GAS PRICE MECHANISM
IS UNIFORM BTU PRICING FEASIBLE?
Jan 10 - 16, 2011
It has been reported recently that natural gas prices would be rationalized. Some ADB wise man seems to have suggested it, as a precondition to some loan agreement. It is through these lending arrangements that little thought through ideas and policies are imposed on us. I am not sure weather government would accept much of it.
Admittedly, gas prices in Pakistan are low, but so are the production cost and the incomes of the people. In a utopian world of these economists, all prices everywhere would converge to be the same, but after a lot of adjustments in the world where most of the people of the world would be populated in the hitherto under populated developed countries. This kind of adjustment is certainly not acceptable. They would suggest every other type of adjustment, sacrifice, and even cruelty on the poor. Their counterpart rich people, of course, do not suffer, as a consequence of the proposed adjustments.
The ostensible logic may be that the gas is under priced, and thus sends wrong signals resulting in sub-optimal consumption and waste and that price should represent scarcity value leading to allocated efficiency ultimately. And, those higher prices would enhance producer profits and would thus attract investment in exploration and production, increasing supply and stabilize prices but at a higher level. We have seen how capitalism and competition has been thwarted by the powerful monopolists and the vested interest. Take the case of sugar, but that is a separate subject, which we would not enter into here due to space constraints. All economic theory is made to fail in this country in the implementation process.
Let us test this logic against the real world data. Today, in the US gas prices are one of the lowest in history, having hovered around 6-8 USD per MMBtu (call it unit for simplicity) for most part of the last ten years. This is a yearly average; otherwise, there is significant seasonal variation. In gas producer countries, gas prices have never been linked to oil prices; reason very simple and oft-practiced. Natural gas is not tradable, except for LNG, which represents an insignificant proportion in trade and production. Oil is tradable, and hence priced as per international trade prices plus some tariff and taxes. It is only in non-producer countries of Europe, Japan, and South Korea that gas prices are linked to oil. In these countries, natural gas prices have hovered around 75 per cent of the oil prices. In the case of Japan and South Korea, it is the LNG factor that operates in pricing.
In throughout gas producing countries of Asia e.g. China, Malaysia, Indonesia, natural gas is priced low even as compared to the low prices of USA; the rationale affordability of people and competitiveness of industry. Chinese economy and exports would nearly collapse if higher energy prices and higher exchange rate are forced on them.
Currently, there is no major rationale to this kind of linkage in Pakistan, as gas trade in the form of either LNG or expensive natural gas from Iran, are still a few years away and even then its contribution in overall consumption is projected to be low. As the costly imports increase there would be an automatic reflection of it and no such policies would be necessary. We have already increased gas prices over the recent years, especially the gas prices coming from Balochistan. The recent currency devaluation and its expected slide downwards would keep the prices high and increasing. No special tools should be moved in to achieve this.
Power sector is the major consumer of gas with a share of 33.7 per cent, followed by general industries 28 per cent, domestic 16 per cent and fertilizers another 15-16 per cent. CNG/Transport consumption has been increasing at a very fast pace until recently, and is expected to stabilize around. Higher gas prices for power sector would enhance electricity tariff, which is slated to increase under various pressures and sources including rental power. Something, however, may have to be done with respect to the gas prices in fertilizer sector, where gas goes literally free, at one-tenth of the average tariff. But, increasing those would increase crop prices. This is the kind of hidden subsidy that we provide to agriculture. This is indeed a very difficult situation. People outside the power corridor think that it is all a free flowing stream and if they get a chance they would be setting it right.
Finally, the answer to Pakistanís energy woes is hydropower and Thar coal, both suffer from various set of political and administrative problems. Leadership would have to be shown towards creating consensus and removing the other bottlenecks that are there. Nothing was free and would be free. Hydropower would not be as cheap as it is now (less than a Rupee per unit) due to older investments in Tarbela and other dams. New investments would result in hydro electricity costs of 5-6 rupees per unit. The royalty demands of KP alone would be more than the current total unit production cost, on which a reasonable settlement is long overdue.
The government would be well advised to thoroughly consider the impact of these proposals, which enter into the national policy apparatus through lending requirements of the often unfeasible projects, which the vested interest keeps pushing on government functionaries. What would be the use when it is a fait- accompli? The funny situation is that consumer and trade bodies start shouting at the very end at the level of distribution companies tariff, be it gas or electricity and enter into useless and destructive litigations, when the die has already been cast. Expensive projects are approved with considerable padding by some of their brother project promoters and investors.