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Oil and gas sector: reform, restructuring

Oil and gas (O&G) sector has defied reforms and restructuring for a long time now, despite a demand by the stakeholders and recommendations of others. Even the 18th Amendment could not move them. It is a big joy lording over such a big and in many ways quite a prosperous sector. So much so that recently, some wise men of MPNR proposed investments and activities in power sector as well, scaring the latter.

Over the years, power sector has undergone major restructuring from a monolith of Wapda to the Discos and Gencos and more reforms are in continuous deliberations. Resultantly, the O&G sector has not progressed as is indicated by deteriorating performance of the gas companies, depleting gas reserves, and underdeveloped transmission infrastructure. Exploration companies have been complaining all along of bureaucracy and red tape in petroleum concessions. Fortunately, Minister Khaqan Abbasi has turned his attention to it and is in favour of a fast track change. The World Bank consultants have been appointed who are in the process of consultation and finalization of their recommendations. The purpose of this article is to inform the stakeholders of the issues involved.

T&D losses data There has been no dearth of advice. I made my submissions in this respect in, my books (Pakistan’s Energy Development (2009); and Issues in Energy Policy (2011). There are others who made recommendations in this respect. There is almost a consensus among the policy experts that reforms should have the following components; (in fact, this mantra is common for all utilities including electricity as well:

1) Privatisation;

2) Separation of transmission and distribution;

2) Decentralization into smaller distribution companies;

3) Central System Operator, controlling transmission, if not owning the infrastructure;

4) Separation of pipes from Supply and selling business;

5) Competition in retailing (which I think is an outright stupidity as we shall see later in this discussion);

6) Independent regulator (which perhaps is the only step taken, irrespective of the independence issue);

7) and in our case, role of provinces

In fact, reverse has happened with regard to privatisation, although the story is rather old. There used to be Karachi Gas Company in private sector, very efficient and profitable with almost no losses, which was nationalized in 1973 as a part of larger nationalization campaign. Later, efforts of privatisation have been thwarted by issues of restructuring and provincial role, etc. The current thinking is, and perhaps rightly so that restructuring should precede privatisation, otherwise, there would be legal constraints and also that privatisation of the whole gas sector in the present form may be an unmanageable transaction.

Based on the above-mentioned principles, a consensus is emerging on establishment of smaller Gas distribution companies ala DISCOs;3 distribution companies for Punjab (quietly considering political aspirations of Southern Punjab); two or three in KPK, (Hazara division, Central KP and Kohat-DI Khan); two or three companies in Sindh on the lines of Discos; one or two companies in Balochistan. Provincial lines should not be crossed for eventual provincial role, as we shall see later.

There can be a difference of opinion in case of transmission. Some provincial enthusiasts argue for provincialisation of transmission also. It would be a major disintegration benefiting nobody. It is a common facility. KPK’s access to gas would depend on transmission from Sindh etc. Thus it may be a good idea to make one national transmission company by merging SNGPL and SSGC. It is a separate matter whether transmission function will be bifurcated into a la CPPA and NTDC, the tenet of separating supply from transmission. The transmission company may be in initial days in public sector and may be eventually privatised except the supply company (CGPA-Central Gas Purchasing Agency). Or should the gas distribution companies buy gas from the gas producer or importers (RLNG) directly paying the wheeling charges to the transmission company. The advantage of separating commodity/gas selling from transmission is that competition and investments may come in the pipeline sector as well. Perhaps too utopian in our circumstances. In a society where power, even brute power, reigns higher than competence and efficiency, and may still remain so, for quite a while, trying to approximate pure competition by creating smaller entities may be counterproductive. Some balance is to be maintained among the extremes one or two public sector companies and the 30-40 companies that may emerge under utopia. The utopia (of equality and public ownership) failed in the then Soviet Union and international trade utopia is failing or is being challenged by President Donald Trump.

Another issue is whether a gas Disco should be buying and selling the gas or should only provide distribution service. Gas importers/producers/suppliers should engage in retailing also. The simpler arrangement would be to have Gas Discos operate on the lines of electricity Discos. Large consumers may have the option to buy directly from suppliers and pay wheeling charges to transmission and distribution companies.

The role of provinces is a major issue, which complicates and obstructs decision making almost at every stage, especially after the 18th Amendment. Gas is provincial property under the 18th Amendment. During approval processes of RLNG based power projects in Punjab, hair splitting arguments emerged from Sindh demanding role in RLNG in addition to gas, as to them constitution does not differentiates between RLNG and gas. It mentions of gas only. I could never understand the logic of provincial role in imported LNG. Provincial eminent domain has been recognised in terms of land resource argument. I am not aware as to the outcome of that controversy.

