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EVEN before the people could adjust to deteriorating lifestyles with power load shedding — a term coined only by Pakistanis — they were exposed to a double jeopardy — natural gas shortage under gas (mis) management policy. For the first time this summer, constrained shortfall goes beyond 500 million cubic feet per day (MMCFD). Later in coming winter, the gap between supply and demand is estimated to go up to two billion cubic feet per day (BCFD) — 50 per cent of maximum supplies of about four BCFD.
While the government keeps on providing new gas connections, resulting so far in additional requirement of up to 500MMCFD under the prime minister’s directives and the parliamentarians’ quota, the entire industrial sector is hit by increasing shut-downs. The CNG industry is on the roads protesting gas cuts while fertiliser sector is finding it hard to recover its return on investment made on new plants over the last few years.
The last year’s assessment by the Asian Development Bank that power shortages were restricting economic growth rate by two per cent of GDP per annum is no more valid. The latest rough estimate indicates up to 3.5 per cent drop in the rate of economic growth due to natural gas and power shortages. That should be an alarming sign for the economy, reeling under overall security crisis along with under-investment in energy infrastructure.
The situation is not only affecting the daily life of common citizens, but also creating acrimony among the federating units, affiliated to a dysfunctional centre. The Punjab government has accused the federation of causing over Rs250 billion loss over the just concluded financial year on account of ‘unfair’ gas distribution policy.
On top of that, the federal government’s Planning Commission has admitted that reduction in PSDP 2010-11 has prolonged economic recession due to delay in meeting energy and water shortages.
Amid this doom and gloom, the petroleum ministry has embarked on a plan to raise natural gas prices for all consumer categories on the advice of a US-based contractor who seeks to ban the gas supplies to the fertiliser sector and calls for all future fertiliser needs to be met through imports. The gas prices are being jacked up — although held up after approval by the ECC because of court cases — on the premise that ‘subsidised prices’ have created distortions in the economy.
The price raise may have a logic to lure in fresh investment, but it cannot be an over-stressed. Instead a holistic approach, factoring the impact of entire fuel policy on all segments of society and economy, is the most important thing to adopt while opting for major policy shifts on the use of scarce natural resources. It should not be based on a single analytical report of the United States whose opposition to gas import from Iran is well known.
Advanced Engineering Associates International Inc. (AEAI) in a USAID funded project has made an analysis of the economic value of natural gas in various sectors in Pakistan and proposed fresh gas management policy, envisaging industrial sector switching over to oil from gas and replacing domestic production with imported fertiliser.
“The government should gradually increase the price of the natural gas to equate it to the economic cost of natural gas delivered to the customers”, it said indicating that the current prices need to be increased four-fold over the next 5-7 years. The current prices are about $4 per MMBTU while their economic value assessed by contractors range between $17-$29.
Interestingly, the petroleum ministry headed by a medical doctor by profession has immediately started implementing its recommendations even before a final report was submitted to the government by the contractor. Besides the US, the AEAI has its fully staffed offices in Afghanistan, Pakistan, Armenia and Ireland.
The contractor has recommended gradual price changes to allow consumers to adjust to price increases and provide time for construction of infrastructure for delivery and use of alternative fuels.
On the other hand, the gas price increase suggested by the local gas regulator (OGRA) at 13 per cent has been overruled by the petroleum ministry which has secured approval from the ECC for a hike up to 96 per cent.
For the first two years, the contractor seeks to give priority in supply of natural gas to power generation through combined cycle gas turbine (CCGT) plants on top, followed by cooking, water and space heating in commercial sector and then cooking in households. This order of priority is based on argument that the economic cost of replacement fuel is higher than the economic cost of natural gas delivered to these end-users.
In the long term, the natural gas in fertiliser, power generation from steam stations, industry and transport sector would be replaced by alternative fuels. It says the “imported fertiliser should replace domestic production of fertiliser as the cost of imports ($17.26 per MMBTU) is less than the economic cost of delivered natural gas ($20.3 per MMBTU) for the fertiliser sector” and no new fertiliser plant should be set up in the country. No wonder, the price for gas used as fertiliser feedstock is being jacked up by 96 per cent in one go.
The fertiliser industry, on the other hand, claims that the imported equivalent cost of furnace oil was $18 per MMBTU, followed by diesel at $22 per MMBTU against $34 per MMBTU cost of imported fertiliser. This needs detailed investigation.
The fertiliser sector has been accused of misusing subsidised gas supplies without sharing its benefits with farmers or end-consumers that requires a thorough and professional examination through independent auditors for transparent pricing and benefit sharing. The fertiliser plants cannot be shut down in an agricultural economy.
The US contractors said the furnace oil should continue to be used as the power generation fuel for steam turbine plants since the economic cost of FO ($17.42/MMBTU) is lower than the economic cost of delivered natural gas to the power sector ($20.33/MMBTU). Also, the ‘motor gasoline should be utilised as fuel for vehicles instead of natural gas since motor gasoline is more economical than natural gas delivered to CNG stations’.
As a matter of principle, the US contractor has said that in sectors where natural gas is to be replaced by its alternative such as fuel oil in the industry and solar water heating appliances in the household, the price of natural gas should be set higher than the long term economic value to encourage switching to alternatives. In areas where gas is not connected, the government should facilitate LPG.
Fuel allocations and supplies are too serious a matter to be left to foreign consultants and medical doctors to decide. Given their far-reaching economic and political costs, a national fuel policy has to take into account the best economic uses of domestic natural resources and prudent diversification of imported fuels.
Keeping in view the best international practices, viable domestic options need to be evolved and implemented through detailed dialogue among economic and political stakeholders in provinces, parties and sectors at this critical stage of shortages to get best for the entire nation.
