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The making of another white elephant?

There has been great public outcry over the past several months regarding shortage of gas across the country. Long queues of vehicles at CNG stations seem to have become a norm while gas supply to industries has also been severely curtailed. With the advent of winter season, gas shortage is hitting domestic and commercial consumers as well.

In different parts of the city of Karachi, for instance, gas supply to homes suffers either from low pressure or there is no supply at all. There was no shortage of gas (or Sui gas) as a domestic and industrial fuel ever since 1954 when natural gas was discovered at Sui in Balochistan and was supplied for domestic and industrial consumption. Ever since, there have been several more gas finds in various parts of the country and all available gas has been continuously added to the system, with the result that there has never been a gap in the demand and supply of this clean and relatively cheap fuel.

It was in the earlier part of last decade that the equation began to turn around and it was realised that demand would soon outpace supply owing to massive increase in population, rising need for gas by industrial units and power suppliers, conversion of public transport to CNG, depleting gas reserves, etc.

While the policymakers did raise an alarm and demanded a shift in the gas distribution paradigm, perhaps it was a bit too late in the day as users at all levels – domestic, commercial and industrial – had taken the availability of gas for granted and power utilities did not seem to pay much attention to shifting their generation capabilities to other affordable fuels such as coal, hydel power or biogas. The over-dependence on gas has therefore severely affected the fuel mix which, in turn, has brought gas to the forefront and has also turned gas suppliers into culprits, now that supplies are running short and there is no comparable alternative fuel available in the near-term.

Where demand and supply of gas is concerned, there are certain other factors that need to be taken into consideration to understand the entire scenario. It should be clear that the function of a gas supplier like SSGC or SNGPL is to only transmit and distribute gas and make it available on tap at the consumer end. These companies do not explore for gas or produce it at the wellhead as this is the function of E&P (Exploration and Production) companies.

There is also no technology available that can enable gas supplier to store or hoard gas or to increase or decrease supply at will. While demand is overtaking supply, need for gas is also expanding in various sectors. There is, for instance, demand for more domestic connections due to massive increase in population. According to information available, some 100,000 new domestic gas connections were provided by SSGC in its franchise area of Sindh and Balochistan during 2012. By the same account, the load on gas supply continues to increase in the commercial sector (restaurants, bakeries, etc) as well as the industrial sector with expansions and coming on stream of new industries.

The gas customer priority profile in Pakistan has been lopsided from the very outset. In no other part of the world is this fuel source squandered away as cheaply as it is in Pakistan where the most preferred recipient is the domestic segment and not industrial units.

In fact, the bulk-to-retail ratio has changed drastically in recent years and the situation has come to a point where gas supply to major industries is being curtailed in order to accommodate domestic consumers. Similarly, the decision to run public transport on CNG is also an injudicious one and is a drain on the available gas resources.

Furthermore, as a result of the short-sighted policies followed by succeeding governments, there has been no check on allocation of new domestic connections and underground gas lines have mushroomed in all directions like spaghetti. One major factor responsible for this is the political pressure that is exerted for new connections. While Ogra is the gas regulatory body, it adds to the chaos by approving unplanned connections. Another important factor that contributes to losses in the available volumes of gas is UFG – Unaccounted for Gas.

This occurs due to pilferage of gas by non-consumers (non-registered consumers). Gas theft occurs in all consumer segments, whether domestic, commercial or industrial. In certain residential areas, where the law and order situation is adverse, the gas company has to continue supply in view of socio-political considerations.

There are many residential areas where meter readers cannot enter while, in many cases, consumers are reported to have even removed their meters. A tug-of-war continues between the gas suppliers and Ogra as to who will nab the thieves and take punitive action against them. Rule 30 of the Natural Gas Tariff Rules requires Ogra to catch the thieves, recover the cost of stolen gas, along with relevant penalties, and pass it on to the gas company; Ogra says this is the responsibility of the gas company. Therefore, when SSGC complains that its financial burden is mounting and negatively impacting its operational efficiency, then it has none other but itself to blame for not resolving its disputes with the regulators.

Low pressure in gas supply is another issue which everyone talks about. It needs to be understood that the gas company needs to maintain a certain volume of gas in its transmission and distribution system in order to maintain the requisite pressure. However, when the gas supply is reopened to CNG stations, after a break of two to three days, the gas off-take increases tremendously as a result of the long vehicle queues and the requisite pressure in the main line is lost, leading to low pressure at the consumer end, such as homes, commercial outlets and industrial units.

Poor receivables position in the context of major gas consumers such as KESC, Pakistan Steel Mills, etc, also places a heavy burden on the operational efficiency of the gas supplier. SSGC finds itself in a peculiar quandary since KESC owes it more than Rs 40 billion against gas purchases but the gas utility cannot curtail supply to KESC beyond a certain limit since such action would trickle down to the end consumer when the power utility resorts to further loadshedding.

In the case of Pakistan Steel Mills too, which owes Rs 11 billion to SSGC, if the latter were to cut supply below a certain minimum level, the Mills’ main blast furnace would stop functioning and it would not be possible to re-fire it. The gas supply situation across the country would receive a great fillip if a more rational approach were taken by the government and Ogra. Gas companies too need to settle their issues with the afore-stated. It would certainly be regrettable if heretofore efficiently-run enterprises were allowed to deteriorate and go down the way of Wapda, PIA or Pakistan Steel Mills. Do we need more white elephants?

Iqbal Mirza, "The making of another white elephant?," Business recorder. 2013-01-10.