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SSGC, SNGPL resist shift as regulator begins stakeholder consultations; public hearing set for Friday
Gas utilities. Photo: file
Following the government’s plan to restructure gas utilities, the Oil and Gas Regulatory Authority (OGRA) has decided to review the existing gas pricing formula based on return on fixed assets, keeping in view current gas sector dynamics and market liberalisation.
The government had tasked the OGRA with restructuring the two public gas utilities by doing away with the fixed asset-based return. According to officials, the regulator hired consultancy firm KPMG to review the formula, and it has submitted its report.
The regulator has started consultations with stakeholders to change the gas pricing formula and has scheduled a public hearing here on Friday to consider the views of stakeholders.
Since 2018, OGRA has been allowing a market-based rate of return to the gas utilities, namely Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC), on the value of their average net fixed assets in operation for each financial year.
OGRA said that, considering the latest gas sector dynamics, including demand and supply conditions, price volatility, market liberalisation and international benchmarking undertaken across the world, it has decided to review the existing gas pricing formula based on the rate of return (ROR) through an independent consultant, in line with the approved terms of reference.
“OGRA, after receipt of the first draft report as furnished by M/s KPMG, has decided to call a public consultation with all stakeholders as per its ToRs and the relevant legal provisions to ensure transparency and inclusive stakeholder engagement,” the regulator said.
The gas utilities are opposing the proposal to shelve the guaranteed asset-based return formula and have asked the government to continue with the current pricing regime.
The gas pipeline network continues to expand, resulting in higher gas prices and increased profits for the utilities, but this expansion has also led to gas shortages across the country. SNGPL’s operating cost surged from Rs66 billion in the financial year 2019-20 to Rs94 billion in 2023-24. At the same time, its earnings swelled from Rs19 billion to Rs38.9 billion, despite a drop in gas supply.
The utilities, SNGPL and SSGC, are of the view that the current asset-based return cannot be abandoned. They argue that several benchmarks, including unaccounted-for-gas (UFG), are linked to the asset-based return regime.
However, a number of industries have repeatedly criticised the fixed rate of return, arguing that the profits of the utilities are rising while gas supplies are shrinking due to continued expansion of the pipeline network.
At present, gas companies are facing a circular debt of Rs2.6 trillion, which has choked the entire energy chain. Liquefied natural gas (LNG) has been a major factor behind the accumulation of circular debt, as SNGPL has to pay billions of rupees for LNG supplies procured through Pakistan State Oil (PSO).
The present government has also opened the gas market by allowing gas utilities to allocate 35% of their gas to third parties. As a result, the regulator has received several applications from private parties seeking licences to market gas.
Oil and gas exploration companies had welcomed the government’s decision to increase gas allocation to private parties from 10% to 35%, saying it would help improve their cash flows by enabling them to secure better prices from private buyers.
The exploration companies are also facing cash flow constraints due to the circular debt issue and are of the view that the mounting debt has slowed the pace of their development projects.