Monday March 27, 2023

Necessary reforms

October 29, 2018

Pakistan’s oil and gas sector is searing through inefficiencies and losses. The ever-increasing transmission and distribution losses of both the Sui companies have put the sitting government in a fix.

Ogra was formed in 2001 with the object thereof to bring efficiencies in the oil and gas sector of Pakistan. The performance of the Sui companies shows the opposite trend. Distribution losses of both the Sui companies have touched new scales, presently hovering around 27 percent which translates into Rs50 billion annually.

Successive governments failed to inject enough gas to cope with the growing demand of the economy. As a result, the gas load curtailment programme became a common phenomenon, drawing down economic production in the country. Import of LNG partly assuaged the crisis, yet the high import bill of LNG is a challenge. While the three gas producing provinces are getting cheaper domestic gas, Punjab is bearing the entire brunt of the imported LNG.

A comprehensive examination of the causes of the present inefficiencies is essential for an objective discussion on the matter. A number of World Bank initiated reforms were introduced during Musharraf’s era in the oil and gas sector of the economy. Around 17.5 percent and 17 percent rate of returns for SNGPL and SSGCL on their regulated assets were ensured to both the companies, aiming to streamline the financial health of the public-sector entities with a caveat attached therewith that both the companies would have exclusive rights to sell natural gas in their franchised areas till 2010. Exclusive rights were conferred to ensure sustainability of both the public-sector companies.

However, the potent natural character of saddling the consumers in any monopolistic environment was neither foreseen by the World Bank nor by the regulator. Moreover, public enterprises are frequently marred by political intervention in Pakistan, which further debilitates the efficiencies in the system. Both the companies – in the absence of any competition – expanded the infrastructure without augmenting the integrity of the system, debunking the flawed exercise. Political appointments, cahoots in theft of gas, poor procurement practices and lack of staff training exacerbated the losses technically known as UFG (Unaccounted for Gas).

A parallel study of the telecom sector during the same period transpires entirely different results. Five GSM licences were issued to private companies during Musharraf’s era. As a result, all five operators scrambled to expand their infrastructure in voice and data services. Since all five operators hailed from the private sector, they fought tooth and nail to remain efficient, scaling down the tariffs for end consumers. Today Pakistan is one of the most efficient and low-cost economies in terms of telecom services. Tele-density here is also one of the highest in the region.

Ogra had initially set the benchmark of 4.5 percent UFG for the Sui companies. This was contingent upon receding the losses. But over the course of time the actual UFG of both companies has steadily increased. Apart from the permitted benchmark of UFG, both the companies have been allowed to recover additional losses from consumers on account of law and order issues in special zones in Khyber Pakhtunkhwa and Balochistan. An honest consumer foots the bill of a gas thief.

The prices of RLNG (Re-gassified LNG) for end consumers stand at nearly $12.5 per MMBTU, which is decimating the competitiveness of the industrial sector in Punjab. The price of natural gas in neighbouring economies is nearly $8 per MMBTU. The huge disparity in the input energy cost has eroded the export competitiveness of the country. On top of all, a special component called COS (Cost of Supply) has been introduced in the RLNG tariff which has further saddled the consumers.

A World Bank led study is also underway, which harbingers the unbundling of the Sui companies and development of a TPA (Third Party Access) regime. The unbundling of the Sui companies in various transmission and distribution companies is a zero-sum game because the summation of various fragmented inefficiencies equates the whole of a singular inefficient system. Eight DISCOs in the power sector are a classical example of the zero-sum game. HESCO (the Hyderabad Electricity Supply Company) is known to have monumental losses and the lowest recovery.

Ogra is falling for the DISCOs fallacy. The answer to the problem does not lie in replicating the failed experiment conducted in the power sector, but rather in the success of the telecom sector. The private sector must be encouraged to lay the transmission and distribution infrastructure of the gas sector. Proper reforms must be introduced in the system, for example the right to sell must not be extended to the Sui companies rather only those companies that have minimum losses must be given the right to sell natural gas. To this end, petroleum policy should also be amended.

Open and fair competition must be introduced in the gas sector. Similarly, the private sector must be encouraged to lead the consultative process for bringing in reforms in the country’s oil and gas sector.

The writer is a freelance contributor.