WACOG: A solution? — I

Local gas resources are dwindling and gas demand is increasing continuously creating need for expensive imported LNG. Currently, there is a dual-separate pricing system for local gas and LNG creating many complications. Petroleum Division is trying to simplify gas pricing issues and has proposed an average wholesale and uniform gas pricing approach called WACOG. It is being discussed for almost a year now. Recently, a seminar was held on the issue of Gas Issues in Islamabad. The speakers included PM Imran Khan. In the following, we will discuss various aspects of the WACOG issue including socio-economic and political implications. The issue has generated a lot of controversy with smaller provinces opposing WACOG, impelling us to title this article as we have done.

At present, there is a dual gas pricing system; local gas is priced separately while LNG is priced separately. Local gas is cheaper than LNG due to peculiarity introduced by Qatar LNG; otherwise LNG is cheaper than local gas. Local gas is at an average price of 4.5 USD/MMBtu, while LNG price including Qatar gas is 6.5 USD/MMBtu and LNG price without Qatar gas is between 3-4 USD/MMBtu. Although, LNG is imported by PSO (Qatar LNG) and PLL (non Qatar LNG) ,and SSGC and SNGPL are the retailers of all gas, GoP is the real buyer and seller of all sorts of gas, for it has to face the deficit that is created due to the difference between the gross selling and buying prices of gas.

There are all sorts of gas prices; of buying and selling. There are three major gas pricing issues causing problems; 1. Qatar gas prices which at times soar to as high as 10-12USD, but are lower now at half the earlier level due to general low oil and gas prices; 2. Low consumer tariff of category 300 M3 per month which has a share of 50 % in total gas sales; 3. Low gas tariff for Fertilizer sector, although the share of fertilizer sector in gas consumption is less than 5%.

And there is provincial issue. Punjab does not produce gas, but has the largest consumption (1999 mmcfd). Sindh is the largest gas producer (2585 mmcfd) but consumes lesser gas (1403 mmcfd). KPK also produces more gas (414 mmcfd) than it consumes (206 mmcfd). Gas consumption in Sindh is growing faster and its production is going down. Although, it has currently surplus, it is being projected that it will be in deficit in a few years time. KPK has a different outlook. KPK is in surplus and may remain in surplus for the coming many years, as gas production in KPK is growing and is expected to continue to grow. It is a virgin territory and a large number of gas plays are expected to come on stream.

Due to gas surplus in Sindh and Balochistan, SSGC used to be in comfortable mode without LNG; but no more, as the gas crisis begins to unfurl itself. However, SNGPL has been in bad shape as it has 50-50 Local and LNG share and has to sell expensive LNG to domestic consumers due to gas shortage in its franchise area, although GoP is expected to bear this price deficit. In future, SNGPL (Punjab) is going to have more consumption and more deficit and will have to consume more LNG at expensive rates. Up to now, there was no problem or lesser problem due to low LNG share. This problem is going to be more severe (for SNGPL) both in terms of price and quantity. Gas consumption of residential sector doubles in winter. In Punjab, in winters, there have already been shortages so much so that in some parts, people could not cook their meal and breakfasts. A human rights issue and a moral issue going beyond the gas sector rules and regulations.

Federal government (Petroleum Division to be exact) has found WACOG to be a solution; a partial solution at-least simplifying the complications of separate LNG and local prices. Sindh and KPK are opposing it, arguing that they are in gas surplus with sufficient local and WACOG would increase their gas tariff. They do not accept the uniform pricing argument. They bring forth the constitutional provision of the first-use rights of the gas producing province and argue that despite producing more gas than their own consumption, they are deprived of local gas which could be utilized by their local industry.

They say that the only beneficiary would be Punjab which as leader or elder brother should be making sacrifices rather than trying to seek undeserved advantages. It is not, however, as simple. There are larger political economy questions and a full accounting of who loses and who gains is a highly complicated issue. It would be, however, worthwhile to initiate studies on regional inequalities.

