5PC INCREASE IN GAS CHARGES

There will be a direct impact on electricity, becoming further expensive

By SHABBIR H. KAZMI
June 06 - 12, 2005

The Oil & Gas Regulatory Authority (OGRA) has approved a 5% increase (Rs10/mmbtu) in prices of gas. The two gas distribution companies are planning to implement this increase from July 1, 2005. The only thing pending is approval from the government. This increase has been brought about due to increasing international oil prices, which in turn is causing a jump in the gas well-head prices. This increase is going to affect the economy across the board, but electricity consumers will be the worst hit because of hike in electricity tariff.

Interestingly, the government has been encouraging switch-over from furnace oil to gas in the power generation sector. In the recent past, the switch-over helped the power generation companies in reducing cost of generation per unit. It is still expected to keep the cost low when compared with furnace oil. However, the switchover is depleting the limited available gas reserves at a faster pace necessitating import of gas. On top of this, government has been obliged to allocate more gas for the power sector and curtail availability of gas for the fertilizer industry.

According to a report by InvestCap, gas prices have only a 2-3% impact in the CPI inflation basket. This price increase, once implemented, will have its impact in an indirect manner on the prices of almost all the products. There will be a direct impact on electricity, becoming further expensive. Electricity charges account for around 3-4% of the CPI basket, and under the likely scenario of a power tariff increase, this impact would be most prominent. On the fiscal front, this increase would help the government in collecting higher Gas Development Surcharge (GDS) and meeting whatever target it sets for 2005-06. The government is expected to budget around Rs15 billion GDS collection for the next fiscal year.

Urea prices will have to be adjusted upwards definitely once the gas price increase is implemented. Based on estimates, an increase of Rs10/mmbtu gas price will translate into Rs3/bag impact on urea production cost. This increase will definitely be passed on to the farmers by urea producers.

This would be apart from the Rs11-12/bag increase in urea production cost, which would come about as a result of a 12.5% feed gas price increase as per the 2001 Fertilizer Policy. The impact of this hike is also highly likely to be passed on by the urea producers, as has been the case in the past.

Gas distribution companies in Pakistan operate on a fixed return on assets formula. Therefore, profitability would not be affected due to any price increase. However, this increase would provide these companies with additional cash flow, and working capital financing may see reduction. A positive point is that gas distribution companies are following ambitious capex program, which is expected to improve their bottom line and also help the government in collecting extra GDS.

Industries such as textile and PSF, and to a very small extent cement, that use gas as fuel will face higher input costs. However, the government's recent decision to allow industries to generate their own power will help in bridging the gap to some extent. Power generation costs will go up but IPPs will not be affected because they also operate under a guaranteed return formula. However, KESC and WAPDA will have to bear the brunt because of higher generation cost and enhanced power purchase bill.

Rising cost of energy has an adverse impact on textile industry, value-addition units in particular. Cloths processing (bleaching, dying and printing) units are mostly working in the unorganized sector and are often inefficient in energy use. With the rising cost of energy, their competitiveness erodes. It is often said that energy is cheaper in Pakistan as compared to many regional countries. But it is also true that cost of doing business in Pakistan is far higher to these countries.

Electric utilities face a situation, where the increase in electricity tariff is announced with a time lag. There were efforts in the past to ensure automatic tariff increase/decrease with the variation in fuel cost. However, the formula is not being implemented in letter and spirit and delays are common, the reason being that every increase has to be approved by the National Electric Power Regulatory Authority (NEPRA). This approval is a lengthy process and there is no necessity to go through the ritual.

Use of CNG and LPG is growing in private and commercial vehicles. Prices of both these products are directly dependent on oil and gas prices. The government wants to encourage use of CNG in transport to contain pollution. However, the rising prices of CNG kits and gas prices do not encourage people to use CNG as alternative fuel to petrol and diesel in particular.

Rise in energy cost may be an unavoidable factor. However, the government must offer some other incentives to overcome this nuisance. Energy tariff can be brought down if government decides to reduce the level of different taxes applicable on these products.

PRESCRIBED PRICES FOR SUI SOUTHERN GAS COMPANY LIMITED.
W.E.F. 02-02-05

Rupees per MMBTU

1)DOMESTIC CONSUMERS:

First slab (Upto 100 cubic meters per month)

73.95

Second slab (Over 100 Upto 200 cubic meters per month)

120.61

Third slab (Over 200 Upto 300 cubic meters per month)

192.96

Fourth slab (All over 300 ubic metres per month).

251.01

FOR HOSTELS AND RESIDENTIAL COLONIES TO WHOM GAS IS SUPPLIED THROUGH BULK METERS.

All off-takes at flat rate of

120.61

2)COMMERCIAL CONSUMERS:

All off-takes at flat rate of

212.79

3)ICE FACTORIES

All off-takes at flat rate of

212.79

4)INDUSTRIAL CONSUMERS

All off-takes at flat rate of

192.69

5)CAPTIVE POWER

All off-takes at flat rate of

192.69

6)CNG STATIONS

All off-takes at flat rate of

192.69

7)CEMENT FACTORIES

All off-takes at flat rate of

192.69

8)PAKISTAN STEEL

All off-takes at flat rate of

192.69

9)POWER STATIONS

All off-takes at flat rate of

192.69