The gas dilemma and Pakistan’s winter of discontent
In Pakistan, it is now the norm that the cold comes with gas shortages. As soon as November began, both commercial and non-commercial gas users started experiencing low gas pressure and load-shedding. Relevant officials confessed that despite the most expensive LNG procurement from abroad, gas would have to be rationed with residential consumers getting supplies at fixed timings.
The structural problems in the gas sector are not new. The lack of adequate local reserves coupled with weak procurement capabilities, for example, difficulties in importing LNG on time and in the right quantities, and importing at a time when prices are at an all-time high, ultimately pushes price inflation to unprecedented levels and also jacks up the cost of doing business in the country. The export industry which was experiencing decent post-pandemic gains is already complaining on this account.
Packaging the transaction with local and foreign firms involved is technical business. The federal government has time and again shown it’s lack of experience in hedging its energy imports. There is weak clarity with regard to who within the federal government should lead the hedging process. There are fears of excessing accountability which prevents the political and civil service leadership to move fast when markets are favorable. Entities such as PSO and PPL are corporate in nature and may have experience but even their boards have representation from and influence of federal government which ultimately slows down the process.
Pakistan’s manufacturing sector wants competitive cost and price structures. This is where the role of regulators such as Oil and Gas Regulatory Authority (OGRA) and Competition Commission of Pakistan (CCP) remains pivotal. There are several evaluations suggesting that the enforcement of regulatory decisions in gas space remains weak. One consequence of this has been the arbitrary rise in prices of gas but second and more important has been the unchecked provision of gas connections on a political basis despite diminishing supplies.
The regulatory framework in the energy sector requires consolidation. The three regulators in the energy sector, i.e. petroleum concessions office, OGRA, and National Electric Power Regulatory Authority may also be merged for expediently moving toward a more responsive energy sector oversight. The regulatory role has been particularly lagging when it comes to product standards in the gas sector. Inefficient gas appliances are manufactured by small scale or often unregistered producers without compliance with necessary quality and safety standards. A point related to this is the missed opportunity when it comes to gas conservation and smart-use at the residential level.
The government is now engaging with the Russians for a $2 billion loan. Such borrowing can be partly prevented if the gas sector was competitive and attractive for investment by the private sector.
Dr. Vaqar Ahmed
Gas Infrastructure Development Cess (GIDC) was paid to the federal government by the private sector. As the name implies, this was supposed to finance Pakistan’s commitments under transboundary cooperation initiatives in the gas sector as well as improvements to internal supply networks. However, this cess was unable to achieve its objectives due to weak public finance management which allowed the money to be spent on other priorities. The government now is engaging with Russians for a $2 billion loan. Such borrowing could be partly prevented if the gas sector was competitive and attractive for investment by the private sector. Foreign direct investment is shying away from the gas supply chain.
In October, a consortium investing in Pakistan’s LNG terminals which also included a Japanese firm, complained to the Prime Minister about the time and cost being wasted in bureaucratic details, despite clearance received from the federal cabinet and its committee as well as OGRA.
The issues of weak recoveries by gas companies in turn keeping circular debt high is another concern that worries potential investors many of whom in the past have seen their payments stuck for years. The role of the judiciary in taking more than anticipated time in settling disputes and facilitating recovery from consumers remains another risk. The unaccounted-for-gas (UFG) losses or theft could also be avoided if several gas distribution firms are allowed to enter the market and transmission of gas is effectively unbundled, in turn also paving way for greater competition. The provincial governments could also play an effective role in curtailing losses if they are allowed autonomy in sectoral gas allocation and management.
In the longer run, the country’s woes can only be solved by gradually moving away from the current two-third share of fossil fuels in the overall energy mix. As most of the fuel forms like gas are imported from abroad, the country remains prone to trade- and commodity price- shocks. The other options which include bringing gas pipelines from Central Asia and Iran remains only a longer term plan and will be subject to the political environment in the region.
- Dr. Vaqar Ahmed is an economist and former civil servant. He tweets @vaqarahmed