Thursday, February 24, 2011

The natural gas controversy

The natural gas controversy

There is a general gas shortage in the country for the past few years. Known reserves and deposits are on the way to exhaustion, while the exploration activity has been at a low level. Most of the gas these days is being produced these days. Gone are the days when most gas used to come from Sui in Balochistan. Thanks to exploration activities in Sindh, many new deposits have been discovered in Sindh and production started from those wells. More exploration activity is expected to yield new gas resources in Sindh. Due to the political and law and order problems in Balochistan ,no new deposits are being discovered as no exploration activity could be sustained there for the past many years. This is a very unfortunate situation , in which no body is benefitting, people or province of Balochistan who are deprived of income and employment and the other parts of the country and people as they are facing gas shortages.

Shortages create many economic and political problems. A number of controversies have developed. Industries have protested and some of which closed down in protest or due to gas shortage. Earlier Sindh assembly passed a resolution demanding priority in gas allocation and a number of prominent politicians issued statements in this respect. They have complained that Sindh's gas is being taken elsewhere in the central system and that Sindh’s demands should be met first, and then the residual should go elsewhere. The issue of distribution priorities! They have argued that there is a constitutional provision in support of this stance. Now KESC has joined the debate. In a message to the public and consumers in Karachi printed in this newspaper, CEO of KESC demanded more gas allocation and implied that the gas supplies were available and adequate gas supplies are unfairly denied to his company. And in a related case, LPG distributors are going on strike because of what they think is an arbitrary increase in prices by the LPG producers’ cartel. Let us examine the merits of the issue. To top it all, some multilateral agencies are proposing to enhance gas prices to the level of line which in their view would solve many problems including the ones in gas allocation. GOP is already under severe public pressure regarding the proposed increase in electricity tariff. This last issue would require exclusive discussion and we leave it to some future opportunity. We would examine here the other issues as described earlier in the above.

There is a general shortage of gas throughout the country. Power plants in Sindh are not getting enough gas and thus load shedding of electricity. Gas and electricity are distributed to user sectors and customers who pay for the service. It is not supplied to an abstract concept or entity as a province. Then gas is distributed and allocated as per priorities. For example, fertilizer sector is a priority and supposing all of the capacity is located in Sindh, allocating and distributing gas to Fertilizer sector does not mean that gas is allocated to Sindh.

If this logic of prior right of producing province is accepted, then many problems would have been created for Sindh itself. Gas exploration and abundance in Sindh is only a recent phenomenon. Previously all gas consumed by Sindh came from Balochistan and most hydro electricity came from Sarhad/KP. Very little was consumed or allocated in the producer provinces, as there was no demand or distribution investment was not justified for widely scattered insufficient demand. Similar demands and protestations were made by some circles in Balochistan, when natural gas was brought to Karachi and Sindh first leaving Balochistan towns unsupplied.

The issue is that Production, transmission and distribution facilities have to be invested in. Often the investment comes from private and foreign entities that have to be paid back. The revenue is generated through consumers and customers and not from provincial or federal government. Principles of economic efficiency, markets, sustainability and rate of return to investors are involved. If we do not learn to respect these principles, we are going to end up in more shortages due to lack of investment in supplies sector and higher production costs of utilities and services. The capacity of people to pay has already reached or even crossed their limits.

If there is a shortfall both equity and efficiency considerations are their in allocating priorities. Where there is no efficiency or criticality issue, equity principles of equal distress are to be applied and not a province based formula based on the ownership of resource.

As to the ownership issue of the resource , except for political ownership which does not mean much in practical sense ,bulk of the resource(88%) that has been extracted belongs to the producer who has spent money, effort ,resources and know-how in bringing out the resource from the earth and processing it and making it use-worthy. So the ownership of the extracted resource belongs to the producer, save the royalty portion of say 12%, and not to the province where the resource is located. What is in ground belongs to a people and provincial or federal government as per laws and constitution of the country, but when it comes out of ground it is a different issue.

Energy sector in Pakistan has been developed as one undivided market. It is still the case even after 18th amendment. Electricity has become a federal only subject, while it used to be a concurrent subject earlier. In the past almost all investments in energy have come from federal or foreign equity or debt sources. All WAPDA investments and the ones in Oil and Gas have come from federal kitty. And even in future all investments in nuclear and hydro resources is to come from federal resources. After all these investments, would KP politicians be in their right to make similar demands of electricity ownership. Certainly, they can demand their royalties which issue should be resolved on a permanent basis. They cannot possibly demand that Tarbela should meet their demand first and then the electricity should flow to the rest of the country. KP has been suffering severe load-shedding despite Tarbela being right there. In future also when hydro power would come from Bhasha and Bunji etc dams, there would be no fundamental right of priority allocation to KP. In fact if Sindh’s argument and demand of priority allocation based on producer provinces right is accepted and established, it would be a sufferer in the long run .Temporary advantages and ups and downs do develop in various parts of the country at different times and these should not lead us to bring in constitutional issues unnecessarily.

Constitutional provisions are often desires and ideals. These have to be creatively and constructively interpreted and understood. It is well-nigh impossible for the framers of the constitution to understand the implication of every sentence they write into the constitution. American constitution explicitly allows only currency, defence and foreign policy in federal domain. American courts have interpreted the constitution so broadly and in totality, that there are sixteen federal ministries dealing with 16 or more subjects. Constitution may have to be amended if too literal interpretation of the quoted constitutional clause is attempted.

As for KESC, its issue is a bit complicated due to the tariff issue, which may not be intelligible to the non-specialist. KESC runs on what is called a constant tariff, with periodic adjustments for the fuel price inflation and general inflation as well. Gas is more thermally efficient fuel than oil in the sense that in combined cycle plants, an efficiency of 50% or more is possible to day than the traditional efficiency of steam turbine plants run on oil. KESC is expected to earn through increase in thermal efficiency and reduce other losses and leakages. There are many other issues with KESC tariff formula as it exists today. Normally such formulae are agreed to for relatively short periods. It has no answers or solutions for the long run. It may cause much more serious problems in future, details of which cannot be explained in this space. A review of this formula is required, along with a number of reforms and pro-active actions. For the time being GOP has allowed Oil sales and supply in lieu of non-supplied gas, at the price of gas. Perhaps this solves KESC’s working capital problem. A longer run solution would require the following steps; KESC should be a part of the central pool and eligible to draw from the central pool as per an agreed formula ; KESC to be treated as an IPP, and allowed to make investments in generation outside Karachi, for example utilizing cheaper gas resources elsewhere. KESC’s generation assets and activities be separated and treated at par with other IPPs .A new tariff formula based on cost-plus approach and central whole-sale pricing is introduced as it is there in other parts of Pakistan

1 comment:

  1. Great analysis.

    Sir would you also comment on the policy decisions related to gas sector? The massive diversion of gas capacity to country's transport system making us the no. 1 country in CNG vehicle use. DO you think its sustainable and a wise policy in the longer run to keep the industry suffer from outages and divert gas to transport (where the problems could be solved otherways e.g. mass transit systems etc.)?