Running Out of Steam

Cash-strapped government likely to default LCs payments

Islamabad: After bearing the skyrocketing increase in the electricity tariff and intermittent power outages during summers, the Petroleum Division shook the nation by announcing gas rationing during the winter season.

The higher international prices of the liquefied natural gas (LNG) is creating problems for the government, as its flagship company, Pakistan State Oil (PSO), is on the verge of default because of the non-payment of LNG cargoes supplied to the gas distribution companies.

In a meeting of the National Assembly’s Standing Committee on Petroleum, Additional Secretary In-charge Captain Muhammad Mahmood (Retd) made it clear that every effort would be made to ensure gas supply to the domestic consumers for three hours in the morning, two hours in the afternoon and three hours in the evening.

“In peak winter season (December-January) there would be no gas supply to the household consumers for 16 hours,” he said, adding that the natural gas was scarce in the country and the coming winter was quite difficult in terms of its availability and; hence, could be provided only three times a day to the domestic consumers for cooking.

During the meeting, an official of the Petroleum Division said that the local gas production was declining at the rate of 10 per cent every year and there would be no indigenous supply after 10 years, if the situation persists. Alone the gas production of Pakistan Petroleum Limited (PPL) declined to 283,792mmscf in 2020/21 from 360,733mmscf in 2010-11.

Regarding the LNG diversion to the household sector as had been the practice in the past, the petroleum secretary said the authorities could not purchase expensive LNG and sell it at cheaper rates and even then, it was not available at higher rates.

There were prospective areas in the country with gas deposits but the exploration was not possible due to security reasons, he added.

“There are no new gas discoveries due to the security risks and political instability. Instead of coming to Pakistan the big international petroleum companies were going to other low-risk countries in search of oil and gas.

Owing to the political instability, the international oil and gas companies are reluctant to invest in Pakistan due to their uncertain future, as they believe that after a year this government will not be in place.

Over the last many years, the gas supply has deteriorated with no major discoveries and fast depletion of the existing reserves. Estimates suggest gas flows will drop further and go down to 1,659mmcfd in 2029/30.

According to industry experts, the country has failed to discover new gas reserves after a major discovery in the Qadirpur field prior to 2000. Owing to the rapid depletion of natural gas reserves, the cheap gas-based power plants have remained under-utilised.

According to the petroleum secretary, Pakistan would have to depend on imported gas and there was a possibility that the commodity would get cheaper in the next four years in the international market.

Regarding imports from Iran and Russia, he said due to the international sanctions, the government cannot purchase gas from these two countries in the given circumstances. However, it was making efforts to secure gas from alternative resources but to no avail.

Imran Maniar, managing director of the Sui Southern Gas Company (SSGC), informed the committee that the gas load management plan for winters had been submitted to the Petroleum Division. Priority would be given to the domestic consumers, while the captive power plants would get reduced gas supply.

Some of the Karachi areas, such as Lyari, Keamari and other tail-end areas would face gas supply problems, as there would be an estimated shortfall of 200 to 300mmcfd gas on the network during the winter season. The Karachi industries would not be allowed to draw gas through pressure pumps.

According to a senior official of the Petroleum Division, the main problem would be encountered on the Sui Northern Gas Pipelines Limited’s (SNGPL) network, particularly in Punjab, due to the scarcity of gas. Punjab’s own gas production stands low, compared with other provinces.

Under Article 158 of the Constitution, gas producing provinces have the first right to consume their own production. Therefore, in the peak winter season, the energy situation may be better in other provinces but the domestic consumers in Punjab will be worse off, as they will get gas for cooking purposes in the morning, afternoon and evening for limited hours.

The gas supply has so far been better in the ongoing month. However, it is feared to decline sharply with the harsh weather next month.

The SNGPL’s network, which covers Punjab and Khyber-Pakhtunkhwa, would face a shortfall of 300 to 400mmcfd from December 2022 to March 2023, sources said.

Therefore, it will be forced to slash supplies to the domestic consumers, captive power plants of industries and compressed natural gas (CNG) filling stations.

The CNG sector in Punjab has already faced restrictions on domestic gas supply and relies on imported LNG but it is not readily available due to the failure of Pakistan LNG Limited (PLL) to procure spot cargoes.

In December, the CNG stations in Khyber-Pakhtunkhwa may also experience supply curbs, if the situation deteriorates in the wake of the rising gas demand.

There will be no gas disruption to the processing industry. However, supplies may be reduced to the captive power plants in peak winters.

At present, the total number of gas consumers in Pakistan is 10.65 million. Of these, Punjab has 6.43 million and Khyber-Pakhtunkhwa 997,904 consumers. In Sindh, the consumers are calculated at 2.92 million, while Balochistan has 304,468 consumers.

At the same time, in utter disregard to the dearth of the locally-produced gas, the gas schemes of parliamentarians have continued to win over voters in their constituencies, which resulted in a hike in gas prices and further shortfall in the flows.

The shortage has also caused the shutdown of the industrial units that are the backbone of the economy.

G A Sabri, former petroleum secretary, said that the country is facing a gas shortage because of poor planning and short-term gains.

For him, diverting indigenous gas to the domestic consumers and the CNG sector proved disastrous for the economy. Instead of promoting liquefied petroleum gas (LPG) for domestic use and transportation purposes, the locally-produced gas was wasted in the sectors, which generated no economic activity as such.

During the Pakistan Peoples’ Party’s (PPP) government, the Petroleum Division had finalised cheaper deal to purchase LNG because, at that time, there were sellers not buyers but unfortunately former chief justice Iftikhar Choudhry taking a suo motu raised objections on that deal, which eventually resulted in the cancellation of the deal.

