Declining indigenous gas reserves have heightened concerns of gas unavailability on the back of growing demand as users continue to prioritize gas as the primary fuel option owing to its eco-friendly nature as well as lower prices relative to alternate fuels, experts said.
Supply gap has lately been satisfied through higher priced imported LNG, which occupied a 23 percent share in the overall gas supply mix in 2018. OGRA foresees long term gas demand to almost double from current levels whereas delay in large scale government projects (Turkmenistan- Afghanistan-Pakistan-India Pipeline, Iran Pakistan Pipeline), coupled with depleting indigenous reserves imply that a significant portion of gas demand, expected to be as high as 50 percent of the total mix, will have to be satisfied through the higher priced LNG in the future. This could have severe implications on the government which must introduce an alternate price structure if it is to avoid a catastrophe similar to the power sector circular debt, the burden from which has crossed Rs 1.7 trillion.
An associated burden the government carries is offering gas distribution companies including Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL) a fixed percentage return. Any deficit on account of this is payable to the distribution companies as Gas Development Surcharge (GDS). With gas prices to industry players as well as power producers largely subsidized, gradually rising costs to the supplier as a result of imported LNG occupying a larger share in the gas mix, will aggravate an already burgeoning GDS imbalance.
A plausible solution to this problem is for the government to implement a basket gas pricing mechanism whereby, end users will be charged a uniform price of gas equivalent to the weighted average cost to the supplier. Such a mechanism will provide significant relief to the providers of gas who have significant outstanding receivables from the government in the form of GDS. The government on the other hand will have lower cash outlays to satisfy and could potentially make increased concentrated efforts on improving the local gas infrastructure.
Owing to the importance of gas as an ideal choice of fuel for a growing number of users it is important that the government takes immediate steps to curb a pressing problem at its infancy. The Government must ensure that it makes commercially viable choices which do not facilitate certain industries only but ensure sustainable economic growth. Failure to do so could heap further fiscal burden on an already ailing economy.
Sources confirmed that rising Gas Development Surcharge (GDS) deficit of approximately Rs 100 billion for SSGC and SNGPL poses serious concerns for the economic stability of the country. With higher priced LNG expected to occupy a larger share of the gas mix in the future to meet excess demand, the government must enforce higher prices for industry users if it is to avoid another poorly managed circular debt situation in the country.
The government decision to reduce GIDC on fertilizers sector despite growing gas circular debt crisis in the country has taken the industry by surprise. The government was well aware of the fact that current fertilizers prices have been established in the market. Fertilizers industry made record sales of urea during 2019, touching 6.2M MT as against the past 5 years average of 5.7M MT. Just during the month of December 2019, the industry recorded a sale of 1.4M MT - highest ever in a month - at current urea pricing level. Despite of knowing this, they opted for a decision to support rich zameedars to continue the legacy left behind by PMLN and PPP in the Naya Pakistan.
By opting for this solution, they ignored the other proposal wherein it was recommended to increase the fertilizers feed prices to offset reduction in GIDC. Such a proposal would have ensured maintaining urea prices at current sustainable levels whilst generating Rs 50 billion for the government to offset Gas Development Surcharge (GDS) imbalance. Removal of GIDC for the fertilizer industry may prove to be yet another strategic faux pas for the PTI government that is still struggling to bring economic stability in the country.
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