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Natural Gas: Need For Price Rationalization

January 26, 2011 

By Ali Salman
 
The multi-pronged strategy of the government to make up for the gas deficit does not consider price rationalization in its policy mix. In presence of wrong price structure, supply side measures like exploration and conservation are likely to meet with failure. 



By Ali Salman
 
The multi-pronged strategy of the government to make up for the gas deficit does not consider price rationalization in its policy mix. In presence of wrong price structure, supply side measures like exploration and conservation are likely to meet with failure.
 
Every time there is a gas shortage, the government yields to quantity restrictions through quotas and load shedding. Instead of correcting the incentive structure intelligently, government resorts to artificial controls and the public sector entities follow by starting ill-designed conservation campaigns. Even more, the government, by importing gas or its substitutes such as LNG, treats only symptom- shortage; and not the problem- wrong prices.
 
As per Pakistan Energy Year Book 2009, the share of natural gas in primary fuel supplies during 2008-09 was 48.3%, thus making it the largest energy source in Pakistan. For comparison, Coal currently supplies over 38 per cent of the world’s electricity and 23 per cent of global primary energy needs. Thus Pakistan’s energy mix sharply contradicts global trends. I find the explanation in the wrong price structure. Policy makers, since the discovery of Sui gas fields in 1952, have continued to believe that this indigenously occurring natural resource should be supplied cheap, irrespective of global trends in pricing.
 
It should be noted that the present international rate of natural gas is around $6.00 per 1000 cubic feet. When the cost of import plus the cost of transportation and distribution is added, it will cost 5 times higher than the present gas price in the country. Thus there ought to be an unnecessary preference for natural gas in Pakistan by all consumers due to this huge arbitrage. In open economies, such gaps tend to reduce due to arbitrage opportunities. In closed economies, such arbitrages result in black marketing, smuggling or inefficient usage.
 
By keeping prices low, the government has actually facilitated fast depletion. So far about 54 TCF (trillion cubic feet) of gas reserves have been discovered of which 25 TCF have already been produced. Pakistan’s total remaining gas reserves are estimated at 29.80 TCF (2008) which are adequate for meeting the gas requirement of Pakistan for 6 years at the current rate of production, according to ATCO consultant, Manaullah Khan, in a recent article. 
 
Consider an average household of 6 persons paying a monthly bill of Rs. 150/- for about 8 months in a year for complete kitchen requirements. The same household would pay several thousand rupees in remaining four months of winter. These extraordinary spikes in the gas expenses can be normalized around an average by adopting more intelligent pricing.
 
Another example of poor pricing structure is the huge difference between the tariffs of ‘indigenous’ gas and ‘imported’ oil. The owner of a 1000 cc car can save around 50% by converting to natural gas. This has created an avoidable burden on the natural gas reserves. However the major brunt of gas load shedding is taken by the power, fertilizer and general industry.
 
Natural gas sectoral consumption during 2008-09 was: power (31.8%), fertilizer (15.9%), cement industry (0.6%), general industry (25.1%), domestic (16.9%), commercial (2.8%) and Transport (CNG; 7.0%). The price structure punishes industrial producers and large consumers in a bid to protect small consumers. However, when the power, fertilizer and general industry sectors have to pay extra-ordinarily high than the small consumers, all the costs would ultimately be transferred to end consumers. Here also the price structure needs rationalization. 
 
The pricing structure is not only wrong at consumers end. The government has also induced inefficiencies while awarding tariffs. The government is required under covenants with international lending agencies to ensure a minimum of 17 to 17.5 per cent guaranteed rate of return to SNGPL and SSGCL. Also as per the regulations, OGRA determines the consumer prices while distribution companies are entitled to claim any shortfalls in their revenue that includes the gas purchase prices from exploration and producing companies and a pre-defined operating margin.
 
The above two examples suggest that the government has provided artificial oxygen to the two public sector entities namely, SNGPL and SSGPL. When the government has provided constitutional guarantees on rates of return, why an enterprise should worry about efficiencies?
 
The best evidence of a complete ignorance about the need of price rationalization is provided in this policy statement by the government.
The Ministry of Petroleum states that “to fill the growing energy supply deficit, the GOP is implementing a multi-pronged strategy which includes: (i) increasing domestic oil & gas exploration and production, (ii) fast tracking utilization of hydro power potential, (iii) expediting the development of vast local coal reserves, (iv) importing piped natural gas from neighboring countries, (v) importing LNG, (vi) setting-up new nuclear power plants, and (vii) exploiting affordable alternate energy resources.”
Read again. The multi-pronged strategy of the government has actually no bite. It does not mention price rationalization as at least one of the strategies. In presence of wrong price structure, supply side measures like exploration and conservation are likely to meet with failure. Prices constitute the most fundamental structure for a market economy. If they do not convey the right message, the economy may still grow like the production centric Communist regimes-or stifle…but always remains on the wrong path.
 
Author, an economics consultant, is Director Program and Development, Alternate Solutions Institute. This article first appeared in The Express Tribune on December 27, 2010.




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