Energy sector remained in the forefront in terms of investment

July 03 - July 09, 2006

The financial year 2005-06 received exceptional increase in foreign direct investment of which a major chunk was directed towards energy sector. Official figures revealed that the Foreign Direct Investment (FDI) during the fiscal registered an exceptional increment at 239% to US$3.1billion as against US$0.89billion during the previous fiscal.

Prominent sectors which attracted the foreign direct investment included power, telecom, chemicals, pharmaceutical and fertilizer, oil and gas and banking and finance which received 90% of the total FDI.

Historically speaking, so far the conventional areas of the energy sector such as oil and gas, and power generation remained in the forefront in terms of investment. However, a wind of change has started blowing as the investors are now eyeing to tap the areas of alternative energy resources as well.

Recently, regulatory authority Nepra has admitted an application of Tenaga Generasi Limited (TGL) for consideration of grant of power generation licence to develop, own and operate a wind farm in Deh Khoti Kun, midway of Gharo and Mirpur Sakro near Thatta in Sindh.

Under this project, TGL will be setting up a wind power plant having a 50mw power generation capacity at a cost of $86.744 million. The area of alternative energy resources has been the talking point for quite some time and some of the interested parties had conducted survey of wind direction and speed on many locations in Sindh and Balochistan, however, these surveys and discussions were never converted into practical shape. This is for the first time that a project is coming up on the ground and hopefully would go into operation by 2007.

Being a major producer of natural gas, Pakistan's energy sector is usually dominated by the natural gas under the energy policy to have an energy system led by the natural gas.

According to current statistics, Pakistan's total production of gas is distributed among sectors including general industries consuming 18 percent of the total gas production, cement 1 percent, fertilizer 18 percent, commercial 2 percent, domestic 15 percent, transport 2 percent while the lion's share goes to power generation which at present consumes around 44 percent.

In view of the increasing oil prices, most of the sectors of the economy are swiftly shifting on this cheaper and environment-friendly fuel. Consequently, the demand for natural gas is increasing with every passing day portraying a shortfall in the years to come if back up arrangements including exploring more resources within the country and its import through cross border pipelines either from Iran or Central Asian state Turkmenistan. However, the growing demand has naturally forced the producers to increase its prices. Another factor responsible for increase in gas prices is said to be the gas distribution companies, which had raised funds from ADB and World Bank in the past. The World Bank has advised the gas distributing companies to have semi-annual price revisions to bring the gas tariffs in line with the prevailing international gas prices.

However, the Ministry of Petroleum and Natural Resources has to confirm its decision proposed by OGRA to increase gas prices by 10% to 22.5% for different categories of consumers from July 1, 2006.

According to gas price increase formula, the increase in gas prices for domestic and fertilizer sectors is about 10 and 15.5%, respectively, while the increase in other commercial and industrial consumer rates is about 22.5%.

It may be mentioned that the gas prices in Pakistan have been kept on lower side with a view to psychologically convince the consumers that it is purely a local product and no foreign exchange is involved in its import. Hence the benefits of indigenous resources should pass on to the consumers.

However, owing to recent increase allowed by OGRA the gas-distributing companies have had to face certain factors amidst the increasing input costs.

Sui and Kandhkot alone account for 21% of the gas supplied to SNGPL and 10% of gross gas supply to SSGC. Therefore, we can safely conclude that the increase in costs faced by SSGC would be of a lower magnitude than SNGPL.

However, SNGPL also has a larger consumer base viz SSGC, therefore, the higher cost would be balanced by higher revenues earned and therefore mitigate the effect on cash flows.

The bottom line of the gas distribution companies is tied with their asset base therefore their operating profits would not change as a result. The cost of gas purchases will increase on average by 10.5% and the government has increased the tariff rates by 10 22.5% resulting in cash surplus in the company. The surplus in cash flows for SSGC and SNGPL would be around 10%, and would result in an increased working capital, assisting the Sui's to finance their short-term obligations


On the other hand, the station owners and dealers of compressed natural gas (CNG) have also started a campaign for an increase in the prices of CNG, as they claim that it is hard for them to continue passing on any benefit to the consumers due to high input costs. Previously, the CNG Station Owners Association had passed on the benefit from their earning margins.

Chairman and President of CNG Station Owners Association of Pakistan and President of CNG Dealers Association, Abdul Sami Khan said that last year's increase in natural gas prices by 17.5 percent by the Oil and Gas Regulatory Authority (OGRA) had not affected the CNG consumers. The association had only passed on 7.5 percent to its users.

The OGRA has not yet notified the gas determination and the association is waiting for the document to workout the new CNG price. Rising fuel cost and other overheads has forced the CNG stations not to pass on any benefit to consumers. The Association has urged the OGRA to look into the matter seriously, as increase in the CNG price would hit the industry and its consumers hard.

