Ministry of Energy's Petroleum Division (PD) is all set to implement gas sector reforms aimed at ensuring supply to consumers and improving financial sustainability of the sector with a new tariff methodology, well-informed sources told Business Recorder. Gas is Pakistan's primary fuel accounting for nearly a half of all primary energy consumption in the country. Domestic supplies of gas have stagnated around 4 billion cubic feet per day and have not kept pace with rising demand. Currently the demand-supply gap is about 2 billion cubic feet per day. Therefore, imported gas is becoming an important energy source for Pakistan.
LNG supply is expected to reach nearly 2 billion cubic feet per day by mid-2018. The introduction of imported gas and changes in the market dynamics require reforms in Pakistan's gas market regime and gas sector structure.
The government is mulling achieving a competitive and market-oriented sector whereby a customer in any part of the network can be served gas while ensuring security of supply and improving financial sustainability for the sector and providing a framework for facilitating constitutional provisions regarding the allocation of domestic gas resources.
Towards this goal, the federal government initiated analytical work in November, 2015 to design a reform program of the downstream gas sector with support from the World Bank. This yielded a reform program with the following pillars: a two-tier market which distinguishes users of imported gas from those of domestic gas; tier 1 will comprise domestic gas delivered on an interruptible (as and when available) basis at regulated prices set by the government, as has been the practice to date. Tier 2 will comprise imported gas (RLNG at this point) delivered on a firm basis at market prices with all costs of delivering RLNG ring-fenced. This regime will ensure implementation of a key concern expressed by the provinces that all costs of delivering RLNG must be borne by RLNG customers without placing any related burden on non-RLNG consumers.
A new tariff methodology is being devised by Ogra to ensure proper allocation of costs under this two-tier market. In due course, this tariff methodology will be circulated for consultation with all key stakeholders, particularly the provincial governments, under Ogra's consultative process.
The Third Party Access (TPA) introduction to the transmission network where a buyer of gas can contract with a supplier may use the transmission system to move that gas against a transmission charge. With the introduction of TPA on the network, the Sui companies will not be taking title to gas being transported on the network. They will simply transport gas from the entry point and deliver at the exit point requested by third parties. This will allow every consumer of Tier 2 gas to choose the supplier of Tier 2 gas and promote transparency of cost allocation as well as competition among importers bringing RLNG to Pakistan without present benefits. This will be achieved without placing burden on Tier 1 customers since they will be served Tier 1 gas by their respective distribution companies as has been the practice to date.
Unbundling of SNGPL and SSGC into a single national transmission company and four provincially defined distribution companies: This pattern is intended to facilitate the allocation of gas produced in a province to be delivered to the customers located in that same province. Each distribution company will have an exclusive right to serve Tier 1 customers in their service territory, as has been the practice to date.
Since summer 2016, a significant progress has been made with World Bank support towards the development of the third party access rules, the new licenses which separate transportation from distributors, a new tariff methodology (which allows ring-fencing of RLNG costs and end-consumer tariff and subsidy policy for a reformed downstream gas sector). These rules have been developed in a consultative manner with the particulars of key sector stakeholders. This process has been supervised by a high-level forum comprising the Federal Minister for Energy (Petroleum Division) as the chair and the Provincial Energy Ministers as members. This forum, titled the Gas Sector Leadership Committee, was created to ensure the participation of the provincial governments with the federal government steering this reform process.
The implementation of reforms is now to be initiated through a policy statement by the government, which lays out how the reformed sector is to operate. This policy statement was presented to the Gas Sector Leadership Committee at its third and fourth meetings held on April 26 and July 27, 2017. The Gas Sector Leadership Committee agreed in principle with the policy subject to observations regarding provincial representation on the Sui Company Boards and advised that constitutional provisions must be complied with in the implementation of the policy. The government will ensure that the Sui shareholders, employees of Sui Companies and gas consumers will not be worse off as a result of the implementation of this policy. Key features of the policy statement are: (i) separation of transmission and distribution- Sui companies to separate transmission and distribution/sale businesses and run them under separate licences; (ii) open access to transmission networks; (iii) transmission business will not take title to gas; (iv) a postage stamp tariff will be charged (tariff = revenue requirement/gas transported); (v) two tier-market- tier 1: domestic gas; tier 2 imported gas; (vi) as and when available supply for tier 1, firm supply for tier 2; (vii) each Sui gas distribution business to be exclusive provider of tier 1 suppliers; (viii) no additional cost burden for tier 1; tier 2 customers ring-fenced for full cost recovery; and (xi) tier 1 GoP will continue to notify prices- tier 2 market prices.
According to sources, when a proposal for the unbundling of the Sui Companies was referred for approval of the ECC in 2013, the ECC had directed that the matter be taken to the CCI after due consultation with the provinces. This consultation has since taken place through the forum of the Gas Sector Leadership Committee.