KARACHI: The government has to start passing on the impact of higher liquified natural gas (LNG) prices to the consumers via an appropriate price pooling mechanism otherwise it risks the formation of a circular debt situation akin to the one prevailing in the electricity sector, the central bank said on Thursday.
“With LNG imports set to rise substantially over the coming years, it is crucial to devise ways to address the mindset of cheap availability of natural gas in the country,” the State Bank of Pakistan (SBP) said in report. “Due to the prevalence of extensive cross subsidies, various segments of the economy, in particular fertilisers and household sectors, have taken the availability of subsidised natural gas for granted.”
The SBP said the policy of subsidised natural gas has entailed significant economic cost for the country, with the indigenous reserves deteriorating at a rapid pace as excessive consumption of the fuel was encouraged. “Going forward, consumers would have to quickly readjust to the more expensive imported LNG.”
The SBP said the swift shift towards imported LNG is the right step, keeping in view the falling indigenous gas supplies.
“Given that the domestic consumption of natural gas is expected to increase sharply going forward, an increase in prices would help cut down extravagant household consumption, which would in turn help reallocate the cheaper fuel to the power and industrial sectors to decrease the cost of energy generation and increase the fuel’s usage in value-addition segments,” said the SBP. “The impact of subsidy rationalisation on the low-income quintile can be compensated via targeted cash transfers, which is a more efficient way of providing social protection. In addition, the relevant authorities also need to develop a long-term strategy that, among other aspects, also focuses on expanding the indigenous reserves base of natural gas.”
The SBP said LNG trade requires substantial investments at multiple stages of value addition. The first stage in converting natural gas to LNG is the exploration of natural gas from underneath the earth’s surface. Countries with an exportable surplus of natural gas reserves export the commodity; exploration contributes approximately 11 percent to the overall cost of LNG.
The next step is liquefaction, which involves the removal of various extraneous elements and ensures consistent composition and combustion characteristics of the natural gas.
The liquefaction process requires huge investments and adds 42 percent to the overall LNG cost. Once natural gas is converted to liquid form, it is transported to the importing countries via specialised trucks and ships; for long distances, shipping is the preferred option.
The overall transportation/shipping approximately adds 20 percent to the LNG cost borne by the importer. In the next stage of the value chain, the marine terminals at the importing destinations receive the LNG, store it, and later convert it back into gaseous form. In some countries, ships and barges – such as floating storage units, floating regasification units, and floating storage and regasification units – perform these different functions.
These floating facilities provide a rapid and low capital cost solution to the LNG importing countries, and approximately sum to 27 percent of the overall LNG landed price. In the last stage, the LNG in gaseous form is transported to the final customers through the countries’ own transmission and distribution networks.