WACOG: A solution? — II

All parties have their own arguments. Other free riders are emerging in the form of market supporters. They argue that they can import cheap LNG and should be allowed to do so. CNG sector is leading this group. The fact is that government’s PLL (Pakistan LNG Limited) is already importing LNG at cheap rates. Last LNG import prices by PLL were 2.20 USD/MMBtu (5.74% of Brent as opposed to 13.35% of Qatar gas contract; other bidders quoted at 7-8%) lower than Asian LNG prices of the corresponding period. It is argued that private sector may not have any special reason, tool or wherewithal to be able to import LNG at cheaper rates (Private sector is beset with transparency and price collusion issues as has been recently demonstrated by Sugar sector enquiry). They wouldn’t like WACOG. But then how can government allow some selected group to have free or cheaper lunch? Fertilizer sector, being supplied at lower rates, may be required to import their own gas requirement. This would facilitate market-based pricing policies by the fertilizer sector. Similarly, power sector (RLNG power plants) may have a justification to be in this direct LNG import category for the same argument. GoP has very recently removed 66% mandatory purchase by RLNG power plants. It appears they would be allowed to procure their own ‘cheaper’ LNG.

Sindh may eventually come round to accept WACOG as it approaches to consume its surplus; already, there are gas shortages even in posh areas like DHA Karachi. KPK has the least inclination or incentive to do so. However, KPK has an incentive to cooperate or comply with it has to export its gas and there are infrastructural requirements which have to be financed. There is an issue of disproportionate gas and electricity losses in KPK which cost is being borne by other provinces. Gas and electricity losses are the least in Punjab. In Karak KPK, people drill into the pipeline and steal gas, wasting it way beyond their actual needs. Factories are emerging in that area based on free gas. The federal government has the required numbers to bulldoze the WACOG formula in CCI (Council of Common Interest); the latter has to approve it to be legalized and be put into effect. The tradition of CCI has been that all decisions be taken by consensus. Who will give in ultimately?

Ultimately, looking into the other energy sector complications, it appears that provincialization of the energy sector may be the ultimate destiny, as is the case in most federations. Many think that the provincial governments have been the free rider wherein all costs are borne by the federal government and when the latter proposes some solutions, these are opposed. Can provinces be left on their own to manage sensitive issues and the onerous responsibilities of infrastructural planning and investments? The Reko Diq experience does not appear to be a very good one. If no consensus emerges on WACOG, what are the other options? 1. Qatargas contract which is currently the source of all gas pricing problems may have to be sorted out while renegotiating prices has been tried and has failed. Even India, having a similar contract has not managed to get any concession from Qatar. The price difference between Qatargas and locally produced gas may have to be pushed into the future by some financial and arithmetical contrivance. At present, this difference comes out to be under 2 USD/MMBtu; 2. Residential sector gas tariff may be ring-fenced based on WACOG of locally-produced gas. Local gas production may have to be even curtailed to maximize the life of local gas resources to be reserved for residential sector. All other gas, residual local and imported LNG may be dealt with under a different formulaWACOG or otherwise. Implications of the two options should be worked out; 3. Gas subsidies may have to be increased for lower consumer slabs in which relevant provincial governments may be required to chip in. In passing, one would like to add that eventually provinces may be required to share the cost of circular debt.

Finally, a more rigorous gas planning initiative is called for including a Least-Cost Gas Plan as is done in the power sector replacing the current practice of an informal and less-structured approach. There are macro-economic, sectoral, inter-sectoral, provincial and socio-economic issues and constraints. A structured approach may facilitate political reconciliation on the issue as well. International LNG prices are expected to be cheap than locally produced gas due to stiff competition and more economic and efficient gas sources.

Concluding, Punjab should develop its own gas resources, besides clinging to LNG. Punjab has a lot of potential for biogas. Not much has been done in this respect as compared to China, India and some other countries. A bio-digester made of plastic costs less than Rs.10,000. A community biogas plant may cost between Rs.20,000 to Rs.200,000. Only 20% population of the country gets piped gas. The rest consume biomass, LPG and kerosene. Biomass burning is unhealthy; it causes indoor and outdoor pollution. However, biomass can be converted into biogas efficiently. It is as good as natural gas. For cooking, it can be used in as produced form. For more sophisticated uses like bio-CNG, biogas has to be processed and cleaned. Pakistan is an agricultural country generating large biomass and cow-dung which remain unutilized or under-utilized.