Expansion in the CNG sector has helped it save $1.8 billion annually and in next five years it will further reduce the oil import bill. On the occasion, Abdul Sami Khan also said the government decision for implementing the new policy to set up a CNG station by reducing the number of no objection certificates (NOCs) from as much as 15 to only three would help us greatly.

The station owners had to strive for one-and-a-half to two years to set up a CNG station, now it would take only one month. If at all, the bureaucratic hurdles in Karachi would not hamper this initiative. Sami Khan said, "We want to help the government's policy to encourage the use of cleaner fuel in the country".

Previously, a CNG station owner had to obtain NOCs from the local police station, Traffic Police Department, Forest Department, Environment Department, phone, gas, electricity utilities, Water and Sewerage Board, Town Planning Department etc, he said. He added that obtaining NOCs from these departments took over a year and created several problems for the investors.

The new policy for obtaining the NOCs would help establish a CNG station in a month's time, if the electricity and gas utility too adopt the same.

The gas utility in the city has victimized the CNG stations. The gas utility is charging an extra amount of Rs 1.5 to 2 million from a CNG station for increasing the eight pounds per square inch (psi) to 15psi of gas pressure which is unjustified. He added, the gas utility in Punjab province does not charge such an amount for enhancing the pressure. Secondly, the billing problem of city's CNG stations should be monitored on a quarterly basis. Presently gas utility charges different prices from various stations. Some stations do roaring business due to the location.


Ameen Bandukda, Chairman SITE Association of Industry, has expressed his disappointment on unilateral decision of the government to increase gas prices by 22.5 percent for all consumer categories throughout the country from 1st July, 2006.

He said that SITE Association presented strong and convincing arguments and other consumers who were interveners at the public hearing held by OGRA in the recent past, which apparently had been of no avail. We had provided them convincing arguments and suggested ways of meeting the revenue deficit by the gas companies and the report was available with us.

Commenting on the proposed revision Ameen Bandukda said that he was very surprised to note that as the amended petition for estimated revenue requirement for F.Y. 2006-07 filed by Sui Southern Gas Company Ltd with the Registrar, Oil & Gas Regulatory Authority (OGRA) vide its letter No. RA/21/07 dated 24th March 2006 worked out the gas cost at Rs. 29.36 per MMBTU as against Rs. 4.04 per MMBTU previously. He said that he had worked out the increase in gas prices based on the rates applied by SSGC i.e. Rs. 31.52 per MMBTU and the existing rates i.e. 240.91 per MMBTU, the increase in percentage comes to about 15.5 and not 22.5 percent as quoted by the government.

He said he failed to understand as to why the government is bent upon facilitating the SSGC and is allowing them to increase prices more than what they have actually petitioned for.

He said that in the first quarter the SSGC had demanded an increase of 13.04 % but the government had actually allowed an increase of 15.5% across the board, which was more than what was demanded by the gas producer. He said that this is for the second time in the history of Pakistan that a utility supplier has been allowed to increase their prices more than what they have actually petitioned for.

The manufacturing companies, especially in Karachi, are beset by a number of infrastructural problems and rising costs. The government has time and again realized the need for reducing the cost of doing business and providing an enabling environment, but is not following this in letter and spirit.

Bandukda said that the ever-increasing prices of gas have rendered particularly the products of value-added industries unviable in the domestic and international export market. If the price of gas is not capped the export oriented and value-added industries will be constrained to close down.

He urged President Gen. Pervez Musharraf, Prime Minister Shaukat Aziz, Federal Minister for Petroleum & Natural Recourses Amanullah Khan Jadoon to direct the authorities concerned to review their decision and bring the prices of gas down. He said that gas is an indigenous resource and in abundance thus there is no justification in continuously scaling its prices upward.


Third international conference & exhibition - CNG Connex 2006 - will be held in Karachi sometime in September this year. The objective of the conference is to promote CNG as an alternative and environment-friendly fuel in the country as well as promoting locally manufactured CNG equipment and CNG conversion of heavy vehicles.

Foreign representatives of CNG trade from Italy, New Zealand, Britain, China, Malaysia, Korea, India and Canada would attend the conference.

The conference is being organized by National Forum for Environment & Health (NFEH), CNG Stations Owners Association of Pakistan (CSOAP), while Ministry of Petroleum and Natural Resources and Ministry of Environment are patronizing the mega event.

The theme of the conference is "CNG & Urban Transport". It is aimed to provide latest information to delegates about the infrastructural developments and technical advancements made in the CNG sector worldwide (Argentina, Brazil, Italy, Canada & USA) and particularly in Asian countries including China, Iran, Bangladesh, India, Japan & Pakistan (both by government and private sector).

The conference would discuss the emerging trends, production and processing tools, business opportunities and challenges ahead in next five years by taking advantages from the "best practices" presented by local and international experts from CNG-NGV industries.






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Source: Ministry of Petroleum & Natural Resources