The Ministry of Petroleum and Natural Resources (MNPR) in a statement issued last week has nullified the points raised in the gas tariff report presented by Zubair Motiwala with reference to textile sector.
According to the statement of MNPR, "Zubair Motiwala made a presentation to National Assembly Standing Committee on Textile Industry 6th November, 2006 in which several incorrect statements regarding gas tariffs were made and conclusion was drawn on the basis of incorrect statistics".
Ministry of Petroleum and Natural Resources (MNPR) was requested later in December by a sub-committee on textile to furnish written reply to the contents of the presentation made by Zubair Motiwala. Accordingly, point-wise replies, based on the published annual accounts and determination of revenue requirement by OGDA in respect of both utility companies, are submitted as under:
POINT NO 1: Industry consumes 80 percent of gas.
REPLY NO 1: It is incorrect to suggest that industry consume 80% of gas, as the share of industry in gas consumption during 2005-06 is only 19%.
POINT NO 2: Official position that major cause for upward revision of gas tariff for textile industry during last few years is increase in wellhead price is incorrect which is rather caused by guaranteed rate of return, GDS and subsidy to domestic & fertiliser sector.
REPLY NO 2: Following table based on actual data on gas prices notified by OGRA vindicates official position that major cause for upward revision of gas tariff for textile industry is increase in well head price is based on factual position; (See table 1)
POINT NO 3: Gas price formula for fixing the tariff is based on theoretical concept of opportunity cost: which should not be case for "indigenous gas".
REPLY NO 3: It is important to understand the structure of consumer gas price formula under the applicable law ie Oil and Gas Regulatory Ordinance, 2002. Under the said law, the revenue requirement of gas utility companies, as determined by OGRA are made basis for fixation of gas prices through public hearing process in which all stakeholders active participate. As can be seen from the above figures, over 88% in 2005-06 (77% in 2002-03) of prices is cost of gas (ie the price paid by the gas companies to buy gas form the producers).
As regards producer gas price policy it is worth mentioning that in order to attract investment in oil and gas exploration, the Government has to provide incentives, which are globally competitive, as otherwise the investors will divert their investments to other parts of the world offering incentives better than Pakistan.
In doing so, oil and gas wellhead prices have to be kept globally competitive for drawing more investment. If no new investment is forthcoming, there will be no option but to import oil at the price prevailing in the international market to meet domestic demand which will not only be drain on country's forex reserves but will also make supply of energy to local consumer more expensive. Following table clearly indicates that domestic gas is still the cheapest energy source: (See table 2)
Therefore, Pakistan has no option but to offer globally competitive gas prices to upstream, investor to lure in investor. The notion or misconception that domestic gas has to be at low cost, as is being done by net exporter of energy, is not correct. Net energy exporting countries cannot be compared with energy importing countries as their domestic consumer price polices are based on different paradigms. It must be noted that domestic gas does not come free of cost.
POINT NO 4: State owned companies produce 45% as compared to foreign companies and as such, there price should be lower.
REPLY NO 4: It is correct that State owned companies produce significant gas volumes. Their contribution in gas production is 35% instead of 45%. It may however be worth noting that average gas price paid to such companies for their 100% owned field far lower as compared to foreign companies: (See table 3)
POINT NO 5: The Government did not negotiate the Qadirpur gas pricing formula timely.
REPLY NO 5: The Position reported in the presentation is not based on correct understanding. As per Qadirpur Gas Price Agreement, if the price of HSFO exceeds US $200/M. Ton in the international market, a new schedule of discounts applicable for sale of gas to the Government beyond the said limit will be negotiated within 6 months. The Government immediately started negotiating the discount schedule with the joint venture when the price went past the said limit. However, since no agreement on new schedule of discounts within the said period, could be reached, the gas price for Qadirpur field was fixed provisionally on the lower side. The benefit of lower gas price will be passed on to the consumers in the next gas price revision expected to be made in January 2007. This action of the Government, clearly demonstrate that the Government was alive to the situation and reacted appropriately to safeguard public interest when negotiation with the Qadirpur joint venture could not be concluded within reasonable period.
POINT NO 6: Under Kadanwari gas price agreement very high price is being given to producer, which should be re-negotiated.
REPLY NO 6: Gas price under Kadanwari agreement is linked to HSFO price in the international market. This agreement has no re-opening clause and as such, cannot be open-up unilaterally. As a matter of fact, the Government has not opened up any agreement in oil and gas sector which if done, will not only have negative effect on the Government's credibility but will have unmanageable fallout of driving the investment away.
Notwithstanding the above comment, despite the Law & Justice Human Rights Division's clear opinion that economic hardship provision cannot be invoked, the Government has initiated discussion with Kadanwari joint venture to re-work gas price. Kadanwari field is any how under depletion and is producing around 50 MMCFD of gas which constitutes to be about 1.3 % of country's gas production.
POINT NO 7: Guaranteed rate of return indexed with fixed assets instead of weighted average cost of capital. Under this formula, gas companies are only interested to built-up assets.
REPLY NO 7: As per OGRA Ordinance 2002, OGRA is mandated to regulate capital spending of both gas companies only on those projects where investment is prudent. It is not fair to suggest that the companies have free hand in making capital spending to generate higher return on assets for their shareholders.
In the presentation, a comparison of SSGCL revenue determination for 2005-06 and 2006-07 has been made as under: (See table 4)
This is not a fair representation of actual position as OGRA did not allow the T & D cost as requested by SSGCL and reduced the same as under: (See table 5) Therefore, the increase in the T & D cost is proportionate to the increase in gas sales volume.