Federal government as a (de-facto) gas seller would like to average out all gas cost including the cheaper local gas, the cheapest LNG and the expensive Qatar LNG, as all gas traders would do. It has to sell the gas at differentiated prices to meet its socio-economic agenda and general economic policy. The two or three most important factors in this respect are; 1. The poor get the gas (and electricity) at an affordable prices and even lower than the production cost; 2. General prices are uniform throughout the country for which industrial and power sectors have to have gas prices at uniform rates.

There are other justifications, it is argued, by many. Constitution provides that the gas needs of the producer province have to be met first and then the surplus can be exported to other provinces. But the question that is being asked is that is this constitutional provision is limitless to even surpass the other constitutional provisions covering basic needs? All parties are akin to interpret constitutional provision in their own interest. An important question is the definition of needs, the gas needs. Some people tend to differentiate in it. They say that only residential sector needs are the genuine inalienable gas needs; some others add industrial sector and CNG to it. The Fertilizer sector caters to the common countrywide needs and Power sector feeds to the common grid as well.

The other counter arguments by WACOG protagonists seem to be even more interesting; the hardship caused by high Qatar gas price has been caused by the federal government which is composed of all the four provinces. The impact is to be borne by all and not by the Punjab consumers, especially, the poor and the lower middle classes. It is also argued that resources are shifting sands; these are found, consumed or become obsolete as well, as may be happening to fossil fuels in not too distant a future. Sindh devoured Balochistan’s gas when it had no gas or had little of it, as the Baloch nationalists complain. Same may be said by Sindh nationalists now for Punjab vs Sindh gas issue. The then East Pakistan used to make a big deal about its jute and got separated, among other things, claiming that West Pakistan consumed its foreign exchange earnings of Jute is no more. Plastic has largely replaced it. It is a separate matter that the (West Pakistan) continues to suffer from current account deficit despite a remittance earning of 20 billion USD largely developed in the 1970s and beyond in the wake of the 1973 oil crisis.

(To be continued)

(The writer is former Member Energy, Planning Commission).

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                                                    Annual Average Demand/Supply in Pipeline System
==========================================================================================================================================
                                                                         SSGCL
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                             FY 21      FY 22       FY 23      FY 24      FY 25       FY 26       FY 27       FY 28       FY 29      FY 30
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Supply                       1,109      1,094       1,081      1,068      1,057       1,046       1,036       1,027       1,019      1,011
Demand                       1,244      1,270       1,297      1,325      1,353       1,383       1,413       1,444       1,476      1,509
Annual Avg Shortfall         (135)      (176)       (216)      (257)      (296)       (337)       (377)       (417)       (457)      (498)
Shortfall in Winter          (162)      (211)       (259)      (308)      (355)       (404)       (452)       (500)       (548)      (598)
LNG for KE new plant          (38)      (150)       (150)      (150)      (150)       (150)       (150)       (150)       (150)      (150)
------------------------------------------------------------------------------------------------------------------------------------------
                                                                         SNGPL
------------------------------------------------------------------------------------------------------------------------------------------
                             FY 21      FY 22       FY 23     FY 24       FY 25       FY 26       FY 27       FY 28       FY 29      FY 30
------------------------------------------------------------------------------------------------------------------------------------------
Supply                         854        754         652        533        420         327         271         208         148        127
Demand                       1,775      1,769       1,805      1,835      1,868       1,911       1,956       2,002       2,052      2,118
Annual Avg Shortfall         (921)    (1,015)     (1,153)    (1,302)    (1,448)     (1,584)     (1,685)     (1,795)     (1,903)    (1,991)
Shortfall in Winter        (1,059)    (1,167)     (1,326)    (1,498)    (1,665)     (1,822)     (1,938)     (2,064)     (2,189)    (2,290)
LNG need for Trimmu           (45)      (119)       (119)      (119)      (119)       (119)       (119)       (119)       (119)      (119)
==========================================================================================================================================
Total Need for LNG         (1,304)    (1,647)     (1,854)    (2,075)    (2,289)     (2,495)     (2,659)     (2,833)     (3,006)    (3,156)
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LNG capacity with GoP is 1200mmcfd, all contracted to SNGPL & used for supply to Punjab

Copyright Business Recorder, 2020