New gas tariff won’t plug energy sector losses

ISLAMABAD: With fulfillment of IMF condition for approving the Weighted Average Cost of Gas (WACOG) Amendment Bill from the Parliament, the gas prices will go up by 50 percent in the domestic market.

Under the IMF programme, only so-called pricing reforms are undertaken to fix cash bleeding energy sector but all other measures are ignored in totality. So, this pricing mechanism is also bound to fail because lack of structural reforms would allow leakages, so the hole of losses would only get bigger.

The gas pricing has nothing to do with the undertaking of much-need structural reforms, which the government had failed to implement in the last three years. These structural reforms included establishing LNG terminals, incentivizing increasing local production, unbundling of giant gas utilities and taking steps for reducing the cost of electricity, so that the excessive mode of energy could be replaced with scarce gas sources.

Pakistan’s renowned economist and former finance minister Dr. Hafeez A Pasha said that the monster of circular debt in the gas sector touched Rs1 trillion mark and the government was just implementing pricing reforms. “With fuel price adjustment demand of Rs6 per unit, the electricity sector had never witnessed such a hike and the Weighted Average Cost of Gas Amendment Bill would also hike gas prices by 40 to 50 percent at least in the domestic market.

Dr. Pasha seemed concerned over rising inflationary pressures and said it might fuel more inflation to unprecedented levels in the wake of recent steps taken by the government. But he did not mention any figure on CPI-based inflation. Top official sources said that despite claims, the government could not make the much-needed progress in establishing LNG terminals, incentivizing to increase local production of gas and removing bottlenecks, and improving Unaccounted For Gas (UFG) up to the desired level for giant gas utilities. The giant gas utilities SSGCL and SNGPL always played tricks with UFG as it is estimated on average at 10 to 11 percent against the desired limit of 7 percent. This 3 to 4 percent gap results in the building up of circular debt in the gas sector.

When contacted, Dr. Khaqan Najeeb, former head of Implementation and Economic Reforms Unit, Ministry of Finance, said the weighted average cost of gas (WACOG) amendment bill can help remove the price anomaly between indigenous and imported RLNG, and the associated adverse impact on the sector’s financial sustainability. He explained the cost charged to gas consumers only takes account of the cost of domestic natural gas, which averages about Rs 558/mmbtu (OGRA determination) versus the cost of imported RLNG at $13/mmbtu or Rs 2,300/mmbtu. The share of imported RLNG is now more than 24pc in the sales mix, which is not being reflected in the current price. The difference is covered by government subsidy and the build-up of energy companies arrears.

Dr. Khaqan contends WACOG could go up by more than Rs250/mmbtu to over Rs800 /mmbtu from the prevailing PKR558/mmbtu. It will raise the cost of gas for industrial, commercial and residential consumers and phase out the large subsidy bill on the imported gas. This would be a difficult proposition for the consumers reeling under high inflation. A further surge in gas prices would invariably put the inflation outlook in jeopardy. Besides the direct impact on domestic consumers the key industries of cement, steel, fertilizer, textile, and chemical sector would face the brunt.

The reforms have trade-offs. To be fair, the determination of prescribed prices has never truly been translated to end consumer prices. This has landed the sector in a financially vulnerable position of building circular debt to 1pc of GDP – a quasi-fiscal responsibility of the Government of Pakistan.

Dr. Khaqan concluded that WACOG is a pricing reform and should be considered as such. To meet the country’s energy needs, the quantum of imported RLNG would need to rise substantially in coming years, more importantly, exploration of local resources needs to be accelerated and incentives need to shift consumers from gas usage to electricity. We must however start thinking about the overall structure of the energy sector and the real much-needed reforms, he concluded.