Provinces get royalty on locally produced gas and a share in excise duty and GDS. The residual issue is of control. However, when gas comes into the pipe, there is no distinction as to which molecule is local and which is not (Molecule labelling technology is being developed in the context of tracing material origins for international security and safety purposes. Separate control and management of molecules would still be impossible).

There may be a case of direct provincial role in case of oil and gas exploration. Classically, DGPC used to be under federal government without any provincial representation. Lately, provincial representation has been provided in DGPC. There have been complaints by the foreign and local investors against DGPC of red-tapism, inefficiency and confusion. I am not sure but I have been told that some kind of the two-stage concession processing has been initiated by KPK where exploration activities have been put on a fast track by the appointment of some very efficient persons heading the relevant departments and companies. There is an argument for provincialisation of DGPC as it may promote competition and distribute power. There may be capacity issue for Balochistan, for which some solution may be evolved.

Provincial role may be included in gas Discos by providing for provincial shares in its capital structure in the range of 26-49% varying with individual situations of affordability. In central transmission companies, perhaps there is no case for provincial role. I have long been proposing to consider double-board system in selected companies and institutions. This system has been largely adopted in public listed large companies, albeit in a different context. An oversight/supervisory board (without or limited financial and management powers) may be introduced not in utilities only which is a subject of discussion here, but may be extended to other areas of service providers.

An RLNG supply company (Pakistan LNG Ltd) is in the initial formation process following the tenet of separating pipe from commodity. Perhaps, the intention is not making a public sector monopoly. A role for RLNG imports in the private sector has been provided. CNG sector has been given permission to import LNG for its members, although the sector could not organise itself yet into doing so. Hopefully, others like IPPs would be able to import for themselves and may buy from local producers directly. There has to be a company or entity in public sector, at least initially, with a responsibility to take care of supply and demand balance and to see to it that no shortages occur. In my opinion, this company should be made responsible for all gas supplies a la CPPA for power sector, if not immediately but eventually, a form of a supply integrator, some kind of PSO for gas. ISGS had initially been formed for similar purposes initially for handling Iran Pakistan Pipeline project and has also been responsible for TAPI. ISGS is now also handling RLNG terminal and Gwadar-Nawabshah pipeline. A company named Pakistan LNG Terminals Ltd is also being organised which I think would be too much of a khichri. Pakistan LNG Ltd to be eventually responsible for overall gas supply may be entrusted with the task of controlling the RLNG terminals also.

The establishment or introduction of gas market at a wholesale level is also a matter worth consideration. With the advent of RLNG, the issue has become more important. A certain percentage of market could be reserved for market operations; initially, for introductory and training purposes. LNG imports could be on free list. Importers should be able to sell directly to large consumers at unregulated prices. This may enable price discovery. PSO is importing petroleum products along with all others who are importing petroleum like refineries and IPPs. Open economy under market principles, as much out of the grip of politicians and bureaucracy, promotes growth and efficiency and lowers prices. However, this is a rather complicated subject wherein chances of market manipulations are always there for which adequate oversight infrastructure is required as well. Some beginning, however, may have to be made in this respect.

All of the above is a tall order. It cannot be possibly done in one go. Some kind of phasing may have to be done. But the risk in phasing is that much may not be done. Reform and restructuring is on table for a long time now. Elections are to be held in 2018. Legitimacy and political authority to take such major decisions wither away even earlier. Restructuring would be much easier while all the companies are in public sector. Divesting of distribution assets from SNGPL and SSGC and bringing about Gas Discos as discussed earlier can be done in the tenure of this government. After this restructuring is completed, the next government can undertake privatisation and undertake residual reforms. Indeed, virtual restructuring can be undertaken immediately through cost centre accounting. A thousand miles journey starts with the first step. Let me remind the readers that before Margaret Thatcher’s reform period, it used to take months even a year in the UK to buy a gas stove from British Gas, a government monopoly. We would be starting from a much better condition. Gas stoves and heaters have always been available here from eager shopkeepers. Consultants’ report should be coming in. Let us start the work earnestly.

Akhter Ali, "Oil and gas sector: reform, restructuring," Business Recorder. 2017-02-09.
Keywords: Economics , Oil industries , Natural gas , Bank management , Energy policy , Community development , Business Planning , International trade , Political leadership , Bureaucracy , Technology , Pakistan , UK , O&G , MPNR , TD , DISCOS , KPK , KP , SNGPL , SSGC , CPPA , NTDC , CGPA , RLNG , LNG , GDS , DGPC , TAPI , ISGS , PSO , IPPs