Gas circular debt surges to whopping Rs350b

December 03, 2020

ISLAMABAD: The monster of circular debt into the gas sector has escalated to a staggering Rs350 billion because of different inefficiencies and policy inactions.The gas prices were not passed on by...

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ISLAMABAD: The monster of circular debt into the gas sector has escalated to a staggering Rs350 billion because of different inefficiencies and policy inactions.

The gas prices were not passed on by increasing tariff from some time and the circular debt also piled up on account of RLNG. Thirdly, the Unaccounted for Gas (UFG) is also causing the hike. “At this moment, the circular debt build up into gas sector has touched around Rs350 billion,” former Economic Adviser Dr Khaqan Najeeb told The News on Wednesday.

Earlier, it was assumed that the circular debt was only haunting the cash bleeding power sector where it was accumulating at supersonic speed and crossed Rs 2,253 billion mark but now the circular debt in gas sector has also surfaced.

Unaccounted for gas (UFG) is causing huge losses and its control is becoming increasingly difficult under the existing large unbundled system. There is a need to create separate cost centers in the form of separate legal entities so that accounting and operational performance can be measured with great authenticity and reliability. The existing consumers are accustomed to lower domestic gas prices and are not willing to pay the delivered cost of LNG. Thus a significant mismatch is created for the utility companies. The power sector has not yet taken the expected volumes of LNG and zero rated industry is not paying the full cost of LNG. In addition to this, LNG is being diverted to domestic users paying lower tariffs. Thus cost revenue mismatch for the utility companies is growing wider. Keeping in view the piled up difficulties, the government is devising much ambitious gas sector reform plan whereby the un-bundling of two giants into different distribution companies is on the cards.

A mechanism of weighted average sale price equalization or any other suitable mechanism would be developed for gas sale pricing and the same would be implemented simultaneously. The distribution companies would be established on a technical and economical basis, including population, network density, gas demand, workload and management/supervision and efficiency for the sustainability of newly formed gas distribution companies.

A Transaction Advisory may be appointed through a competition process. The draft terms of reference (ToRs) for transaction adviser will be reviewed and finalized. The OGRA is of the view that the ToRs of the Transaction Adviser will stem from the concerted consultation between the stakeholders/provincial governments/federal government dully approved by the Council of Common Interests (CCI). The cost to be incurred during this process would be equally shared by the two gas utility companies, SSGC and SNGPL, and OGRA should accordingly allow the same in revenues of the companies.

According to official summary prepared by the Petroleum Division, the Sui Northern Gas Pipelines Limited and Sui Southern Gas Company Limited are engaged in gas purchase from Exploration and Production (E&P) Companies as well as RLNG and its transmission, distribution and sale to various categories of consumers under an integrated business model. They are operating on cost plus return formula under license from OGRA. The Economic Coordination Committee (ECC) of the Cabinet vide case No. ECC-74/06/2013 dated March 8, 2013 approved in principle to initiate the proposed unbundling of gas companies subject to advance consultation with the provincial governments and the matter will be placed before the CCI.

The services of international consultants were procured through the World Bank which undertook detailed consultation with all stakeholders, including both gas utility companies and the provinces. However, both heavily bundled companies SNGPL and SSGC carry some inherited issues. With passage of time and as a consequence of the induction of imported gas, these unaddressed anomalies and issues became complicated such as Article 158 of the Constitution provides precedence to the gas producing provinces over other parts of the country in use of gas. The gas producing provinces are now demanding uninterrupted supplies on the basis of surplus production.

The growing gas demand (constrained and unconstrained) and depleting trend of indigenous gas production are creating an ever-widening demand-supply gap. To fill the demand supply gap, import of gas option was extended in 2016. Thus reliance on imported gas (RLNG) has substantially been increased. At present, all the associated risks on import of LNG are borne by the public sector. The public sector companies have back to back, take or pay contracts for sustaining the LNG import supply chain. These agreements are tri-partite in nature and cover the terminal (SSGC & PLTL), gas imports (PSO & PLL) and transportation of gas (SSGC & SNGPL). This rigidity in supply chains contacts restricts the sector to accommodate new entrants. The private sector has shown interest in establishing LNG terminals (FSRU-based) but progress on this front is not forthcoming despite promulgation of third party access rules and development of network code. The third party access rules and development of terminal code will be finalized shortly by OGRA.

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