KARACHI: The State Bank of Pakistan (SBP) has asked the government for an appropriate price pooling mechanism to pass on the impact of higher LNG prices to consumers; otherwise, it risks the formation of a circular debt situation akin to the one prevailing in the electricity sector.

The SBP Second Quarterly Report on “The State of Pakistan’s Economy” for the fiscal year 2020-21 features a special section on the domestic LNG market, which discusses the challenges in the planning, purchasing, and supply of the imported commodity, and contextualizes these challenges within the current regulatory and operational framework.

According to report with LNG imports set to rise substantially over the coming years, it is crucial to devise ways to address the mindset of cheap availability of natural gas in the country as due to the prevalence of extensive cross subsidies, various segments of the economy, in particular fertilizers and household sectors, have taken the availability of subsidized natural gas for granted.

In hindsight, the policy of subsidized natural gas has entailed significant economic cost for the country, with the indigenous reserves deteriorating at a rapid pace as excessive consumption of the fuel was encouraged. Going forward, consumers would have to quickly readjust to the more expensive imported LNG, the report said.

Ensuring energy security lies at the core of a country’s energy policy and the swift shift towards imported LNG was the right step, keeping in view the falling indigenous gas supplies. At this point, the incoming capacity expansions in terminals and pipeline networks mean that LNG’s share in the country’s energy mix would continue to increase.

Recently, Pakistan has also signed another G2G deal with Qatar to import 200 mmcfd (roughly two cargoes a month) of LNG from 2022 onwards at an applicable Brent slope of 10.2 percent, which would then increase to 400 mmcfd (four cargoes per month) after three years. This contract entails the option of increasing the import volume during high-demand months, for example during winters, and also has a price renegotiation clause of four years.

“The government has to start passing on the impact of higher LNG prices to the consumers via an appropriate price pooling mechanism; otherwise, it risks the formation of a circular debt situation akin to the one prevailing in the electricity sector”, the SBP warned.

Furthermore, the report said that given that the domestic consumption of natural gas is expected to increase sharply going forward, an increase in prices would help cut down extravagant household consumption, which would in turn help reallocate the cheaper fuel to the power and industrial sectors to decrease the cost of energy generation and increase the fuel’s usage in value-addition segments. The impact of subsidy rationalization on the low-income quintile can be compensated via targeted cash transfers, which is a more efficient way of providing social protection, the SBP suggested.

In addition, the relevant authorities also need to develop a long-term strategy that, among other aspects, also focuses on expanding the indigenous reserves base of natural gas. According to the US Energy Information Administration (EIA)'s 2013 Technically Recoverable Shale Oil and Shale Gas Resources report, Pakistan held sizeable shale gas reserves of 105 trillion cubic feet (tcf).

The report mentioned that Pakistan's Ministry of Energy (Petroleum Division) also completed a study in 2015 on the evaluation of shale oil and gas resources in the Lower Indus Basin and the Middle Indus Basin with the help of USAID. The results revealed that Pakistan's shale gas geological resources amounted to 95 tcf recoverable reserves. However, the exploration companies face many challenges in developing these resources because of complex geography, environmental constraints, and low natural gas prices in the country. Thus, the country needs to develop preferential policies (increasing the wellhead prices to begin with) and conduct pilot projects as early as possible, to encourage domestic and foreign oil and gas companies to plan investments, it added.

The report suggested that beyond gas, the government also needs to take an all-inclusive view of the energy mix in the country, given that renewable, especially solar, have appeared as low-cost and crucial alternatives in the midst of worsening climate change situation.

At present, the renewables’ share is only 4 percent in Pakistan’s installed power generation capacity and 2 percent in power generation. However, the incentive to switch to these sources is significant.

According to the World Bank’s 2020 Global Photovoltaic Power Potential report, utilizing just 0.071 percent of geographical area of Pakistan for solar photovoltaic (solar PV) power generation would be sufficient to meet the country’s current level of electricity demand.

This makes the country rank 49th out of 210 economies in terms of average solar power generation potential. Furthermore, bringing the share of renewables to at least 30 percent of the total generation during the next 20 years would also lead to a reduction of US$ 0.002 for every kWh consumed in Pakistan, or around US$ 5 billion.

Going forward, the report said that the government’s decision to allow greater involvement of the private sector in LNG import has the potential to address many of these issues, and ultimately enhance the share of the relatively cheaper fuel in the economy’s energy mix.

Copyright Business Recorder, 2021