LNG sector in Pakistan - VII

5) A consistent policy on the treatment of UFG losses borne by the Sui companies

According to the Ministry of Energy (Petroleum Division), unaccounted for gas (UFG) "is a phenomenon of gas loss which is contingent upon occurrence of various technical factors when gas flows from fields to end consumers. It is calculated as the difference between metered gas volume injected into the transmission and distribution network (Point of Dispatch/Delivery) and the metered gas delivered to the end consumers (Consumer Meter Station) during a financial year". The rate of UFG of SNGPL stood at around 12 percent (about 52,577 mmcf), while that of SSGCL stood at around 18 percent (70,810 mmcf) in FY19. This compares to the UFG benchmarks of 1.0-2.6 percent in the advanced economies (US, UK, Canada, New Zealand and Germany), and 4.2-5.0 percent in developing economies (Turkey, Russia and Bangladesh). Meanwhile, OGRA has allowed a UFG charge of 6.3 percent for domestic consumers. This means that the unmet amount becomes part of the distribution companies' losses.

The current revenue calculation mechanism disproportionally incentivizes network expansion over pipeline maintenance. This is because new connections increase the utility companies' fixed assets, and the companies are guaranteed a market-based return of 17.43 percent on their net operating fixed assets. As a result, residential connections have risen by an average of 504,722 per annum (6.5 percent YoY average growth) during FY16-19, compared to per annum average additions of 1,753 commercial consumers (2.8 percent) and 111 industrial consumers (1.0 percent) during the same period. Continued addition of new connections, particularly residential, without addressing the high UFG rates and low slab pricing would mean that the inefficiencies in the gas distribution network would keep on rising.

Encouragingly, the federal cabinet recently ratified a three-year plan approved by the ECC to trim the UFG losses of the Sui companies. The reduction plan, which is based on yearly UFG reduction targets, has two components: tracking against 30 key monitoring indicators (KMIs) as advised by OGRA; and UFG reduction plans in law and order affected areas. The overall objective is to reduce the UFG losses of SNGPL and SSGC by 4 percent (18,240 Mmcf) and 9.55 percent (40,629 mmcf), respectively, in three years.

In FY20, a number of improvements took place with regards to the UFG reduction policy. For instance, SSGC replaced and tested 1,244 industrial meters against the target of 1,560 meters. Moreover, over 2,758 raids were conducted against the illegal use of gas, resulting in a claim of 390 mmcf of natural gas. Meanwhile, in Karak, the region contributing the most to the UFG losses, the HR strength of SNGPL was increased, and work was expedited to lay the legal gas pipeline network and install gas connections. During FY18-20, a total of 6,466 illegal taps in the distribution and transmission network were removed and 160 FIRs lodged in the Kohat district for gas theft.

S1.8 The way forward

Ensuring energy security lies at the core of a country's energy policy. In case of Pakistan, the swift shift towards imported LNG was the right step, keeping in view the falling indigenous gas supplies. At this point, the incoming capacity expansions in terminals and pipeline networks mean that LNG's share in the country's energy mix would continue to increase. Recently, Pakistan has also signed another G2G deal with Qatar to import 200 mmcfd (roughly two cargoes a month) of LNG from 2022 onwards at an applicable Brent slope of 10.2 percent, which would then increase to 400 mmcfd (four cargoes per month) after three years. This contract entails the option of increasing the import volume during high-demand months, for example during winters, and also has a price renegotiation clause of four years.

With LNG imports set to rise substantially over the coming years, it is crucial to devise ways to address the mindset of cheap availability of natural gas in the country.

Due to the prevalence of extensive cross subsidies, various segments of the economy, in particular fertilizers and household sectors, have taken the availability of subsidized natural gas for granted. In hindsight, the policy of subsidized natural gas has entailed significant economic cost for the country, with the indigenous reserves deteriorating at a rapid pace as excessive consumption of the fuel was encouraged.

Going forward, consumers would have to quickly readjust to the more expensive imported LNG. Here, it is pertinent to mention that natural gas as a heating source is less efficient than electricity, and that the consumption in terms of energy equivalent of running, say, a 35-gallon gas geyser (29,000 BTU/hour) is much higher than that of a 1.5-ton air conditioner (18,000 BTU/hour). However, in Pakistan, the bills consumers face with regards to the former are substantially lower than those for the latter.

The government has to start passing on the impact of higher LNG prices to the consumers via an appropriate price pooling mechanism; otherwise, it risks the formation of a circular debt situation akin to the one prevailing in the electricity sector.

Furthermore, given that the domestic consumption of natural gas is expected to increase sharply going forward, an increase in prices would help cut down extravagant household consumption, which would in turn help reallocate the cheaper fuel to the power and industrial sectors to decrease the cost of energy generation and increase the fuel's usage in value-addition segments. The impact of subsidy rationalization on the low- income quintile can be compensated via targeted cash transfers, which is a more efficient way of providing social protection.

In addition, the relevant authorities also need to develop a long-term strategy that, among other aspects, also focuses on expanding the indigenous reserves base of natural gas.

According to the US Energy Information Administration (EIA)'s 2013 Technically Recoverable Shale Oil and Shale Gas Resources report, Pakistan held sizeable shale gas reserves of 105 trillion cubic feet (Tcf). Pakistan's Ministry of Energy (Petroleum Division) also completed a study in 2015 on the evaluation of shale oil and gas resources in the Lower Indus Basin and the Middle Indus Basin with the help of USAID. The results revealed that Pakistan's shale gas geological resources amounted to 95 Tcf recoverable reserves. However, the exploration companies face many challenges in developing these resources because of complex geography, environmental constraints, and low natural gas prices in the country. Thus, the country needs to develop preferential policies (increasing the wellhead prices to begin with) and conduct pilot projects as early as possible, to encourage domestic and foreign oil and gas companies to plan investments.

Beyond gas, the government also needs to take an all-inclusive view of the energy mix in the country, given that renewables, especially solar, have appeared as low-cost and crucial alternatives in the midst of worsening climate change situation. At present, the renewables' share is only 4 percent in Pakistan's installed power generation capacity and 2 percent in power generation. However, the incentive to switch to these sources is significant. According to the World Bank's 2020 Global Photovoltaic Power Potential report, utilizing just 0.071 percent of geographical area of Pakistan for solar photovoltaic (solar PV) power generation would be sufficient to meet the country's current level of electricity demand. This makes the country rank 49th out of 210 economies in terms of average solar power generation potential. Furthermore, bringing the share of renewables to at least 30 percent of the total generation during the next 20 years would also lead to a reduction of US$ 0.002 for every kWh consumed in Pakistan, or around US$ 5 billion (in today's discounted terms).

(Concluded)

(Excerpts from "The State of Pakistan's Economy: Second Quarterly Report of the Board of Directors of State Bank of Pakistan")

Copyright Business Recorder, 2021