Painting a dismal picture of domestic resources, the Planning Commission has estimated the country’s annual energy import bill at $50 billion by 2025-26 — almost four times higher than current $14 billion.

“Pakistan’s energy sector is in a state of lingering crisis and over the past few years has negatively impacted the social and economic development of the country”, said the Planning Commission in a report to the cabinet adding, “This is neither desirable nor sustainable for the country’s slow growing economy”.

Assuming status quo, the domestic gas production has been projected to drop from the current four billion cubic feet per day (BCFD) to less than one BCFD by 2025-26 and resultant increase in gas shortfall from existing two BCFD to around eight BCFD. “This will lead to growing energy and gas shortfalls and significantly depress GDP growth rate over the next 15 years”

Natural gas has emerged as the largest source of energy supply contributing 30.68 million tons of oil equivalent (MTOE) or 47.6 per cent at present followed by imported oil and oil products at 20.67 MTOE or 32 per cent, hydropower at 7.59 MTOE or 11.8 per cent, imported coal at 4.3 MTOE or 6.7 per cent and nuclear power at 0.8 MTOE or 1.3 per cent.

Consumption of indigenous natural gas has grown rapidly in all sectors of the economy including residential, commercial, industrial, transport and power sector over the past 15 years, mainly driven by growing availability of gas and low-government controlled gas price as compared to alternate fuel prices.

As a result, Pakistan has developed a vast natural gas — one of the largest in the world — transmission and distribution integrated network across the country. But domestic reserves have been rapidly depleting and an irrational gas price has become significant disincentive in attracting new gas supplies, either through increased domestic exploration — party contributed by inaction in auctioning of new leases — or through imports of LNG or regional offshore gas pipeline.

The Planning Commission also believes that it was highly unlikely that Pakistan will be able to substantially develop its other indigenous energy resources of hydropower and coal by this time. Consequently the energy import requirements may grow to over 75 per cent of energy mix by 2025-26.

Depending on transparent and successful implementation of three recent initiatives — LNG import, gas from Iran and increased producer prices — could provide a breathing space for a short-term but shortages would continue to go up if the economy has to grow at a desirable rate of more than seven per cent to accommodate a growing young population.

It is in this background that the Planning Commission is called for unbundling of the existing transmission and distribution network towards gas market that can operate like mercantile stock exchange rather than a protective environment that allows gas supplies to lobbies, influence and rent- seeking people than fair economic principles.

This is important in technical terms because LNG and pipeline imports would hardly be managed with current configuration of Sui companies systems as serious complications could arise due to high UFG (unaccounted for gas) levels currently in excess of 10 per cent. This is on top of gas theft, unmetered loss in law and order affected areas. “It may be noted that both SSGCL and SNGPL are no longer viable commercial going concerns under the current structure and pricing regime”, said the Planning Commission.

But the government will have to find a solution to low-economic value gas consumption like residential and transport sectors. While domestic fuel consumption in rural and urban areas currently involves huge price gaps that need to be equalised to stop increasingly oversupply of gas for burning, the government needs to pull out of gas allocations and its pricing on political basis and restrict its pricing role to production level.

This has been leading to conflicting interests between commercial and economic objectives and none addressed on fair basis. For example, the Sui companies’ commercial interest lies in maximum gas supply to transport sector because of its highest price but economic interest of the country require domestic and transport sector gas diversion to power plants and industrial sectors (not for their gas guzzling captive power plants) for competitive input costs and maximum manufacturing output.

A complete freeze on gas allocation for domestic sector at current level and gradual increase in prices coupled with maximum supplies for sectors that have no other alternate fuel option or too expensive substitute could be a prudent way forward. Along with this, transport sector needs to be phased out of gas market.

With this in mind, the Planning Commission and petroleum ministry have started campaign for unbundling of the two gas utilities into one countrywide transmission company and a number of regional distribution companies and for introducing a new tariff regime for gas consumers.

All the business units – broken down distribution companies - will further need to be segregated into independent profit and cost centers for ensuring cost effective operation of the companies.

They have decided to appoint an independent consultant to devise a new pricing mechanism for sale of natural gas to various sectors keeping in view the cost of imported gas while prescribing mechanism for determination of separate transmission and distribution tariffs per international standards for efficiency of the new entities including benchmarks for unaccounted for gas.

For an interim period, the gas pricing mechanism would be designed in a manner that the sale of gas to bulk and retail consumer ratio would be frozen at 2004-05 level when bulk gas sales stood at about 45 per cent and retail at 54 per cent for Sui Northern Gas Company Limited and SSGC’s bulk sales were at 54 per cent and retail at 45 per cent. Since then, the bulk sales by the two companies had dropped to about 26 per cent owing to expansion of transmission network on ‘socio-political considerations’, resulting in higher leakages in retail system.

At present two gas utilities — SNGPL and SSGCL — have integrated midstream and downstream operations serving more than 6.2 million consumers through a 130,000 kilometers of transmission and distribution network.

To achieve ultimate objective of privatising the gas transmission and distribution system, the single transmission company would envisage gas transmission on an open-access basis from which a number of smaller distribution companies on regional basis would operate on a competitive manner to provide improved business discipline and customer management.

Similarly, a competitive gas market would be created with de-regulated prices and open access to the unbundled gas distribution companies for third-party gas suppliers. The rate of return for private companies would be set at Karachi Interbank Offered Rate (Kibor) plus nine per cent on the net operating fixed assets of the gas companies.