Gas Price-hike pinches people differently in Pakistan
Pakistan Times Business & Commerce Desk

KARACHI: Increase of Rs.29.80/MMBTU in gas prices which has been allowed by the Oil and Gas Regulatory Authority (OGRA) for financial year 2006-07, as against Rs.31.52/MMBTU solicited by SSGC, shall be effective from July 1, 2006 after the approval by the government.

Government, however, may elect to adjust or rationalize prices, as it deems fit, to reduce the impact on certain categories of customers including industrial customers in accordance with its National Economic Policy.

The price increase allowed to SSGC i.e. 7.2% for domestic customers and 15.95% for other categories, including the commercial and industrial sectors (but excluding fertilizer plants’ who use natural gas as feedstock), is also required to offset the anticipated increase in the weighted average purchase price of gas of Rs.27.28/MMBTU, which SSGC has to absorb as its “cost of gas” and has no control over.

The meager amount of Rs.2.52/MMBTU left as a result, would pay for normal increases in the company’s operational costs to ensure sustained supply of gas to customers across SSGC’s franchise areas in Sindh & Balochistan.

The basic rationale for SSGC’s petition to OGRA, requesting an upward revision in customer prices, was the anticipated increase in weighted average well-head price of natural gas from Rs.170.52/MMBTU last year to Rs.211.08/MMBTU in the year 2006-07, over which SSGC has no control.

Well-head prices allowed to gas producers by the Government are linked to a basket of Crude Oil and HSFO prices in the international market. This is as per the terms of contracts signed between the Government of Pakistan and the Exploration and Production (E&P) companies as per international norms and standard Gas Purchase Agreements (GPA), which are essential to attract heavy investments in exploration and production by world-class Oil & Gas companies.

The SSGC however claims that customers of natural gas in Pakistan do not bear the full brunt of the increase in the price of crude in the international market. It is for common knowledge for instance that average Crude Oil C&F Price applicable for FY 2004-05 was US$ 35.21/Barrel, which on average increased to US$ 50.09/Barrel applicable for FY 2005-06.

Taking the full impact of this increase would have necessitated an upward revision in customer price of natural gas by 42.2% on a straight-line basis. Against this the effective increase allowed by the Government in response to OGRA’s recommendation was only 9.5% for Domestic customers in the lowest slab, using up to 100 units and 22.2% for other domestic, commercial and industrial customers (excluding fertilizer plants using gas for feed stock).

This relatively smaller increase is due to the S-curve pricing formula which the New Gas/Petroleum Policy 2001 incorporated as a prudent measure for the benefit of the vast majority of citizens of Pakistan that continues to get gas supplies at a rate considerably lower than in most countries.

Transmission & Distribution (T&D) cost projected by SSGC is 6.2% of cost of services in 2006-07 as against 6.6% for FY 2005-06 respectively as a result of improved productivity and efficiency etc that has further been reduced to 5.3% by OGRA in the determination under discussion. The cost of gas is nearly 92% of total cost of service in FY 2006-07 as against 90% in FY 2005-06.

It is however estimated that as a result of the increase allowed by OGRA, SSGC will generate additional amount of Rs.10.7 billion profits, at the cost of gas customers.

It may be clarified that this amount required for meeting to increase in cost of gas and T&D cost and return as well. It will not increase SSGC’s profit for the year 2006-07, as the report suggests but only pay for the increased cost of gas.●