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Will the increase help the GoP in raising Rs 15 billion as development surcharge on gas?

Jul 10 - 16, 2000

The GoP has announced 15 per cent increase in gas tariff effective July 1, 2000. The key reason for the increase is to improve cashflow of Sui Twins which in turn improves the prospects of achieving collection of Rs 15 billion as gas development surcharge during the current financial year.

According to some analysts, the gas price hike will not benefit gas marketing companies as raw gas price is linked with international price of crude oil. The profit margin of gas distribution companies is linked to their fixed assets. While their cashflow will improve with immediate effect, it will reduce their reliance on short-term debt and subsequently lower their financial charges. If this increase was not made the GoP would be paying to these companies.

However, one can question the rationale for the hike. Some analysts, term this move necessary as the GoP plans to upgrade and expand gas transmission and distribution network. There has been a policy change — discouraging use of imported furnace oil in power generation and other industries— to curtail oil import bill. To facilitate this switchover the GoP/gas marketing companies have to make huge investment in revamping transmission and distribution infrastructure. The hike will improve the cashflow of gas marketing companies and brighten the prospects for large scale investment.

The GoP is pursuing a policy of gradual shift from consumption of oil to gas. However, the major constraint is inadequate infrastructure. Present transmission capacity of gas pipeline network in the country is 1,675 million cubic feet per day (mcf/d). In order to utilize the supply of gas from recently discovered fields, an additional transmission capacity of 850 mcf/d is needed. Out of this 550 mcf/d would be needed in the northern pipeline system and 300 mcf/d in the southern system. Provision of these facilities need an estimated investment of over US$ 600 million.

Is the hike surprising for gas consumers? Certainly the domestic consumers do not approve this increase but they were well aware of the move in advance. The figure of development surcharge on gas was clearly stated in the budget. They were fearing about 20 per cent increase whereas the hike is 15 per cent only. They still believe that the GoP will increase the tariff by December this year depending on the movement of crude oil price.

Since September 1999 gas tariff has been increased by nearly 60 per cent — including the GST. The domestic consumers still get gas at subsidized rate. Some analysts say that gas tariff is still low if one compares it with the cost of other fuels. They rule out further increase as international prices of crude oil are expected to come down with the increase in oil production by OPEC members.

Power sector will be hit the worst as furnace oil price has already increased. One can expect around 20 per cent hike in electricity tariff any time. However, both WAPDA and KESC will have to follow the ritual of getting the approval from National Electricity Power Regulatory Authority (NEPRA). While the process may take two to three months the power generation companies, meanwhile cashflow of WAPDA and KESC will be adversely affected.

As regards impact of this increase on various industries, the affect on fertilizer price will be about Rs 10 per bag. The gas (feedstock) price for fertilizer companies has not been increased. It seems that the GoP, at this juncture, does not wish to increase fertilizer price to achieve its objective of improving the GDP growth rate through higher wheat and cotton output.

These analysts also say that fertilizer manufacturers have already taken into their budgets the impact of at least 20 per cent increase in gas tariff. Therefore, even if 15 per cent increase applies on gas used as fuel they are still better off. Still, one needs to quantify the impact of gas price increase on the sale price of urea in particular. The price per bag is expected to increase by Rs 10 if manufacturers decide to pass on all the burden to farmers. These analysts say that since the GoP has minimized the chances of dumping of urea in the country, the manufacturers, at the most, will increase the price per bag by Rs 5 only at the most. Whereas some other analysts believe that due to piled-up inventory and poor off-take manufacturers will not be able to increase price at all.

As regards impact of the hike on other industries, the other affectees will be textile processing mills, ghee and oil mills, glass manufacturing units and all other industries using gas fired boilers. Some analysts say, though there will be an increase in cost of production but it will be marginal only — gas charges as a percentage of total cost is nominal in most of the industries except a few.

Some analysts even go to the extent of saying that most of industrial units do not use energy efficiently — rather there is tremendous waste. Therefore, the only way to teach them to use energy efficiently, is to make it real expensive.