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Production and priority

Every winter, there is gas shortage and every winter Sindh says that it produces more gas and it should get its due share. The scarcity, however, is equal throughout the country.

One would have expected that with the advent of the LNG, the problem wouldn’t be there. But the Sindh government does not want to buy expensive LNG. The issue is complicated and has many sides to it. We will in the following present all sides of the issue, which may provide a basis for some kind of accommodation or settlement between the province(s) and the federation on the issue.

We have a federal system. It may be useful to see how such issues are dealt with in other federations. In federations, the energy sector as a whole is generally devolved to states or provinces. Minerals including oil and gas resources belong to the provinces generally. However, the political ownership of resources is diluted by the role of commercial companies. All commercial contracts are to be honoured under law .Supply contracts cannot be undone by provincial or federal governments except under extraordinary and emergency conditions.

All major decisions regarding these resources are made by the provinces. However, companies operate the facilities which are generally independent. Political decisions have to respect the commercial contracts and requirements of the companies. It is a separate matter that scarcity is not there in those parts of the world and alternatives are generally available. And then there are gas storages, which help meet the variations in demand. We have paid attention to this quite late and a gas storage project is at a planning stage.

The Indian example may be more relevant and may enable us to understand the issue. In India, there is a provision of joint determinations in the form of the concurrent list. Pakistan used to have a concurrent list before the 18th Amendment. In India, states maintain the gas and power sector accounts and bear all deficits and provide subsidies and absorb losses, where required. Electricity regulators are in the state’s domain. However, oil and gas regulation is in the federal domain (PNGRB-Petroleum and the Natural Gas Regulatory Board).

GAIL India – a federally owned and controlled corporation – deals with gas transportation. Mainly, gas distribution is in the private sector and its capacity charge is competitively determined through auctions. There are more than 100 gas DISCOs in India and more are coming. There are state electrical boards similar to our federal CPPAG. Most of the electrical DISCOs are owned by states. There are hardly many private DISCOs. There are IPPs but a large number of GENCOs are federally owned. Losses of the energy sector are taken on by the states – unlike Pakistan wherein the federation takes the responsibility.

The situation is complicated in Pakistan, as much of the energy sector is in the public sector, owned by the federation – for example: PPL, OGDC, SNGPL, SSGC, Pakistan LNG, ISGS etc. All DISCOs and IPPs are in the private sector, but governed by CPPAG, NTDC, Nepra, PPIB, AEDB – all federal institutions. The federal government has all the liabilities of the energy sector. There is a circular debt of Rs200 billion which is a liability of the federal government. Similarly, gas sector deficits are there where applicable, although mostly cross-subsidies finance it.

The issue is more complicated than it appears to be. Thus, reasonableness, accommodation and economic efficiency arguments must also be considered in addition to the constitutional requirements.

Some of the issues are as follows: first, resources are developed by the federation. It is the federal market and finance that creates financial feasibility for resource development. At the time of Sui gas exploration and development, there was no market in Balochistan. There was no export possibility, pipeline or LNG. Development of Thar coal is another example which may not have been possible without federal support and input. The Sindh government has given equity input. Further development of Thar coal would also depend on federal support.

Second, the energy sector is integrated. Gas is also used in the power sector which supplies electricity to all provinces. Third, electricity and gas losses are highest in Sindh and have to be federally financed resulting in circular debt which is a federal liability. Fourth, commercial supply contracts – whether in the federal or the provincial domain – have to be honoured with priority.

Fifth, the country is mostly governed under a uniform pricing system and a federal development system. Industries have been set up without provincial considerations. Sixth, there can be a provincial pricing system for which much preparation and development work is required, if at all a consensus is reached on it.

And finally, there is a moral question as well. Should the poor of one province suffer and not be able to cook their food, while in another province, people may have all kinds of usage including CNG. Thus, problems cannot be solved in isolation. Even PPP-led federal government could not solve this issue of producer-provinces’ priority.

Gas demand in the domestic sector is higher in the winter. LNG is also expensive in the winter, costing money as well as foreign exchange. Sectoral diversion of gas from the power sector to the domestic and industrial sectors appears to be more feasible than ever before. There are proposals already to make adjustments in gas supply and operational provisions in RLNG-based new combined cycle power plants.

There are three new coal power plants which could be utilized at full capacity in the winter. Furnace oil has become cheaper than RLNG. Furnace oil could be utilized more. Refineries are suffering on account of furnace oil. The Ministry of Energy should be aware of these issues, although some inertia is always there and is understandable.

There is a proposal of WACOG (Weighted Average Cost of Gas) circulating in federal circles. A seller normally averages the cost of an item received from various sources and prices accordingly. It makes things simple and can help gas planning and supply more manageable. The net effect would be to transfer the extra cost from Punjab to Sindh. Keeping in view the federal subsidies to the energy sector, it is argued that Sindh should be ready to absorb this cost and should accept some LNG.

Direct federal subsidies, partly replacing cross-subsidies, could lower the difference between WACOG and tariff revenues, and make it more bearable for unwilling provinces;

domestic sector lifeline customers and zero rated industrial sectors

are already financed by the federal government.

There may be a case for direct federal subsidies for the fertilizer sector than the cross-subsidies that finance it currently. The IMF and other IFIs have been arguing in favour of removing cross-subsidies. Alternatively or simply speaking, there may be a case for supplying domestic, industrial and CNG sectors (including the power sector based on captive low CV gases where there is no choice otherwise) cheaper domestic gas and all others out of LNG. An analysis of implications is proposed.

Finally, in addition to infrastructural reinforcements like gas storage and additional supplies, consensus on some policy principles may have to be adopted rather than the cost-revenue balancing approaches that are in vogue presently. Reasonableness and accommodation would be the fundamental virtues required. Are they lacking?

Syed Akhtar Ali, "Production and priority," The News. 2020-01-10.
Keywords: Gas shortage , Industrial sector , Political ownership , Political decisions , Commercial contracts , Power sector , Cost revenue , Economic efficiency , India , Pakistan , LNG , PNGRB , CNG , IMF