SSGC: Recovery and transformation

Sui Southern Gas Co. Ltd. (SSGC) serves the gas transmission and distribution to Sindh and Balochistan. SSGC caters for 3 million customers, including 4,500 industries.

In the absence of new investments in the exploration and development, indigenous gas supplies fell from 1,090 MMCFD in 2019/2020 to 800 MMCFD in 2023; the bulk of which is being supplied to households.

Since domestic gas is insufficient, remaining industry requirements are being met through imported re-gasified LNG that now constitutes about 9 percent of SSGC gas supplies.

Like other public sector utility companies in Pakistan, SSGC for decades has been saddled with social obligations: it has had to accommodate 11,000 employees, double the level of its requirements; and cater to uneconomical connections while operating in difficult terrains and sometimes hostile environment.

Several initiatives have been launched to review gas sector issues and develop reform options. Most prominent is the recommendation to unbundle gas transmission and distribution system and to engage provinces to offer expeditiously right of way to strength gas pipeline network and to cooperate in control of illegal connections and theft.

Consideration is being given to introduce a new pricing regime and a task-force is examining options for the resolution of inter-enterprise liabilities. For now, however, buying and selling of SSGC’s primary input gas is administratively controlled and the regulations govern its rate of return and require it to cross-subsidize sale price across sectors.

Setting the policy regime and gas load management has been complex. With pricing below the costs of transmission and distribution, SSGC has had to subsume phenomenal losses.

Besides these sector policy distortions, the company suffered from host of external and internal corporate governance challenges.

SSGC’s financial statements were not finalized for half a decade and losses continued to be accumulated largely because of inefficiencies, mismanagement, and UFG (unaccounted for gas) that has resulted in unprecedented line losses.

Losses compounded further as OGRA (oil and gas regulatory authority) did not fully recognize RLNG-UFG losses for SSGC, which are higher than Indigenous gas-UFG losses. SSGC’s claim on RLNG allowance is close to Rs 70 billion as of June 2022.

Moreover, SSGC does not have full powers to discontinue gas supplies to defaulters and there is no institutionalized arrangement to settle inter-enterprise liabilities and defaults.

Cumulative inter-enterprises liabilities have now ballooned to Rs 280 billion; these remain on SSGC’s books. Of the total liabilities, as of June 2019, receivables from electricity sector reached Rs 167 billion, including late payment surcharge (LPS), while those from industry reached Rs 98billion (also including LPS) which in any case enjoys privilege in access and pricing.

This non-resolution of inter-enterprise liabilities has generated gas sector circular debt, amounting to about Rs1.6 trillion as on 30 June 2021.

Change is in the air! The SSGC Board early on in its tenure mandated itself to turnaround and transform the company. True to its mandate, the Board has taken on multiple challenges, the most important of which was to safeguard the company’s interests. In the case of SSGCL the top management is nominated by the Board but appointed by the Cabinet.

The Board, including the Management, have resolved to introduce extensive change management and transform the culture of the organization to deliver results. Relentless efforts have been made to operationalize a new corporate strategy to make SSGC operationally and financially sustainable, especially in a depleting indigenous gas reserve scenario.

The priority for the SSGC Board has been to strengthen financials of company, reduce UFG, reform HR system, promote LPG and business diversification. These untiring efforts executed by the management under the steer and oversight of the Board are already paying dividends.

First, SSGC has finalized its pending 5-year financial accounts, incorporating legacy losses to the tune of Rs36.7 billion over the period 2011-2015. From being a loss-making company, SSGC declared Rs 1.9 billion in profits for FY 2020-21 and earnings per share (EPS) of Rs2.22.

The profitability curve is likely to rise even more as the regulator allows SSGC the RLNG adjustment (as approved by the ECC (economic coordination committee) in 2018 and its liabilities with the Pakistan Steel Mills and Karachi Electric are expeditiously settled so that locked up dues may be released.

Second, UFG reduction is critical for sustainable growth of finances and investments. Backed by a comprehensive and improved strategy and plan, the UFG institutional framework has been restructured to allow for coordinated and holistic action at the zonal level.

Work is underway to upgrade gas pipeline network to reduce gas leakages, strengthen the measurement and billing system, and regulatory action has been underway against theft, illegal connections and meter tampering, etc. SSGC has established a meter plant with European technical partners.

Enhanced metering of 830 plus town border stations (TBSs) has been established across SSGC franchise areas. As a result, company-wide UFG has been on a decline; hence SSGC has been able to reduce its gas losses from 78 BCF in 2018/19 to 52 BCF by 2021/22. Balochistan, which consumes around 15 percent of gas in SSGC system, contributes more than half of the gas losses in volumetric terms and its UFG in percentage terms is over 50 percent.

Karachi consumes 60 percent of gas supplies. Diligent efforts of SSGC have helped reduce Karachi’s UFG from 14.17 percent (in FY 2018-19) down to around 8 percent (in the last six months of FY 2022-23). UFG in interior Sindh has been arrested to under 14 percent (FY 2022-23) from 16 percent (in FY 2018-19) by controlling theft which was a major reason for UFG. UFG reduction will remain priority of SSGC.

Third, by introducing a new HR policy and Employment Handbook, SSGC has already adopted a best practice incentive framework, and is rooting out ethical issues.HR reforms have helped institutionalize accountability and austerity.

Improvement in the incentive framework has involvement of introduction of a new salary scale, a competitive, merit-based and transparent recruitment system and best practice performance management system backed by key performance Indicators (KPIs). Manpower capacities are being built up with training while skill gap analysis is underway.

Fourth, in the wake of pipeline gas shortages, SSGC LPG (Pvt.) Limited, a fully-owned subsidiary of SSGC, is being harnessed to enhance LPG supplies. SSGC-LPG brought the largest LPG vessel into Pakistan and has increased its terminal utilization to 80 percent. As a result, SSGC LPG has opened up new outlets throughout its franchise, and upgraded its network. It also continues to enhance and diversify business by seeking out partnerships.

Fifth, to enhance its value proposition, SSGC is promoting business diversification by establishing SSGC Alternate Energy (Pvt.) Limited to bring in unallocated gases to market, optimize gas quality, capitalize on Bio-Gas Potential and drive synthetic gas revolution through coal-to-gas, etc.

Corporate reforms of SSGC and investments to enhance the accessibility and sustainability of its network are expected to deliver cost efficiency and effectiveness.

Stronger financials and UFG reduction will generate resources for increasing investments in the rehabilitation of the transmission and distribution system.

Internal corporate reforms will yield higher benefits if reforms of gas sector take off. Most instrumental will be rationalization of pricing regime and development of incentive framework for exploration and development of gas fields to enhance gas supplies.

Copyright Business Recorder, 2023