Switching priorities in gas supply
THE decision by the Economic Coordination Committee last week to give priority to the power sector over fertiliser and other industries in supply of natural gas has far reaching economic consequences while it will serve short-term political objectives of the ruling Pakistan People’s Party and its allies.
Faced with an uphill task of reducing the crippling electricity shortfalls in sizzling heat ahead of general elections, the government has faced criticism from within—- its parliamentarians—- touting load shedding as the biggest failure, making it almost impossible for them to face their voters.
The government has responded to do whatever the cost be to win back its vote bank. While it is arranging funds to ensure fuel supplies, a major policy shift has come in the form of ECC’s decision to divert gas from fertiliser to power generation.
Given its political ramifications owing to a majority of PPP and PML-N assembly members coming from agricultural-rural background, the decision is subject to clearance by the prime minister and his federal cabinet before its implementation.
But the ECC members, mostly with urban background, have found it prudent to bring power sector up by one step. The natural gas allocation and management policy of 2005 currently in vogue gives top priority to domestic and commercial consumers, followed by fertiliser and industrial sector. Power sector gets the third place on priority list just before captive power plants and cement plants at the end.
However, in view of the unmanageable electricity shortfall and increasing power tariffs because of heavy dependence on furnace oil and diesel, the power sector has now been given second place on the priority list just after domestic and commercial consumers. As a result,
fertiliser plants and industrial consumers would drop one step down on the priority list.
If the petroleum ministry is able to divert 200 million cubic feet per day (MMCFD) of gas to power sector, the gas based power generation would increase by 1000mw. Coupled with this a diversion of 650mw of electricity from KESC to Wapda system and additional hydropower generation could significantly reduce power shortage.
There are sufficient fertiliser stocks to meet the requirements of the current Kharif season and early part of the coming Rabi season.
Interestingly, the season for major Kharif crops— rice, sugarcane and cotton- would end in December, just before the next elections.The sowing of next Rabi crops — mainly wheat — would most probably coincide with the general elections. So the present government has to worry about only for fertiliser stocks for the early part of Rabi. Given surplus wheat stocks, there are limited concerns for the coming wheat crop though its long-term consequences are serious.
While the diversion of gas to power sector would cut power sector subsidies, reduce electricity cost and help utilisation of idle power generation, it will increase the need for subsidies in the fertiliser sector to prevent low fertiliser usage. This can lead to crowding out of good agricultural practices, reduce crop yield, increase food prices and compromise economic sovereignty while wheat may have to be imported from India or elsewhere.
According to one estimate, the diversion of about 100 MMCFD of gas to power sector would reduce furnace oil imports by about $600 million, whereas the nation may have to spend about $750 million on import of fertiliser against the same gas quantity. Perhaps a balance would need to be created between an angered population over electricity shortage ahead of elections and social discontentment over
expensive food or food shortage after the elections.
In the given circumstances, it would be prudent to produce a few key recommendations of a US-based contractor who was assigned to look into the economic value of different uses of natural gas. The contractor had examined the economic value of gas uses purely on commercial lines.
Based on analysis of economic value of natural gas in different sectors, the AEAI proposed that industrial sector should switch to oil and domestic fertiliser be replaced with imported one. This has to be examined from food security point of view.
It recommended a gradual increase in the price of natural gas to equate it to the economic cost of natural gas delivered to the customers, suggesting that existing domestic sale prices need to be increased by 400 per cent in about 5-7 years to create a coorelation between domestically produced gas and imported gas in any form.
The existing applicable prices in Pakistan are about $4 per MMBTU while their economic value assessed by contractors range between $17 — 29. The minimum cost of imported gas is $12 per MMBTU in case of Iranian gas and $15-16 in the shape of LNG, LPG etc. The price increase was recommended as a regulatory instrument for the long-term to allow consumers to adjust to price increases and provide time for construction of infrastructure for delivery and use of alternative fuels.
In the short-term of two years, the contractor sought to give priority in supply of natural gas to power generation through combined cycle gas turbine (CCGT) plants on top, followed by cooking, water heating and space heating in the commercial sector and then cooking in households.
In the long-term, the natural gas in fertiliser, power generation from steam stations, industry and transport sector should be replaced with alternative fuels. The contractor said that 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. No new fertiliser plant should be set up in the country.
Secondly, it said 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 for the power sector ($20.33/MMBTU).
Third, the industry should switch to furnace oil as the replacement fuel for captive generation and heating use in boilers and furnaces, because the economic cost of FO is lower than the economic cost of delivered natural gas.
Fourth, motor gasoline should be utilised as fuel for vehicles instead of natural gas since MS is more economical than natural gas delivered to CNG stations. The economic value of natural gas in the transport sector is $24.37 per MMBTU in comparison to $29.21 which is the economic cost of natural gas delivered and compressed for use as CNG. In the long-term, no new CNG plant should be set up in the country.
Fifth, solar water heating should be adopted as economic option in comparison to natural gas in the residential sector. Thus, solar water heaters should be installed in houses to replace natural gas water heaters, as cost of water heating on solar energy is $17.12 per mmbtu of
natural gas replaced in comparison to $20.33, which is economic cost of delivered natural gas for residential sector.