Gas pricing 2.0: transforming Pakistan’s energy landscape with WACOG

In a move that could reshape the energy landscape of the nation, the government is now seriously considering the implementation of a system-wide WACOG (Weighted Average Cost of Gas). This initiative aims to address the inefficiencies and distortions plaguing the current gas pricing system, which have led to a staggering circular debt of approximately Rs 3 trillion.

With a high-powered committee formed by the Prime Minister’s office tasked to explore the feasibility of WACOG within a tight deadline of 07 days, the stage is set for potential transformative change. The Terms of Reference (TORs) set for this committee underscore the urgency of studying WACOG’s impact on various sectors, including its potential to alleviate circular debt, reduce electricity and fertilizer prices, and enhance overall economic stability.

In the following paragraphs an attempt has been made to review the TORs and provide a perspective on each one of them with some ideas as a way forward. It is pertinent to mention that the GoP had resorted to the import of LNG in view of gradual but consistent decline in the local gas production and increased demand from all segments of gas consumers in the country. Although the expensive LNG was imported for exclusive consumption in the power sector with its price ring-fenced, lately it has been diverted to other consumers.

It is important to note that LNG is being imported into the country at a steep price of Rs 3700/MMBTU as compared to Average Domestic Sale Price of Rs 1,100. Even the Average Prescribed Price determined by Ogra (oil and gas regulatory authority) is Rs 1,673/MMBTU.

Tariff-related shortfall alone due to delayed revision in Sale price since FY2022-23 is Rs. 423 billion for which no recovery mechanism has been devised as yet. The shortfall in LNG business is Rs. 284 billion upto FY 2022-23, which is also pending recovery.

The current year projected shortfall is likely to exceed Rs. 70 billion despite increase in the Sale Prices by the GOP primarily because of late revision in sale prices from November 2023 instead of July 2023. Hence the total shortfall which is yet to be addressed increases beyond Rs. 750 billion for which no mitigation measures are being taken.

Clearly, this kind of subsidies and diversion of LNG to domestic consumers cannot continue under existing mechanism. Recently GOP has allowed recovery of diversion of LNG from indigenous gas consumers through Revenue Requirement but that also involves a time lag of up to 1 year.

These issues can only be resolved if system-wide WACOG of LNG and system gas is set up so that no further debt accumulation happens and the gas price continues to change with changes in international prices through an automatic adjustment process like the power sector replacing the current practice of holding public hearings for several months causing considerable delay.

Over 50% of supplies of energy deficient North particularly Punjab comprise of LNG. This expensive imported gas is continuously being diverted to domestic sector for most part of the year. In winter, there is no sufficient indigenous gas to meet domestic demand leading to a huge diversion of LNG.

During rest of the year, massive fluctuations in demand by the power sector necessitate diversion of LNG in domestic sector. This is the primary reason for liquidity crunch and circular debt plaguing the gas sector.

Introduction of WACOG will also resolve the issue of shutting down system gas fields to cater for take or pay contracted LNG when power sector refuses to pick up ordered demand. Under the present scheme of things and disintegrated approach, we would not be able to avoid sovereign debt for long.

We must realize that we are getting around 10 LNG cargoes a month, which is around 1 BCF of LNG supplies which comprises of more than 50% supplies for SNGPL. Even in case of SSGC, they are now resorting to supplies containing 20% LNG blend and this situation is likely to deteriorate pretty rapidly in SSGC system while their indigenous gas supplies are going down quickly. It is, therefore, important that the same weighted average cost of gas be applied to all the provinces and all categories of consumers with the objective that the:

a) Provision of WACOG to industry will reenergize the economic activity in the country which can only happen if lower or actual fuel prices are provided to them. All over the world the bulk consumers are provided lower prices compared to individual households while the same is totally lopsided in Pakistan. This is a major disparity that discourages the local industrial production since the imported products continue to be significantly cheaper especially from the neighboring countries.

b) WACOG will ensure timely payments to indigenous gas suppliers and will ensure that the long-term prices of gas in Pakistan particularly in Pak rupees are coming downwhile reducing the reliance on LNG. The reliance on LNG import not only increased our foreign exchange burden, thereby contributing towards devaluation but it also seriously depressed the indigenous gas productions for which there is still lot of scope in the country.

The recent discoveries from Mari Petroleum and other exploration & production companies have established that there exists a considerable potential of enhancing the indigenous gas supplies. When we can plan to reduce or suspend imports to reduce electricity prices, the same holds true for reducing the reliance on LNG while diverting all resources to indigenous gas production.

We can even talk to our friendly countries like Qatar to reduce some of the firm cargoes so that instead of diverting expensive cargoes to domestic sector, we can use those resources to ensure timely payments to indigenous suppliers and elimination of circular debt

National WACOG is around Rs 2,300/MMBTU. This will increase the domestic prices but they will still be far less than the prices of LNG and LPG. This will resolve market imperfections. We cannot afford to sell expensive resources below their cost prices.

Any country doing the same will go bankrupt. If we can charge the actual price of imported fuels like petrol, diesel and even electricity, the same needs to be done in case of gas to ensure sustainable energy sector. There is always the option of protecting the poorest of the poor through direct subsidies through BISP (Benazir Income Support Programme)-registered gas consumers and the current practice where majority of the consumers fall in lower slabs during 8 to 9 months a year needs to be stopped like the rest of the world. Cross subsidies only add to market imperfections.

Industry in Punjab, including captive, is being charged LNG rate. Even process and captive in gas producing provinces are charged Rs 2,150/ MMBTU and Rs. 2,750 / MMBTU, respectively. The captive consumption is much higher than process. Hence WACOG will have no impact on gas producing provinces’ industries either.

Commercial consumers throughout the country are already charged around Rs 3,900/MMBTU, which is still higher than LNG and doesn’t make any sense and thus hampering economic activity and fueling inflation. WACOG will also help this cause.

As far as impact on fertilizers is concerned, the policy of giving subsidized gas to the fertilizer companies’ plants has not delivered the desired results, which is very evident from their high profitability and astronomical growth. It is high time that instead of continuing with the current practice, we register our farmers and provide direct subsidies to them though BISP.

Also, currently fertilizer is charged the LNG price while they only pay Rs 1,597/MMBTU while the price differential is supposed to be loaded on to the LNG price again, which is already too expensive to bear due to rapid devaluations in the last 2 years. Introduction of WACOG will reduce the price differential as well.

Introducing system-wide WACOG is not without its challenges, but the potential benefits far outweigh the status quo. By embracing this transformative approach to gas pricing, Pakistan can pave the way for a more resilient and sustainable energy sector that fuels economic prosperity for all. In conclusion, the adoption of system-wide WACOG represents a watershed moment in Pakistan’s energy policy.

It’s a bold step towards fostering a more transparent, efficient, and equitable gas pricing mechanism that lays the foundation for a brighter energy future.

Copyright Business Recorder, 2024