SSGC has started retailing LPG in posh areas who may be able to buy LPG (being 4 times or more expensive, depending on the tariff slab one is paying).SSGC and SNGPL could be tasked to launch biogas expansion projects as well. Biogas does not suffer from cliché’s like “small is beautiful”. It is a large resource and economically viable. LPG is a solution for the rich. Government(s) will have to subsidize the poor (small domestic consumers) through their budget. The cross subsidy system is putting unaffordable and unsustainable load on the gas companies. Provincial governments will have to share in this combined subsidy system. In the short-term, kerosene may be encouraged as well which is 25% cheaper than LPG. Urban and rural poor may benefit from it. At least, in the short term, taxation on kerosene may be reduced.

Ultimately, Qatargas contract prices may be renegotiated by the year 2025 (or LNG prices may stabilize at a lower level) and with this the issue would die its own death. Would sitting on the issue be a viable option?

(The writer is former Member Energy, Planning Commission. The views expressed in this two-part series of articles are not necessarily those of the newspaper)

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Province Wise Sale-able Gas Production and Consumption
(Actual Figures June 2020)
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                            Punjab        KP        Sindh        Balochistan        Total
=========================================================================================
Gas Available for Sale          92       366        2,025                651        3,134
Gas Consumption
Dedicated                       307        -          560                325        1,192
Pipeline System                 643      217        1,002                 80        1,942
Total                           950      217        1,562                405        3,134
Surplus / (Deficit)           (858)      149         *463               246
=========================================================================================

• SNGPL supplied202 MMCFD gas to fertilizer & Power Plants in Sindh.

net 261mmcfd going north Into Punjab

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Market Settlement Price-09/24/2020
=====================================================================================================================================================
Index                                    24/09/2020     23/09/2020     changes              index               24/09/2020     23/09/2020     changes
=====================================================================================================================================================
DES JKM (Nov)                              4.924          4.775         0.149        ICE JKM (BOM) (Nov)          5.016          5.011          0.006
ICE JKM (Nov)                              4.950          4.950         0.000             TTF (Oct)               3.997          4.119         -0.122
Brent (Nov)                                41.940         41.770        0.170             NBP (Oct)               4.030          4.119         -0.089
Slope (JKM/Brent (n-3)(n-2)(n-1))          11.37%         11.37          0.00                 HH                  2.248          2.125          0.123
Charter Rate (TFDE-160-E)                  50,000         46,000        4,000     Charter Rate (TFDE-160-W)       53,000         50,000      3000.000
Charter Rate (ST-145-E)                    26,000         26,000          0        Charter Rate (ST-145-W)        23,833         23,833             0
=====================================================================================================================================================

• JKM price rose on higher pricing indications, with tender results showing higher prices and increasing market uncertainties.

Sentiments: Market participants were looking closely at the impact of a fire at an Oil and Natural Gas Corp.-owned gas processing unit in Hazira, but the impact seemed to be limited.

• European gas price decreased as oversupply across northwest Europe pressured some prompt contracts with greater volumes of LNG delivered.

Sentiments: Sellers continue to hold back and not offer much in the Atlantic, with offers stronger than what buyers would deem acceptable. The November spread to Europe is heard to be more attractive to US sellers than Asia.

• Brent oil price continued to be supported by expectations that the supply-demand balance was improving after U.S. oil inventory date showed a drop in crude stocks..

• Henry Hub price extended gains after a government report showed gas stockpiles rose by less than forecast last week, spurring more bargain buying amid optimism that a cold winter will stoke heating demand.

• Pacific and Atlantic shipping rate Increased on the back of higher pricing indications. The range given was $50,000/day to $60,000/day round-trip.

Copyright Business Recorder, 2020