Gas pricing decisions

The gas circular debt continues to grow. One way to deal with it is having weighted average cost of gas (WACOG). Right now, consumers (barring domestic) are at disadvantage in certain provinces (mainly Punjab) at the cost of others. Then the additional cost of LNG supply to domestic consumer in winters (mainly in Punjab) is not easy to recover.

One possible solution is to move towards single pricing, which is admittedly, not an easy job. This must be done slowly and in stages to not hurt the low paying consumers too much, and more importantly to bring provinces – like KP and Sindh on board. These two provinces have higher local gas production as compared to usage and constitutionally they have the first right of use.

If all LNG consumers are added in WACOG, the cost increase for domestic, fertilizer and other consumers using domestic gas would be too high. It would be hard to get KP and Sindh on the same page and would be challenging to recover through domestic consumers by increasing their tariff proportionately.

Seeing this, a proposal came by the government last year to ringfence power and CNG users as LNG consumers and charge them on full cost of LNG. The rationale is simple. These two industries have alternate fuel options, in case of LNG becoming too expensive – like the case nowadays. Power can use furnace oil in dual plants and gas plants can move down the merit order. In case of CNG, consumer can always use motor gasoline.

Once these two sectors are out, the increase in price for domestic and other users would be much less, as LNG in the mix would reduce to 400-500 MMCFD from 1000-1200 MMCFD. This brings some interest for KP and Sindh. KP can still be onboarded as the ruling party in Islamabad and Peshawar is one.

Practically, it makes more sense for Sindh to join, as local gas supply from Sindh is depleting fast and in a couple of years, Sindh may be short of supply. Industrial usage is high in Sindh, and once gas is short, the price of industry will become significantly high, without WACOG. Sindh may ask federal government to bring industrial consumers on board, and the industry may protest. The federal government must do this delicately.

The advantage for WACOG is obvious in terms of reducing circular debt and for industries in Punjab which are clearly at a disadvantage. The WACOG should have all the players – barring CNG and power, in the mix – including fertilizer, zero rated, cement, general industries, bulk consumers and others. Then the government should separately decide how much subsidy to be given to fertilizers and zero-rated industries and give these through federal budget – above the line.

In case of domestic consumers, this will give a solid reason for revising domestic gas tariffs; otherwise, the cost is to be borne by Sui companies to fuel gas circular debt. In case of fertilizer, the concessionary gas agreements are expiring, let them pay the WACOG price and let the government provide subsidy directly, if any.

The government needs to do some creative demand destruction. One way is to provide imported price to CNG - as this may move some CNG users to gasoline. The other is to increase tariff of domestic consumers – WACOG would allow government to do so, to move consumers to efficient appliances on electricity for space and water heating. Then, provide direct subsidy to exporters – perhaps linking to export proceeds, and to fertilizers- or provide direct subsidy to farmers. And create some room for general industry usage through better pricing in Punjab and to sway way inefficient users in other provinces where rates to increase.