ISLAMABAD: Prime Minister Imran Khan has tasked the Ministry of Energy to come up with some out-of-the-box solutions to soften the load of high energy prices on the poor consumers.
However, the Oil and Gas Regulatory Authority (Ogra) has proposed a 32% average increase in the consumer gas tariff. Lifeline consumers and the fertilizer sector will be severely affected if Ogra’s determination is accepted.
The cabinet has frozen the gas tariff. The energy sector being dollarised is very sensitive to international price movements and the exchange rate. Recent heavy rupee devaluation has abruptly increased energy prices and thus the need for some ameliorating measures. Lower-income and poverty do not make international prices affordable and thus there is a need to look into ways and means to reduce energy prices.
Household gas prices
There is a huge cross-subsidy for lifeline consumers, who are practically given gas free of cost and are charged only transmission and distribution (T&D) expenses. No other country provides such a relief.
In Pakistan, there are six slabs in the domestic gas tariff, which is not seen anywhere in the world. The idea is to match the gas tariff with pockets of various economic sectors.
Both in India and Bangladesh, there is one gas tariff slab in the domestic sector. In India, the domestic/household gas tariff is quite high at $10 per million British thermal units (MMBtu), excluding the value-added tax (VAT).
Compared to this, the highest gas tariff slab for the domestic sector in Pakistan is $8.28 excluding taxes. In Bangladesh, it is $4.25 – almost the lowest among oil and gas-importing countries. In European countries, the domestic gas tariff is quite high, varying between $16 (lowest in the UK) and $25 (highest in Italy) including VAT and other levies. Among the industrialized world, it appears that the household tariff is the lowest in the US at $12.
Industrial gas prices
In Bangladesh, the industrial gas tariff is perhaps the lowest in the world at $3.61, which competes with the tariff in the US (shale gas) where it varies between $3.70 in winter and $5 in summer.
Pakistan’s zero-rated export sector should take up this issue with the International Trade Centre (ITC) to force Bangladesh to increase its gas tariff. It is an unfair advantage.
Pakistan’s gas tariff for general industries is $6.9 excluding taxes and other levies. It should be competing very well with India, where the industrial gas tariff is $18.23. The industrial gas tariff in Europe varies between $9.10 (UK – the lowest) and $12.19 (France – the highest).
Incidentally, CNG retail prices in the three Asian countries are broadly comparable – Bangladesh $14.5 per MMBtu, India $12.50-16.80 varying in different states and Pakistan $16.13.
Wellhead gas prices
Pakistan’s current wellhead gas prices are at an average of $3.50, 10% higher than those in India and almost double than those in Bangladesh.
There are separate prices for each of the 55 gas fields. In July 2018, Ogra increased/adjusted wellhead prices by 30%. In Pakistan, there is a local gas price-setting formula, linking it to that of oil in the form of an S-curve, specifying floor and ceiling. Do some circles argue Pakistan’s wellhead prices are unnecessarily high? As it is, foreign direct investment (FDI) in exploration has fallen very low?
Current, locally produced gas prices in India are $3.23 per MMBtu, which were as low as $1.5 in 2017. Bangladesh’s wellhead prices have varied between $1.6 and $2.8.
High Qatar liquefied natural gas (LNG) prices have disturbed gas pricing in all the three countries of South Asia. The three countries entered into a contract with Qatar at roughly the same time and almost the same pricing formula of 13.35% of Brent crude. Both in India and Bangladesh, heavy subsidies are being given in the gas sector. In Pakistan, there is no subsidy on gas except the cross-subsidy ie one sector subsidizes the other.
Pakistan’s government is facing a financial crunch and is not in a position to provide direct budgetary subsidies, although there is a strong case for financing lifeline consumers and the fertilizer sector out of budgetary resources.
Low LNG spot prices and its increase in the overall gas consumption are going to lead to a reduction in gas tariffs in Pakistan, if not in all the three countries. In Pakistan, LNG spot prices for January 2020 were 9.5% of Brent ($5.95 per MMBtu) as opposed to Qatar LNG prices at 13.35% of Brent ($8.3479). LNG prices are crashing internationally and are expected to remain low in the medium term.
Fertilizer, power sectors
Gas tariff for the fertilizer industry has been set at Rs300 per MMBtu recently. For Engro, as per the original contract with Exxon, the gas tariff has been even lower at $0.70 (Rs108) per MMBtu. This is even lower than the lifeline consumer tariff.
Some 75% of the fertilizer sector’s gas demand is met from low Btu gas like that of the Mari field and 25% is met through pipeline gas of Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC). Mari gas field’s wellhead price is Rs272.84 per MMBtu. In that way, only 25% of fertilizer gas demand is subsidized actually. Very little LNG is consumed by the fertilizer sector. Two fertilizer plants remain closed due to a lack of gas supplies. There are proposals to allow them to import LNG at spot prices. This may eliminate the need for the possible import of fertilizers.
In Bangladesh, the gas tariff for the fertiliser sector is $1.50 and in India $6. Similarly, 25% of power sector demand is met from LNG, 42% from pipeline gas of SNGPL and SSGC and 33% from special fields like Mari, Loti, and Khandhkot.
The gas tariff for the power sector at $6.21 is approximately equal to the LNG spot prices. It can be said that, practically, there is no subsidy here. Tariff for zero-rated export industries is incidentally also $6.
Access to gas
Only 20% of people get gas, the rest is without it. Something would have to be done for the have-nots. Biogas is a viable solution for rural areas. Gas companies neither have the gas nor the network. Additional network expansion may be entrusted to private-sector companies or cooperatives like India’s CGD program under which distribution franchises are auctioned. This may include biogas as well.
GST on domestic consumers
In India, VAT/GST has been reduced from 12-15% in various states to 5% to compensate for the impact of high-priced LNG.
The levy of 17% GST on the domestic sector may be reduced to 5%, as they are the final consumers and no input adjustment is given to them. This may have a palpable impact on consumer bills. Increasing sector efficiencies and reducing T&D losses are the medium to long-term issues and thus no immediate hope can be tied to them in terms of price relief.
Concluding, some simplification of the gas tariff mechanism for the power sector is still required. Unnecessary overheads like gas infrastructure development cess (GIDC) – and gas development surcharge (GDS) eventually – are expected to go away.
The weighted average cost of gas is a popular notion in federal circles, which is unlikely to be accepted by Sindh, which is a major gas producer and produces more gas than it consumes.
There are reports of India’s pressure on Qatar to renegotiate prices, which may benefit Pakistan as well. In the meantime, the burden would be borne by sectors other than the ones indicated earlier.
The writer is a former member energy of the Planning Commission