Instead of promoting gas exploration in the country, the government is only focusing on LNG import, which is not a good omen.

“We have huge gas reserves in Balochistan and even in Sindh but we are not removing the hurdles to initiate exploration. The security situation is easily manageable if the local people are convinced that it is for their wellbeing,” Sabri remarked.

The LNG import was planned for 10 years because of the better law and order situation in the country, he said, adding that now the security situation is much better and conducive for exploration activities.

So far, no government has set its priorities right for effective gas use, which can be diverted to the power plants for supply of cheaper electricity to the consumers.

Experts point out that Pakistan has a vast electricity network and the government should give priority to the power sector in gas supply.

Earlier, the imported LNG was provided to the consumers such as the captive power plants and fertiliser producers at subsidised rates. But now LNG is not available in the country due to its rising demand internationally in the wake of the Russia-Ukraine war.

“The government should immediately stop piped gas supply to the domestic consumers, instead give them LPG at concessionary rates to save the precious resource for expansion of the industrialisation base and boosting exports,” an expert suggested.

Meanwhile, PSO’s liquidity crisis has swooped to an all-time high with an unprecedented hike in its receivables to Rs621.168 billion and payables to Rs268.5 billion.

This made the utility unable to offload its liabilities with regard to LCs amounting to Rs218.5 billion for the import of furnace oil and LNG.

According to a senior official of the Ministry of Energy, the liquidity crisis has virtually put the LNG supply at risk for the winter season, as the PSO’s receivables and payables have scaled up to Rs890 billion.

The receivables and payables as of November 9, 2022 and the non-payment of a mammoth Rs400.258 billion by the SNGPL in the head of LNG imports, has emerged as the major headache for PSO.

The SNGPL has so far committed a default of Rs393.5 billion to PSO. It also owes Rs6.758 billion in the face of exchange rate losses, the official said, adding that the worsening liquidity situation of PSO and non-payment of dues from SNGPL has put the LNG supply at risk.

PSO had already intimidated the Petroleum Division on November 11, 2022 that its borrowing limit has reached the maximum level and if the situation continues unabated, it will be unable to further borrow the finances to maintain the LNG supply in the future.

The official also disclosed that PSO wants the intervention of the Petroleum Division to keep the receivables from SNGPL in check, and to this effect, an implementation of payment plan, as was earlier agreed with SNGPL, needs to be met in letter and spirit.

This is necessary so that the foreseeable funding gap during the winter season can be bridged to ensure uninterrupted LNG and other petroleum products supply in the country.

PSO has suggested that a concrete plan is devised for the settlement of
the existing receivables from SNGPL and to halt future receivables accumulation.

Details show that the power sector owes Rs176 billion to PSO, power generation companies and the Central Power Purchasing Agency owe Rs146.877 billion, the Hub Power Company Limited (Hubco) owe Rs24.737 billion and the Kot Addu Power Company (Kapco) owe Rs5.932 billion.

The national flag carrier — Pakistan International Airlines (PIA) has also so far failed to pay Rs23.750 billion to PSO. However, in the face of price differential claims from the government of Pakistan, the state-owned oil company needs to be paid Rs8.934 billion. And in the head of the exchange rate differential on the FE 25 loan, it is also required to be paid Rs10.680 billion.

Coming to the payables situation, the data shows that PSO is also required to pay Rs50 billion to the refineries, which include Rs26.641 billion to Pak-Arab Refinery (Parco), Rs9.783 billion to Pakistan Refinery Limited (PRL), Rs4.401 billion to the National Refinery Limited (NRL), Rs8.309 billion to the Attock Refinery Limited (ARL) and Rs866 million to ENAR.

The data shows that PSO’s liabilities with regard to LCs payments to the Kuwait Petroleum Company (KPC) and LNG payments to Qatar have surged to Rs218.5 billion and this is how the total payables have skyrocketed to Rs268.5 billion.

Petroleum Minister Musadik Malik said just like the power sector, oil and gas is also highly subsidised and it could not be run this way.

“Because of the ill-planning and short-term gains, the circular debt of the power sector reached Rs2.5 trillion and Rs1.5 trillion in the gas sector.

“Our defence budget is Rs1.2 trillion and the circular debt of these two sectors is more than three times the defence budget, which means that the situation is getting out of the control of the government,” he said.

The domestic consumers are paying only 10 per cent of the LNG cost.

“If the consumers are paying Rs400 for the LNG, which costs the government Rs4,000, then it has to bear the cost differential and this is piling up the circular debt.

However, Malik said that three additional LNG cargoes have been acquired for the winter season, meaning that the situation will improve, compared with the last winter season.

According to him, the Petroleum Division has started work on the long-term strategy, which included fast working on the Turkmenistan-Afghanistan-Pakistan-India (TAPI) gas pipeline, encouraging oil and gas exploration by giving incentives and protection to the local and foreign investors.

The government will get rid of the inefficient power plants and would

also counter gas theft, which has reached 12 per cent of the total gas supplied by the two distribution companies, he added.

Comments

Diverting indigenous gas to the domestic consumers and the CNG sector proved disastrous for the economy

G A Sabri

Former petroleum secretary

According to the gas load management plan for winters priority would be given to the domestic consumers

Imran Maniar

SSGC managing director

In peak winter season (December-January) there would be no gas supply to the household consumers for 16 hours

Capt M Mahmood (Retd)

Additional Secretary In-charge