Petroleum Division looks to split gas utilities

Petroleum Division looks to split gas utilities

Seeks approval of Cabinet Committee on Energy as gas firms face high UFG losses

With imported gas burdening state-run gas utilities, the Petroleum Division is now seeking the go-ahead from the Cabinet Committee on Energy (CCoE) for appointing a transaction adviser to split the utilities facing higher losses on account of unaccounted for gas (UFG).

Sui Northern Gas Pipelines (SNGPL) and Sui Southern Gas Company (SSGC) are facing UFG of 11-17%, which is much higher than international standards. According to the Petroleum Division, the two companies face a cumulative loss of Rs50 billion every year due to theft and gas leakage.

Now, the government has planned to split the two gas utilities into four companies. Under the gas sector reforms, the government also wants to set up an independent gas transmission company. Article 158 of the Constitution gives priority to the gas producing province over other parts of the country in gas consumption. Gas producing provinces are demanding uninterrupted supplies on the basis of surplus production.

Growing gas demand (constrained and unconstrained) and depleting domestic reserves are widening the gap between demand and supply.

To bridge the gap, gas is being imported since 2016 and reliance on imported gas (liquefied natural gas – LNG) has increased substantially. At present, all the risks associated with LNG import are borne by the public sector. Public sector companies have back-to-back and take-or-pay contracts for sustaining the LNG import supply chain.

LNG distribution is increasing the risk for the gas utilities. The government had diverted expensive LNG towards domestic gas consumers in the past two winter seasons, which put a debt burden of Rs78 billion on SNGPL. The company fears the addition of another Rs69 billion to the debt in the current winter due to diversion of gas towards domestic consumers.

Secondly, the UFG is causing significant losses and its control is becoming increasingly difficult under the existing “bundled” system. There is a need to create separate cost centres in the form of separate legal entities so that accounting and operational performance can be measured with better authenticity and reliability. Consumers are accustomed to lower domestic gas prices and are not willing to pay the delivered cost of LNG. Thus, a significant cost mismatch is faced by the utility companies.

The power sector has not purchased expected volumes of LNG, and major export-oriented industries are not paying the full cost of LNG. In addition to this, LNG is being diverted to domestic consumers, who pay a lower tariff. Thus, the cost-revenue mismatch is growing wider for the utilities.

In view of the above, present and future requirements for more gas translate into additional liability for the gas utilities and consumers. Hence, the Petroleum Division is of the view that for the sustainability of the sector, it has become imperative to actively pursue a reform agenda.

It has submitted a way forward for pressing ahead with the gas reform agenda for consideration of the CCoE in its next meeting.

It proposed that a transaction adviser may be appointed immediately through a competitive process. Draft terms of reference (TORs) for the transaction adviser, developed earlier, will be reviewed and finalised. The cost to be incurred during this process will be equally shared by the two gas utilities, and the Oil and Gas Regulatory Authority (Ogra) should allow the same in revenue requirements of the companies.

Alternatively, the option of financing from international donors may be explored to accomplish the task. An independent National Gas Transmission Company (NGTC) may be established. The new transmission company would operate as a common corner for the existing/ newly formed gas distribution companies as well as under third-party access rules/ codes promulgated by Ogra.

A mechanism for a weighted average sale price or any other suitable mechanism will be developed for gas sale pricing. The Economic Coordination Committee (ECC) of the cabinet, in its meeting held in March 2013, had approved, in principle, the initiation of process for the proposed unbundling of gas companies subject to the condition that provincial governments would be consulted and the matter would be placed before the Council of Common Interests (CCI).

As a first step, consultants of international standing were to be hired for undertaking the assignment.

Services of international consultants were procured through the World Bank, who undertook detailed consultation with all stakeholders including the two gas utilities as well as provinces.

There was general consensus on an overall approach towards unbundling. However, both heavily bundled companies may face some legacy issues.

With the passage of time and as a consequence of induction of imported gas, these unaddressed anomalies became complicated.

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