UFG – digging deeper into lost gas phenomenon

At 45 percent the composition of natural gas in the country’s energy mix apparently looks quite imposing. However, the greatest challenge in front of the present government and gas utilities working under it is to ensure that this mix is not disturbed to serious levels.

In the recent years, while on one hand the demand for gas is constantly rising due to the increased consumption in domestic, power, industrial and CNG sector, supply on the other hand continues to remain range-bound. To balance this widening gap, SSGC has been following an ECC-approved gas load management program to rationalise the consumption of gas. While import options such as LNG and transnational pipelines will augment the supply side and help in mitigating the gas shortages there have been little progress so far on these fronts.

Hence there is a dire need for examining the demand side as well where the phenomenon of unaccounted-for gas (UFG) or line losses has further influenced the demand and in doing so has aggravated the supply-demand gap.

Unaccounted-for Gas UFG in parlance of a gas distribution and transmission company means the difference between gas purchased in volume, gas billed in volume and gas used internally by the Company for its operations. UFG occurs when the difference between the overall purchased gas and overall sold gas exceeds 10 percent.

A number of factors had contributed to rising UFG levels in recent years, including population shift to urban centres leading to a phenomenal growth in unregistered consumers. Other factors included underground and overhead gas leakages, measurement errors, shift in revenue share in favour of retail from bulk, theft, third-party damages and a volatile law and order situation. Previously, bulk sales constituted 54 percent of total sales, while the rest were retail sales.

SSGC officials contend that UFG would have stood at 6 percent, had the revenue ratio stayed in favour of bulk sales. However, bulk consumers now account for 28 percent of total sales, while 72 percent of gas is sold to retail consumers, which has pushed up UFG by three to four percentage points. In addition, SSGC faces unfavourable conditions in ‘franchise areas’ especially Balochistan, which consume 9 percent of total gas supplied by the company and contributes 40 percent to the overall UFG.

The phenomenon of UFG can be classified into two primary categories:

— Technical which includes above and underground leakages (that are approximated at 35 percent and call for engineering solutions.

— Non-technical which includes gas theft (approximately 30 percent), measurement errors (approx. 20 percent) and billing errors (approx. 15 percent).

Theft has been identified as the main reason of UFG and both SSGC and SNGPL have focused on its prevention and control.

The utility companies have formed large anti-theft surveillance teams and made use of technology including smart meters especially for industrial and commercial customers, laser leak detection device and advanced cyber locks in customer meter stations. Despite the anti-theft law passed by the Parliament in 2011 that made gas theft a major criminal offence, there has been no let-up in UFG, which is growing by 10 per cent every year.

It may be pertinent to say that the leakage rate greatly increases with the increase in system pressure. In the month of December the gas losses in SSGC hover around 20%. Analysts put the ratio of line leakage to theft ratio in the winter months as 80:20. The good news is that this loss is avoidable and can be controlled by plugging the leakages from the leaking distribution network.

This combination of leaks from corrosion holes in the network, measurement, gas quality issues along with gas theft has led gas utilities to take urgent steps to bring down UFG to acceptable international levels. While gas theft is a serious concern, the two utilities cannot take their focus away from efficiency improvement of the gas distribution system that has remained ill maintained and has developed serious bottlenecks especially because of expansion of gas distribution network in bigger urban cities.

It is, therefore, pertinent to study the phenomenon of lost gases caused by above and underground leakages that has caused UFG to shoot up every year while costing SSGC millions in revenue losses.

So what is a leakage in gas industry phraseology? It is the action of unmeasured gas passing from within a transmission/distribution system to the outside atmosphere. Leaks can occur on pipe walls, at welded, screwed, or flanged connections, at couplings and at valve stems. Generally, leaks can appear at any point on a pipeline/main/service-line and on any object attached to the system. Causes of such leaks on the system might be improper assembly or maintenance, faulty material, damaged equipment, poor workmanship and corrosion. Simply put, leakages result in gas escaping from the distribution system while on its way to the customer.

The American Society for Mechanical Engineers has identified 22 root causes of potential threats to gas pipeline. Three of the most common causes of ‘lost gases’ and their percentage influence are given below:

a) External corrosion (40 percent)

b) Poor Construction Practices (40 percent)

c) Third Party Damages (20 percent)

Let us look at each factor and some plausible solutions to get a grip on these factors.

Corrosion is a natural process of deterioration of metal and comes into action when any steel component is left bare or uncoated above ground or buried in soil or under water. Bare or uncoated metal will corrode through cussedness as it attempts to go back to its original oxide form which is more stable than pure metal due to the environmental attack on metal by electrochemical reaction through which the metal is exposed.

The moment pipelines and other steel accessories are installed above or under ground they become vulnerable to corrosion or degradation. Millions of dollars worth of steel infrastructure are scrapped universally because of rust and corrosion. For instance, the cost of corrosion to the US oil and gas industry amounts to US $200 per km of buried pipeline per annum.

