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Will the benefit to industries be passed-on to consumers

Dec 31, 2001 - Jan 06, 2002

Effective from January 1, 2002, the gas tariff calculation will be based on heating value (BTU) rather than on volume basis. The new method of calculation would reduce the cost of production for industrial units across the board. In turn the benefit should ultimately be passed on, as lower prices to consumers. The beauty of this change is that despite a lower tariff paid by the industrial consumers, in case of low BTU value, it would not hit the profitability of Sui Twins. The rate of return formula fixed by the GoP ensures 17 per cent return on average net operating assets. Guess who will bear the cost? Certainly the GoP.

The Managing Director of Sui Southern Gas Company (SSGC) at the Annual General Meeting confirmed that the company has finalized arrangements to start billing its consumers from January 2002 based on the heating value instead of volume. He said that since March 2000, the company has been receiving gas from recently discovered/developed Zamzama gasfield which has lower heating value as compared to the gas being received from Sui gasfield. Therefore, the GoP decided that gas tariff should be based on heating value.

With the linking of many gasfields and declining share of the oldest source of supply, Sui field, industrial consumers were complaining about the quality and pressure of gas being supplied by Sui Twins. Their biggest complaint was that with the linking of low BTU gasfields, the GoP must link the tariff with heating value rather than charging on volume. This was the specific complaint of those industrial units which are energy intensive. The GoP has ultimately consented to accept their demand.

In the recent past load shedding and low pressure during winter was common. However, with the linking of newly discovered gasfields and revamping of transmission and distribution system uninterrupted supply at desired pressure is being assured. The next issue to tackle was, linking tariff with heating value. The share of natural gas, as a percentage of total energy consumed in the country, has been on the constant increase. The present government is pursuing the policy of shift from oil to gas as well as actively involved in deregulating the gas sector. The focus has been on both upstream and downstream companies in order to attract more foreign investment in the sector to develop and utilize already discovered gasfields and recoverable potential gas reserves. The demand and supply for natural gas are both rising, with demand expected to outstrip supply in the near future.

To meet the rising demand, there is a need to increase gas production as well as expand gas transmission and distribution infrastructure. Total investment of over Rs 160 billion has been planned in the oil and gas sector, with Rs 93 billion expected from the private sector and the remaining through GoP's own resources. To share the cost of developing infrastructure, the GoP has been increasing gas prices and curtailing subsidies to attract foreign investment in the gas sector.

The newly explored gasfields have prices linked to the international oil prices and any increase in oil prices squeeze net margins of Sui Twins. The existing return formula guarantees 17 per cent return on average net operating assets of SSGC and SNGPL. As the differential between the wellhead price and sales price widens or narrows, the government uses the Gas Development Surcharge (GDS) figure to balance the return to SSGC and SNGPL. The GDS equals the difference between the actual EBIT and the fixed EBIT @ 17 per cent on average net operating assets of Sui Twins.

Positive GDS means the company has to pay the difference to the government. It also translates into positive cashflow for the company, reducing short-term borrowing to pay off current liabilities. However, the problem arises when the GDS turns negative. The company ends up having huge receivables from the government on its balance sheet for an indefinite period. This increases the financial cost to company as the company is forced to borrow to meet its current liabilities due to negative cashflow. The GDS figure has been shrinking during the last couple of years due to an increase in wellhead prices and fixed gas sale prices. However, the recent declining trend in oil prices is expected to result in a positive GDS for SSGC and SNGPL.

All these measures are aimed at removing subsidy element and bringing gas tariff to a level which corresponds with oil prices to facilitate privatization of Sui Twins. Dividend declaration by SSGC and SNGPL after a long time is expected to be a catalyst in speedy privatization of these companies.