Gas shortages: Tough winters ahead – Opinion

Winters are coming. And a massive gas crisis is in the making. The demand for domestic sector is growing unabated due to low prices while the supply (both indigenous gas and imported RLNG) is shrinking. Local gas supply is falling by around 8 percent per annum while the LNG supply is going to be limited at 8-9 cargos per month this winter as compared to 12 cargos per month two years ago.

The plan is to divert imported expensive molecules to domestic sector at dirt cheap rates. This may add another Rs100 billion to the gas circular debt which may reach Rs 1 trillion after this winter. There would be political bashing of the government for not supplying enough gas in a winter, and there would be economic repercussions of recovering a mere fraction of the cost.

The optimal response would have been to give the right pricing signal and let the gas to divert to the most efficient use. Unlike common perception, majority of the pipeline gas connections are not for vulnerable population. There are around 11 million pipeline gas connections out of 35 million households in the country – covering less than a one-third of the population.

On the other hand, there are 31.6 million electricity connection – conservatively covering 80 percent of population after discounting for multiple connections.

Electricity prices have been revised upward. But the gas prices are not. People living in affluent areas are paying monthly bill of over Rs 50,000 for electricity while their gas bill is less than Rs 500 in summers. Most of the readers have this story at home. On the other hand, the vulnerable segment (without gas pipeline connection) is paying higher amounts by using LPG cylinders or other expensive means. Then the line losses and thefts are high in pipeline networks. There is little justification of providing gas at dirt cheap price through pipeline to residential areas.

A better way is to let the gas divert to power production and direct industrial use (mainly in cogeneration facilities) where efficiencies are multiple times as compared to the use of geysers and stoves at homes. And let the affluent (and middle class) pay their fair share. However, no government has the courage to do so. This weak coalition is worse, as its prime objective seems to revive the lost political capital of the PML-N (Pakistan Muslim League-Nawaz).

The imported LNG prices are at crazy high levels. There is no way Pakistan can procure spot cargos at current prices. The supply is only by term cargos (of 100 mmcfd each) – 5 cargos from the first contract with Qatar, 3 cargos from 2020’s contract with Qatar (in Dec) and this to increase to 4 cargos from January, and one 1 cargo from Eni (but Eni could still default on its commitment). Hence, there would be 8 cargos in December and 9 in Jan and Feb. The number was 12-13 two years ago and there was gas load-shedding back then. The situation is going to be much worse this winter.

The grapevine is that supply to the power sector would be reduced to 150 mmcfd in the NTDC (National Transmission and Dispatch Company) system – that is enough to run merely one RLNG plant. Then there would be 75 mmcfd supply to KE for running half of its new RLNG plant. The supply to power sector would be half of what it was two years ago. The expensive gas molecules to divert from 50 percent plus efficiency to less than 15 percent efficiency use. How can an energy deficient country while heavily relying on imported energy afford that?

Then there would a tug of war for industrial usage. The finance minister has agreed to provide RLNG at $ 9 / mmbtu to Punjab exporters (this may get fixed in PKR) and the indigenous gas is provided at Rs840 / mmbtu in Sindh and KP. RLNG is costing at $ 17 / mmbtu at consumers’ doorsteps at current prices. There would be a subsidy of 50 percent for industry. Therefore, the supply should be only confined to the efficient users who have in-house cogeneration facility. The supply to north is required at 170 mmcfd while in South it’s at 100 mmcfd.

The rest would be supplied to domestic users. And the PM wants to increase the domestic use at the expense of others and taxpayers. He should think twice. The average price charged to domestic is Rs350-400 / mmbtu while the RLNG is costing at Rs 3,700 / mmbtu at current currency parity -a massive subsidy. This would add Rs100 billion to the gas circular debt in Sui North network.

And even with this subsidy, there would be massive gas load-shedding. Nothing is making sense. The government is planning to have intermittent supply – breakfast, lunch, and dinner times, like a doctor’s prescription. However, that is not the best strategy. There might not be enough pressure. As some may use suction pumps to extract higher molecules at the expense of their neighbors. A better option is to supply on rotation – alternate day basis. And inform people to have alternate options for off-days.

Apart from that, the government should encourage LPG use for stoves and facilitate conversion of geysers and heaters to electricity. On the companies are coming into the LPG business; but the quantum of supply would be too low – for instance Sui North to provide 2 mmcfd against the demand gap of 300-400 mmcfd (or even more). The government should encourage private supply of LPG. It should reduce tax on LPG and increase pipeline gas prices. The plan should be to get cut deals of bulk volumes with Qatar and Oman so that sufficient quantity is imported.

Apart from subsidy issue, higher losses in the pipeline network cannot be ignored. The incidence of UFG – unaccounted for gas – is 17-18 percent on an average for Sui South. And in winters it crosses 20 percent, as gas is being supplied to Balochistan where losses are higher than 50 percent. The gas network is old and it is near impossible to upgrade it. Then thefts are hard to stop. That is why LPG is a safe alternative. Most of the world is not using pipeline supply for domestic use. Even energy rich countries like Saudi Arabia provide LPG to households.

LPG is produced both locally and imported from Oman and other sources illegally. One private company in domestic production is having issues with Sui South on commercial contracting. Sui South used to provide high MMBTU gas to that company which after extracting LPG gives it back. The agreement in the past was lopsided in favor of that private company. It expired in 2020 and now in process of renegotiation. The private party used to have pricing and supply rights while it was providing fixed amount to Sui South. That needs to be balanced out with a proper revenue-sharing model.

However, the private company has a clout in the influencing circles. A few days back, the issue was raised in a government meeting where the petroleum minister and secretary vocally disagreed with a senior PML-N leader (who is not the energy minister, but is running the show).

The petroleum secretary was replaced, and perhaps minister’s days are numbered too. Now the powerful PML-N leader and the private company owner are trying to convince chairperson and managing director of Sui South company to have a contract in favor of the private company. However, both officials may resign rather than agreeing on skewed terms. In the process, the precious LPG supply is being constrained.

In a nutshell, these winters are going to be messy. The winters usually after floods are tougher and the gas supply would be even less. The high political temperature will rise further. For consumers, it’s better to start preparing for alternates. It’s advisable to buy LPG cylinders and electric geysers in advance. Do not rely on the gas pipeline.

Copyright Business Recorder, 2022


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