ISLAMABAD   -   Pakistan Institute of Develop­ment Economics (PIDE) has predicted that indigenous oil reserves will be exhausted by 2025; however, current gas re­serves will last for maximum of 15 years.

Oil and Gas Regulatory Author­ity (OGRA) remained hostage to government decisions because of the extensive state presence in all activities in the supply chain. The OGRA law allows too much mandatory government involve­ment in the current oil and gas regulatory system, that has made the regulator powerless, said the latest research brief on “Gas Cri­ses in Pakistan” released by the Pakistan Institute of Develop­ment Economics (PIDE). 

Natural gas and imported LNG contribute more than 40 percent to the country’s current energy mix, including gas resources used in electricity generation. In recent years, the demand for gas has increased rapidly in Pakistan. However, gas exploration and production have declined, and the LNG operational and regula­tory framework is weak, leading to a nationwide shortage and in­creased supply costs. 

According the PIDE, 15 gas explorations and production companies work in 55 gas fields spread throughout the country. The gas distribution and trans­mission are mainly owned and operated by two state-owned companies Sui Northern Gas Pipeline Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL). The gas exploration/production industry and gas dis­tribution/transmission industry lack competition in Pakistan.

PIDE research quoting OGDCL said that it is predicted that Paki­stan’s indigenous oil reserves will be exhausted by 2025. However, current reserves will last a maxi­mum of 15 years if demand is capped at present-day gas levels by 2030. PIDE research showed that 78 percent of households have no access to natural gas in Pakistan. Natural gas consump­tion in the domestic sector has grown by about 11 percent over the years. Supplying gas to house­holds requires significant invest­ments. The cost of gas supply to households is much higher than the cost of supply to the industry or power sector. Gas allocation policy has remained based on political priorities rather than on the objective of maximising value addition. Low gas prices and in­efficient gas allocations have en­couraged higher demands.

With 30.6 billion cubic meters of natural gas, Pakistan shares 0.8 percent of global production. There is a sharp increase in gas demand in Pakistan, but due to the inefficient distribution of natural gas resources, Pakistan has been facing a colossal gas shortfall, the brief revealed. PIDE briefly described that large ar­eas in the country remain unex­plored due to security concerns and the law-and-order situation. 

The PIDE research said that Balochistan’s Pishin basin is be­ing considered a valuable block. However, no exploration activ­ity in this basin is underway due to law-and-order problem. All the activities in the gas sector in Pakistan, directly or indirectly, are under government control. An independent regulator was established in 2002 to regulate mid and downstream activities. Still, it remained hostage to gov­ernment decisions because of the extensive state presence in all activities in the supply chain. The OGRA law allows too much mandatory government involve­ment in the current oil and gas regulatory system. That has made the regulator powerless. Government interference in ser­vice providers’ affairs has led to cross-subsidy and an overall defi­cit in the gas sector. The circular debt in the gas sector has crossed Rs1.5 trillion, contributed by both the utilities SNGPL and SS­GCL. Government irregularities in regulatory frameworks and poor policy formulation are hindering sectoral growth and creating in­efficiencies in the supply chain. Politically influenced allocations and monopolistic business op­erations are all bottlenecks.

The research brief recom­mends that ensuring reliable and high-quality uninterrupted natu­ral gas supply and efficient ser­vices is one of the critical aspects of the regulatory process. The gas distribution companies must maintain adequate pressure in the transmission pipelines and distribution networks and up­grade the system where neces­sary to ensure supply of contrac­tual volume and pressure to its consumers. Gas resources are depleting, but these monopolies are expanding their transmission and distribution networks to maximize their financial returns. As a result, these companies, especially SNGPL, have earned enormous profits over the years.

The research further state that in both utilities, mismanage­ment and irregularities have af­fected their operational perfor­mance. Though private entities own 40 percent or more of their shares, these companies have no business model. There is no reg­ulatory mechanism to link their financial returns to their opera­tional efficiency. Underground pipeline leakage, poor main­tenance, measurement errors, wrong billing, law and order, and theft have contributed signifi­cantly to Pakistan’s unaccounted for gas. The two integrated com­panies, SNGPL and SSGC, are over-regulated monopolies with no incentive to improve their in­efficiencies and service delivery. Against the OGRA allowance of UFG at 4.5 percent, the gas loss­es in these companies remained relatively high. After 2017, this allowance increased to 7 per­cent and 8.5 percent for SNGPL and SSGCL to compensate for declining profits.

PIDE research brief suggested the way forward in the following key recommendations:

Prioritise exploration activities to rely on LNG imports, correct well-head prices, and minimise government interference.

A progressive and market-based exploration policy is needed.

Pakistan should de-regulate the natural gas sector and lib­eralise the pricing structure. Market-based pricing systems will also curtail the misuse of gas. For LNG imports, incentiv­ise third-party access increased involvement of the private sec­tor in the LNG supply chain happening in mature LNG mar­kets like Japan, South Korea, and even India. Higher private sector participation in these countries facilitates cheaper fuel availability, smooth pro­curement processes and allows market-based price discovery.

To maximise returns from private sector involvement and guarantee the sustainability of the natural gas sector, it is essential to first solve the pro­found structural and operation­al challenges.

Without rationalising the subsidy structure, the financial viability of the natural gas sec­tor is difficult to achieve. The tariff must be set on a cost-of-service basis for a reliable and sustainable gas sector. Gas al­location to industries should be from a growth perspective and not based on political decisions. Energy efficiency legislation and strict implementation in all sec­tors are compulsory.

Restructuring of gas utilities is required to improve their opera­tional and managerial efficiency. Unbundling these monopolies between ‘pipeline’ and ‘retail’ is inevitable before allowing for other private participants in the ‘pipeline’ and ‘retail’ business. It’s high time to get rid of guar­anteed returns based on network expansion. Companies must have a business model to earn profits from operational efficiency.

All gas companies should op­erate commercially without any political interference by any gov­ernment. Government should limit its role to policy making and effective legislation for mar­ket liberalisation. There should be a single autonomous regu­latory authority for upstream, midstream, and downstream activities. But the regulator must have the powers and capacity to monitor the sector effectively and ensure market development.