Lack of reforms in gas sector, slow pace of explorations cause gas shortage

ISLAMABAD: The government has failed to establish two more LNG terminals and undertake other major reforms in the gas sector during the last two and a half year rule, causing shortages of the vital fuel that is touching new heights in the current winter.

Total gas requirements have reached 6,500 mmcfd in the current winter season of which 3,600 mmcfd is produced through domestic gas fields while 1,200 mmcfd is being imported through two LNG Terminals built during the PML-N led regime. This makes 4,800 mmcfd gas available against the total requirement of 6,500 mmcfd, leaving an acute shortage of 1,700 mmcfd, causing innumerable difficulties for domestic customers and other sectors of the economy.

Meanwhile, the domestic gas has also started depleting and it dropped from 4,000 mmcfd during the PPP led regime to 3,500 to 3,600 mmcfd now in the PTI led regime in the last one decade. Pre-empting future massive gas crisis, the PML-N established two LNG terminals for importing 1,200 mmcfd gas. It was envisaged that two more terminals would be established allowing 2,400 mmcfd gas to be imported but owing to various reasons, the incumbent government has not so far established more terminals, resulting in aggravating shortages with passage of time.

Similarly, despite tall claims, the incumbent regime failed to undertake major reforms in the gas sector. The domestic gas exploration could not gain momentum thereby the existing gas fields are depleting at a fast pace. Under the last IMF program, the expansion of the gas pipeline was stopped which though has now been revived but without analyzing that the shortages will continue to aggravate with every passing day.

According to official documents of the Ministry of Petroleum, the private sector expressed interest in establishing LNG terminals (FSRU-based) but progress is not forthcoming despite promulgation of third party access rules and development of network code. The development of terminal code is likely be finalized shortly by OGRA.

The Unaccounted for Gas (UFG) is causing huge losses and bringing it under control is becoming increasingly difficult under the existing large unbundled system. There is a need to create separate cost centers as 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. Despite this, LNG is being diverted to domestic users paying lower tariffs, thereby widening the cost revenue mismatch for the utility companies. Furthermore, the power sector has not yet taken the expected volumes of LNG and neither the zero rated industry is paying the full cost of LNG.

Against the backdrop, the Ministry of Petroleum considers it imperative to have a gas sector reform plan. A transaction advisory may be immediately appointed through a competitive process. Dr Khaqan Najeeb, who earlier served as Adviser to the Ministry of Finance while analyzing the gas sector, said the supply improved by 1,200 mmcfd with the addition of two LNG terminals in 2018. At the same time, the South to North gas pipeline with Rs 100 billion investment will overcome the shortages in the country’s north. That still leaves a shortfall of about 1,200 mmcfd, Dr Khaqan said which requires two new LNG terminals and another South-North pipeline. He emphasized that identification and tackling of higher Unidentified Gas losses losses remains a major headache.

These along with mispricing have created a circular debt of about Rs350 billion in the gas sector. Dr Khaqan suggested tariff reforms, and unbundling to create a transmission company and changing the Return on Asset model of the two Sui gas companies as the way forward. He said on a forward looking basis, a market based gas sector would reduce the role of the government.

Divestment of gas assets to encourage business to business solutions should be the guiding principle. He also felt upstream indigenous gas exploration through awarding of new blocks also requires serious effort.