It may be noted that gas sector has registered significant growth during the last few years, as is evident from the following table, and extension of gas facilities to more people required expansion of network, which was only possible with additional investment. (See table 6)
If comparison of financial highlight of the both companies is done for the last four years, following situation emerges which clearly indicates that both companies are rather making modest return for their shareholders and over amplified statement to the effect that these companies generate 17%-17.5% ROA does not hold good as effective ROA as report in the annual audited accounts of both companies is less than 5% as shown. (See table 7)
POINT NO 8: Gas Development Surcharge (DGS) is a source of revenue for the Government.
REPLY NO 8: This statement is not factually correct as GDS from the system is generated in order to keep uniformity in the consumer prices on networks of both gas utility companies. While determining the sale price for different categories of consumers, the Federal Government has to keep in view uniformity of prices across the country, requirement of Gs Development Surcharge and quantum of subsidy for domestic sector and fertiliser sectors.
This point is well illustrated by the example that has been quoted in the introduction of the presentation. It has been stated that OGRA had determined Rs 227.96/MMBtu price for SSGCL in January 2006 whereas the Government had notified consumer price of Rs 240.91/MMBtu. This was done to maintain uniformity in gas price in the country. Had this policy not been vogue, SSGCL's consumers might have to pay more when gas prices for 2006-07 were notified as can be seen from the following table.
In absolute terms, GDS revenues from the system for 2005-06 were Rs 4.2 billion which work outs to be 2% of total revenues generated by SNGPL and SSGCL as can be seen form the following table. (See table 8)
Therefore GDS, which is mainly acting as cushion to bring uniformity in gas prices across the country, can not be termed in isolation as source of revenue for the Government. Anyhow, GDS revenues are disbursed to the provincial government as per NFC award and therefore, can not be treated as a source of revenue for the federal government.
POINT NO 9: World Bank reference with regard to subsidy.
REPLY NO 9: Natural gas sector is historically loaded with cross-subsidisation under which the consumers in power, industrial and commercial sectors pick-up the cost of subsidy for fertiliser and domestic sectors. During 2005-06, total gas sales revenue generated by SNGPL/SSGCL form the textile sector were about Rs 32 billion out of which Rs 27.7 billion was the actual cost of supply.
Therefore, additional revenues generated form textile sector during the said period was only Rs 4.269 billion out of which Rs 3.746 billion was used for cross-subsidisation while remaining Rs 0.524 billion was GDS.
As regards World Bank's suggestions in respect of subsidy, it may be noted that World Bank has mainly suggested that the subsidy being given to domestic and fertiliser sector consumer may be picked up by the Government from the budget.
MPNR supports this suggestion but this is a policy matter requiring approval of Finance Division who has so far not consented to this arrangement.
It may also be added that Zubair Motiwal, a renowned textile industrialist, was directed by Prime Minister to prepare a report on "Cost of doing business", which he presented to Prime Minister in May 2006 titled as "Recommendations on Reducing Cost of Doing Business in Textile and Clothing Sector of Pakistan".
A comprehensive report was prepared by him, which stated that if an input cost of Rs 50 billion was borne by the government in facilitating the sector in shape of subsidies, rebates, zero-rating, capacity building, market access, duties on import of machinery etc, the return for Pakistan would be $24 billion under present world market share of 3%.
His report was supported by comparisons with India, Bangladesh, and Indonesia, where the incentives and facilities to the textile industry as compared to Pakistan are much better. The gas tariff sector was just one aspect of the report and it also covered comparison of gas tariff with Bangladesh, which is less than Pakistan.
(TABLE 1)
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Revenue requirement Allowed by OGRA % AGE
Rs in Million
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2002-03 2005-06 INCREASE
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Cost of Gas 60,629 150,478 148%
T & D Cost 7,255 11,132 53%
Depreciation 4,810 5,900 23%
Other Charges 299 363 22%
Contingency Reserve 850 -100%
Other Income
(including non-Admissible) -2,642 -6,468 -145%
Net Revenue Requirement 78,047 170,319 118%
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(TABLE 2)
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Rs/MMBtu Ratio
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Natural gas-Industrial 264.87 1
Furnace oil-ex refinery 612.87 2.31
High Speed Diesel 1,049.92 3.96
LPG 1,091.90 4.12
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(TABLE 3)
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Weighted Average Ratio
Wellhead Price
(Rs MMBtu)
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State owned companies 35%) 105.17 1
Private and foreign
companies (65%) 220.59 2.1
Total Weighted Average 192.55 1.8
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(TABLE 4)
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2005-06 2006-07 % age increase
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Gas Sales Volume 33,945 360,741 6.43%
T & D Cost 4,073.439 5,153.405 26.51%
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(TABLE 5)
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2005-06 2006-07 % age increase
T & D Cost 4,073 4,359 7%
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(TABLE 6)
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2002 2006 % age increase
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Consumers (Million) 3.73 4.55 22.0%
Distribution network (Kms) 56,955 74,186 30.3%
Transmission network (Kms) 7,922 9257 16.9%
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(TABLE 7)
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SSGCL
2002 2006 % age Change
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Effective ROA 8.64% 4.3% -4.34%
Earning per Share (Rs) 2.14 1.3 -0.84
Return on Capital employed 8.28% 4.5% -3.78%
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SNGCL
2002 2006 % age Change
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Effective ROA 4.14% 4.82% 0.68%
Earning per Share (Rs) 3.78 7.46 368
Return on Capital employed 9.92% 9.53% - 0.39%
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(TABLE 8)
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SNGPL SSGCL
Prescribed Price (Rs MMBtu) 234 243
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(TABLE 9)
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SNGPL SSGCL Total
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Gross Revenue 107,897 68,487 176,384
GDS 2064 2,184 4,248
GDS as % age of gross revenues 2%
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