populist pressures or because they chose the path of least resistance in inter-provincial politics. We have consequently burnt our way wastefully through a precious and finite natural resource that could have been more prudently utilised for value adding industrial uses, resulting in growth and employment.

Problems have now come to a head as the country is running out of cheaper sources of domestic gas. Broadly, the country was producing 4 BCF (billion cubic feet) of gas per day at its peak. Demand began to outstrip production around 15 years ago and it was estimated that by 2016 there was at least a 2BCF per day gap of unmet peak demand during winters.

Concurrently, the major fields, Sui and Qadirpur began to decline and have done so rapidly in later years to less than 50 percent of their peak production, while newer discoveries barely managed to compensate for the depletion. It has been a losing battle and OGRA estimated that domestic production of gas will reduce by 25 percent to 3 BCF per day by 2020.

In practical terms, the government’s response has been two-fold. As a quick remedy to cope with the supply crisis, it encouraged investment in LNG terminals and contracted long-term and spot LNG supply agreements with Qatar and other international suppliers. It also decided to incentivise new discoveries in acknowledgement of higher global oil and gas prices by revising the wellhead prices of domestically produced hydrocarbons.

LNG import, unfairly criticised by the present government for purely political reasons, is actually a life saver for the country as it has relieved the supply side but at a cost the market is not currently conditioned to bear. Pricing revisions under the 2012 Petroleum Policy to indigenous gas producers have also had a cost impact which was not being fully recovered by prevailing gas prices. Going forward, our best hope is finding offshore gas in commercially viable quantities.

The ENI and Exxon Mobil combine has begun deep sea drilling in the Indus Block G located some 230 kilometres off the coast in Pakistan’s offshore economic zone. Pakistan’s OGDCL and PPL are together 50 percent partners, but in case of success, any gas would be priced upwards of USD 7 per MMBTU at current oil prices and would require five to seven years to land onshore. All other potential sources of gas - be it the Iran-Pakistan Pipeline or the TAPI pipeline - are unlikely to come to realisation as they are compromised by regional geopolitics. I would love to be proven wrong.

The crux of the matter is that Pakistanis, even those who can afford it, are simply unused to paying the true economic cost of gas. As reported in The Express Tribune, India has focused on LPG as a domestic fuel and piped gas is only now being expanded but in common with our other regional comparator Bangladesh, there is little or no element of subsidy. Of course, in saying that, one realises that the major segment of gas consumers will be economically hard pressed and must be afforded relief in accordance with their limited budgets.

Even that consideration must be tempered by the fact that 75 percent of the population of this country somehow manages without piped gas! The rest of us simply need to get used to a self-imposed gas quota on the basis of what we can afford and figure out alternative, more efficient ways to keep ourselves warm during winters. The new pricing structure should help to shock the system into doing just that. And not a moment too soon, as the needed gas sector reforms - assuming the government has the stomach to implement them - will realistically need some time.

Prudent use will make more gas available and ameliorate the supply crisis. Higher bills should discourage the wholesale waste of BTUs that currently go up the chimney. People will now be willing to pay for higher quality appliances that are designed to use gas efficiently. I can vouch for all of the above on the basis of my own behaviour as an electricity consumer. Over the last three years, I have reduced my electricity consumption by 20 percent by converting completely to LED lighting and inverter-based air conditioning and in the process, discovering that reversible air conditioners are a very efficient and convenient option for heating on the odd cold night in Karachi. Yes, there will be short term pain for long term gain but since a future of high energy prices is more or less cast in stone, why not act now?

There are other implications of gas price rise. The Ministry of Petroleum needs to immediately initiate reforms to eliminate gas theft and leakages as there is concurrent danger that more expensive gas will incentivise the unscrupulous to steal more of it. By Minister Sarwar Khan’s own admission, the UFG line losses of SSGC and SNGP had already reached Rs48 billion annum. If we continue without full cost recovery of gas from consumers, we will initiate a second equally humongous circular debt situation in the energy sector. What could conceivably happen after that is that the government would have to double down on raising taxes from the already taxed. Ultimately, someone ends up paying the bill. I, for one, am happy to pay full cost for my gas – so should everyone else.

The author is a former CEO of Dawood Hercules Corporation Limited and can be reached at