Admittedly it is not possible to ensure that the pipeline maintains the original condition but with a better mechanism in place corrosion can be prevented. For instance, if prior to burial steel pipelines are properly coated and installed and then buried in a properly-prepared trench, pipeline longevity will be ensured. In the local distribution system, the coating system has deteriorated to the extent that some 30 to 40% of small diameter pipes lay bare and exposed to environment. The rising water table has submerged the pipelines in water which is acidic, further accelerating corrosion of our pipelines.

Experts suggest re-coating of defective system of pipeline or replacing of the corroded sections, wherever possible and installing hot spot Cathodic protection system on priority basis. This methodology can increase the life of ageing pipelines by 5 to 10 years ensuring minimal leaks.

2) Maintaining quality of material and construction: Another reason for the lost gases phenomenon is the inability to ensure quality of materials in-house and maintaining quality in the new construction/pipe laying activities. Properly following the ‘Standing Operating Procedures’ during installation stage will ensure a long life for gas pipeline system.

While poor coatings and poor backfilling practices further exposes pipelines to corrosion, poor quality of equipments including regulators and domestic meters at the time of new connections along with poor workmanship all add to the ‘lost gases’ factor. Proper hands-on technical training and further education of engineers in quality control and induction of fresh engineering graduates in right disciplines are essential to overcome the above shortcomings.

Training of field workers especially welders and fitters should be carried out and should be aimed at skills enhancement, defect/error prevention and quality improvement of the job. In addition, when purchasing equipment and material, quality should be the number one priority and not cost.

3) Third party damages: In most countries, gas pipelines are allotted a separate corridor or right of way as it is referred to in industry parlance. That does not seem to be the practice here in Pakistan where water and sewerage pipelines and electric cables are laid either on top of gas pipelines or parallel to them. During the laying down of these pipelines, gas pipelines get damaged; hence the term ‘third party damages’. If these pipelines are made of steel, they interfere with the CP system thus further increasing the corrosion rate of pipelines. Moreover, high water table due to leaking sewerage lines accelerates corrosion of our pipelines.

4) System maintenance: For last many years, the focus has been more towards providing new connections and constructing new pipelines in economically unfeasible far-flung areas purely due to the state’s socio-economic commitments.

If in their place the core activity of maintenance of the ageing infrastructure was done on regular basis, the distribution system would have been in a relatively better position. SSGC has been continuously replacing and rehabilitating leaking pipelines but the efforts have been more on a reactive basis, whenever there are complains of leaks, low pressure or interrupted gas flows.

NGEP: For a more sustainable solution, the Company plans to deploy a US $200 million World Bank loan/credit assistance program called Natural Gas Efficiency Project (NGEP) towards this goal. It is also important to arrest the rising trend of UFG since for every one percent increase in UFG, Ogra slashes Rs 1.3 billion along with cost of gas from the Company’s profits. The Company’s bottomline is severely hit as a result.

Before we discuss NGEP any further it is equally important to understand the impact of UFG on financials. The Company prepares its accounts on the basis of determination of Final Revenue Requirement (FRR) given by OGRA. For instance in 2011-12, while giving its determination OGRA has taken into account the stay order granted by the Sindh High Court wherein the Authority was directed to treat UFG benchmark at 7% for the said financial year and was also ordered to treat certain incomes as non-operating incomes till the final decision of the petition filed by the Company.

The petition was filed by SSGC on several grounds including 1) the benchmark fixed by OGRA at 4.5% was arbitrary and unrealistic. 2) OGRA could only impose a penalty under Rule 20 of the Natural Gas Tariff Rules 2002 on the company for violating the UFG benchmark, which could not exceed the maximum of Rs 730 million per year. 3) Certain incomes were illegally treated as operating Income. The company is not yet out of the woods. Despite recent media reports, with the matter sub judiced in the courts, UFG benchmark has remained at a highly vulnerable 4.5 percent.

Meanwhile, the major components of the NGEP program are rehabilitation of the leaking system coupled with augmentation to remove bottlenecks and capacity expansion so as to operate the distribution system at optimum pressures. An owner’s engineer will be selected through Tendering process to help manage the NGEP programme. The Owner’s engineer will play a key role in all aspects of project management right from the formulation to implementation phase while bringing in technical expertise for enhancing knowledge base at different levels.

While SSGC has been busy in working out modalities for NGEP, good news is that greater awareness has been created within the Company through various initiatives taken including the segregation of the Distribution system into zones and further dividing them into sub-zones to ensure greater efficiency, transparency and accountability. This requires setting up new town border stations (TBS) and addition of pressure regulating stations (PRS). NGEP will ensure that SSGC “divides” the network into many segments where wholesale meters measure incoming gas and compares it with consumed metered gas.

Since UFG is the difference between the in/out readings, this mechanism will (a) prioritise investments in segments where UFG is the highest; (b) expose gas theft as the remaining UFG in a segment after the physical leakages have been remedied; (c) drastically reduce theft levels; and (d) introduce greater accountability in middle management through business units based on these segments.

If SSGC is serious in taking up leakages issue, it has to allocate its working and human capital towards repairing, replacing and rehabilitating its ageing distribution infrastructure. And since replacement and rehabilitation remain pretty expensive options, the focus should be first on repairing and maintenance on a simple premise – plug the holes and prevent any further damage to the infrastructure. If this approach is not followed, radically reducing UFG will remain a pipe dream.