Gas sector circular debt bloats to Rs1.5 trillion

ISLAMABAD: The gas sector circular debt has ballooned to a staggering Rs1.5 trillion, making the sector virtually unstainable, primarily owing to the rapid fall in indigenous gas production, failure to fully recover the gas price, diversion of costly LNG to the domestic sector in the winter, and under-utilisation of LNG infrastructure, The News has learnt.

This all has been unfolded in the latest presentation of Sui Northern Gas Private Limited (SNGPL) shared with decision-makers on October 13, 2022.

While painting the bleak picture of future gas demand-supply, the Sui Northern has projected that the gas deficit which stands at 1,479 mmcfd in 2022-23, will escalate to 3,590 mmcfd in the next seven years in 2029-30.

The indigenous gas production that stands at 3,408 mmcfd will alarmingly decline to just 1,659 mmcfd in 2029-30. It also projects that the LNG supply capacity of the country, currently at 1,200 mmcfd, will increase to 1,800 mmcfd with unconstrained gas demand reaching up to 7,049 mmcfd in the next 7 years.

Regarding the failure of full recovery of the price of costly RLNG, it has been mentioned in the presentation that in line with the government directions, SNGPL sells RLNG to various subsidised sectors including fertiliser, export-oriented consumers, and the domestic sector. SNGPL receivables from the government against subsidies on RLNG have increased to Rs199 billion.

"And due to subsidised tariffs, SNGPL’s ability to pay RLNG suppliers such as PSO and PLL had been badly impacted. Currently payable amounts to PSO and PLL stand at Rs284 billion and Rs135 billion respectively."

The power sector though pays in full but its receivables have increased to around Rs115 billion leading to considerable delays in payments to suppliers. Regarding the local gas price recovery, the receivables in respect of natural gas of SNGPL stand at over Rs400 billion and SSGC at Rs 300 billion. And the biggest issue remains that 90 percent of domestic consumers fall under the first two subsidised slabs.

The way forward in ensuring the full recovery is that the government should provide an upfront subsidy to end consumers or ensure full price recovery through a revision in the sale price. The gas price escalation of local gas is required for full price recovery. The sale price will need to be increased to Rs1,722 per MMBTU to recover the entire accumulated receivables in one year, which will again come down to around Rs900 per MMBTU in subsequent years.

However, the country has natural gas reserves of 63,311 billion cubic feet out of which cumulative production stands at 42,449 billion cubic feet and the recoverable balance stands at 20,861 billion cubic feet. It has also been projected that the gas supply in SNGPL system from 1,400 mmcfd in 2015 will deplete to below 400 mmcfd in 2026 and in SSGC system the supply will deplete from above 1,200 mmcfd to 800 mmcfd till 2026.

Mentioning the way forward, SNGPL asked the decision-makers to come up with incentives for encouraging exploration and production activities for gas that include lucrative conventional, tight and shale gas policies. The Sui Northern also recommended grid connectivity of stranded gas fields. It also stressed the utilisation of low Btu gas fields.

The SNGPL also asked for streamlining the DGPC (Directorate General Petroleum Concessions) approval process ensuring ease of doing business initiative to be extended to existing licenses and leases. It also suggested a reduction of security risks and costs for exploration activities. It also mentions that 95 TCF shale gas and 14 billion barrels shale oil are recoverable.

“The country's two LNG terminals with a total capacity of regasification of 1200mmcfd are operative. However, they are not being fully utilised. Around 900 MMCFD LNG is imported through long-term contracts whereas the remaining 200-300 mmcfd is to be procured from the spot market. However, LNG importers are unable to procure spot cargoes owing to a heavily inflated spot market.”

Instead of spending massive funds on new projects, SNGPL says the PGPC terminal can easily be extended from 600 to 900 after modification. With a bigger FSRU at Engro terminal, its regasification capacity can also be considerably increased.

The diversion of RLNG to the domestic and commercial sector in the last four winters has been made and the cost of the imported gas has not so far been recovered. The SNGPL has suggested that the upfront subsidy related to RLNG diversion should be paid upfront by the government and the system gas supplies i.e. 50 percent of the allocation, for zero-rated industrial sectors during summer months may be abolished to accelerate the recovery of RLNG diverted to domestic consumers.

The presentation also unfolds that SNGPL and SSGC are working on the enhancement of capacities of their existing infrastructure through augmentation which if approved can increase the capacity from 1,200 MMCFD to 1,900 MMCFD for SNGPL within 1 to 1.5 years. This will also increase SSGC capacity by an additional 1,200 MMCFD. It also argued Public sector organisations shall be obligated to provide RLNG to Sui Companies similar to PSO instead of private sector ventures like supplies to K-Electric.

The existing 1,200 MMCFD capacity should only be used for meeting demand in the North. The existing terminals can be enhanced to meet the demand for LNG in the South including that of K-Electric. The SNGPL has a GTA for full 1,200 MMCFD and that shall not be jeopardised at this time. It says that options like an increase in compression and extended swaps can increase existing pipeline capacity as well, provided SSGC is willing to cooperate.

Pointing towards LNG ordering constraints, the presentation also mentions that there are several constraints affecting LNG ordering, saying spot LNG cargoes are not available for Pakistan in the Global LNG Market. RLNG was primarily imported into the country for the Power Sector and the Power sector remains the major consumer of RLNG.

Power Division does not provide any firm RLNG demand for the power sector, which is why their demand keeps on changing multiple times throughout the year. And the frequent changes in demand affect LNG ordering. The demand for RLNG supplies to the fertiliser sector is being assessed by the Ministry of Industries and Production and given at the eleventh hour without prior planning. The rest of the sectors i.e. cement, industry and commercial have almost stagnant demand and a historical consumption trend-based model is being used to ascertain demand. RLNG is being supplied to the fertiliser and export sector at subsidised prices, while payment of subsidy by the federal government is considerably delayed. This results in the piling up of circular debt.