LOSSES ARISING DUE TO BLOWING UP OF GAS PIPELINES

The impact of these has to be borne by the consumers ultimately

By SHABBIR H. KAZMI
July 03 - July 09, 2006

Almost every one goes through the headline in the newspapers or a story on electronic media that part of a gas pipeline has been blown up in some part of Pakistan. The reader/listener takes it very casually because the incident has taken part in an area which is away from his residence or often fails to understand its implication. However, if one takes it seriously, it means a lot for every citizen of Pakistan.

First of all it is important to understand that who could be the potential looser. Some critics may say that the blast/blowing up of pipeline is of no consequence for a common man. But in reality it is the common man who has to bear the cost ultimately, simply because the loss is to the national exchequer.

In the gas distribution business there are two major stakeholders, exploration and production (E&P) companies and gas marketing companies. Ironically most of the E&P business is still controlled in the troubled areas by the state owned companies i.e. Pakistan Petroleum and Oil & Gas Development Company. Similarly the two gas marketing companies, Sui Southern gas Company and Sui Northern Pipeline are also state owned, though part of the stake is also held by the private sector.

Apparently very little is known by the common man about the gas purchase agreement. It is understood that possibly there could be two arrangements 1) purchase of gas at the well-head or 2) supply of gas up to a specified point by the E&P companies. In the first scenario if the blast/damage is prior to the point of delivery, the loss is for the E&P company and in the second case the loss is for the marketing company. As stated earlier whether it is an E&P or distribution companies the highest probability is that the loss will accrue to the government.

One may say that E&P and distribution companies should have been hedging their risk through insurance cover. As stated earlier that bulk of the business is in the public sector, these entities should have been acquiring insurance cover from a state owned insurance company. According to the rules state owned entities are bound to acquire insurance cover from a state owned insurance company. Therefore, the burden would again be on the insurance companies operating in the public sector.

According to some insurance sector experts blast or blowing up of a pipeline could only be covered under 'sabotage' and up to a certain limit. Therefore, all the blasts and loss of gas could not be covered fully - the claims have to be capped at some percentage point. The loss either goes to public sector E&P and distribution companies or the state owned insurance company. Therefore, it is the loss of the government.

Some critics may say that all the insurance companies re-insure their risk. Therefore losses of state owned insurance company would be the least. However, the fact is that state owned insurance company also gets the re-insurance from another state owned reinsurance company. Ironically, the rules also make it mandatory for state owned insurance company to acquire bulk of its reinsurance from the state owned reinsurance company.

The analysts are also of the view that initially E&P and distribution companies had not obtained the proper insurance cover and had to bear the losses. They also believe that though now they acquire adequate cover but the claims are capped at certain levels. Interestingly, the review of profit and loss accounts of general insurance companies operating in the private sector does not provide any clue about their exposure in such business.

Some of the critics reject all the above stated probabilities and say that there is no proper accounting. However, they are certain that losses may be being compensated by the government from some account, which also may not be appearing in the accounts being maintained by the government.

Some critics say that the stories being published or televised are over exaggerated and are aimed at achieving certain objectives. They also say that losses are only a small percentage of total expenditures. One cannot rule out such perceptions completely because of existence of various pressure groups in the country and their modus operandi.

Whatever may be the facts it is true that gas pipelines are being blown up intermittently, which means loss of gas and incurring of expenditures on repairing of damaged portion of pipelines. Economic losses, due to suspension of gas, are on top of loss of gas and repair expenditures and very difficult to quantify.

Analysts are all of the opinion that one of the reasons for persistent rise in gas tariff is rising transmission and distribution losses, mostly due to loss of gas due to rupture of pipelines. While there is a lot of criticism on WAPDA and KESC for out of proportion transmission and distribution losses, accounts of gas companies are often being ignored.

One of the reasons for this casual attitude is that profitability of gas distribution companies has been ensured by the government, by linking it with operating assets of the distribution companies. It is not easy to calculate profits had this guarantee was not there.

Having explored and discussed various possible options one can only arrive at the conclusion that there could be huge losses, which are not accounted for properly. As such federal and provincial governments are paying billions of rupees to the law enforcing agencies and losses pertaining to ruptures of gas pipeline are on top of these. Can there be a way out or the consumers will continue to pay for the activities of miscreants.