The power sector circular debt is known to all. But not many eyes are catching another elephant building in the room - the gas circular debt. It is estimated that the quantum of debt – between two companies SNGP and SSGC stands around Rs550-600 billion and growing. In turn, the receivables of OGDC and PPL from two Sui companies are standing at Rs525 billion – hindering prospective exploration of gas and oil.

Within gas debt, majority is from domestic gas supply, and lately the share of RLNG is building up. Government cannot keep its eyes shut like a pigeon. Ministry of Petroleum and Natural Gas must come up and put the hands down to curb it – like the power division is doing in its sector.

The gas differential margin in both the Sui companies is the tariff adjustment recoverable – primarily the difference between the tariffs prescribed by the OGRA (based on tariff review petition) and the tariffs approved by the government. This is similar to the difference between the base tariffs prescribed by NEPRA and what government approves in the power sector.

In the yesteryears, the gas differential margin was insignificant. But now it is fast turning into a monster. The gas supply to domestic consumer (households) is at discount to the cost and the remaining customers (mainly industry, commercial etc) cross subsidize these to recover the gap. The indigenous gas supply has been fast declining, while the domestic consumer base is growing. The share of domestic is growing and there is not enough recovery from the shrinking share of others to cross subsidize – the gap is building up as recoverable from government. That is how circular debt is building.

In case of SNGP, in 2013 total sales were 512 million MMBTU – within it, domestic users’ consumption was 175 million MMBTU – it was 34 percent of total sales. In 2019, the overall sales fell by 24 percent to 387 million MMBTU; but domestic consumption increased to 219 million MMBTU – its share increased to 56 percent.

There is no other way to curb the growth in the gas circular debt without increasing the gas tariffs of domestic consumers. A decade ago, indigenous gas supply was over 2BCF for SNGP and there were 3.3 million domestic connections. Today, the supply is under 1BCF and the connections are around 7 million. Every year, new connections are being issued, and the gas is being supplied at ridiculously low rates. The gap is building the indigenous circular debt.

Now the indigenous gas is not enough to supply the domestic winter’s use. RLNG is being mixed in it. The cost of RLNG is almost double that of indigenous supply. The weighted average tariff of domestic consumers is less than half of the indigenous cost. The RLNG cost is more than four times of effective domestic tariffs – its contribution in the gas circular debt is a new headache.

In June 2018, when the incumbents assumed power, the SNGP gas circular debt (indigenous gas differential margin) was Rs122 billion. In March 2020 (based on latest published accounts) the number has reached Rs242 billion. According to sources, the number is today around Rs300 billion. Then there is RLNG related gap. That number was negative Rs7 billion in June 2018 and as of March 2020, it had climbed to Rs55 billion. Sources say that this number is Rs80 billion today.

Thus, the total circular debt of SNGP is around Rs380 billion – Rs300 billion indigenous gas and Rs80 billion for RLNG. The number was Rs116 billion as of June 2018. The buildup under this government watch is around Rs260 billion.

The story of SSGC is less grave. The tariff adjustment recoverable was Rs105 billion as of March 2019 (last published accounts). Sources privy to the information suggest that the number has crossed Rs200 billion as of now. Thus, the total gas circular debt is around Rs580 billion (SNGP: Rs380bn, SSGC: Rs200 bn).

The pace of growth for SNGPL is Rs120 billion per year - approximately Rs80 billion a year for indigenous gas and Rs40 billion a year for RLNG. The cost of sale is above Rs700/MMBTU for indigenous and above Rs1,400/MMBTU for RLNG. The effective recovery from domestic consumers was Rs301/MMBTU for domestic consumers. With increase weight of domestic consumers and increasing supply of RLNG in the system, the pace of circular debt growth will accelerate in years to come.

There are three ways to tackle it. One is to increase rates of other uses to cross subsidize domestic. Second is to increase the tariff for domestic to match the cost and the cost is to be computed on weighted average cost of capital (WACC) after including RLNG in the mix. Third is to keep the eyes shut.

The second option is viable. That must be done sooner. Otherwise, it will become too big an elephant to handle. The domestic tariffs are too low. The maximum consumption is of lowest two slabs (priced at Rs121/mmbtu and Rs300/mmbtu) as the effective tariff was Rs301/mmtbu in 2019. This has to grow to cover the cost.

It’s a tough political decision. Moreover, the government should stop issuing new connections. The cost of gas pipeline laying, metering etc have gone up; but nothing from recovery. Total domestic consumers are around 10 million including SSGC – not covering one third of household. Majority of poor and low middle-class households don’t have gas connections and rely on expensive options for heating. The message is to stop subsidizing gas for rich and middleclass, and provide subsidy to deserving from Ehsas programme.