Transparency in Oil & gas sector

Transparency in Oil & gas sector

In this article, I wish to uniform my readers of something in Petroleum pricing which is almost scandalous. OGRA regulates and periodically announces Petroleum prices that includes Diesel, but that is Light Diesel Oil (LDO) which forms to be a negligible portion of the consumption. The real Diesel, HSD which is used in road transports, trucks and buses, is apparently and clearly out of OGRA’s purview. Ministry of Petroleum is fixing these prices without regulation through its own notification posted on PSO’s web-site. As mentioned earlier, LDO and its pricing are hardly of any consequence. It is such loopholes and gaps in regulatory regime that are the focus of this piece. Also the bipartisan committee which is holding session these days on economic reforms must look into this.

HSD’s latest price is Rs.78.33 per liter as compared to the regulated Rs.66.61 for LDO and Rs.72.96 for Gasoline (premium grade petrol).That means that the real Diesel (HSD) is 7.36% (higher than the ordinary petrol) and 17.59% higher than the regulated Diesel price. There are two problems here. Except in the US, Diesel is priced much lower than the Gasoline, for a very reasonable and understandable logic that the Diesel is used in public transport and thus should be priced cheaper. Those who argue against cheaper diesel normally base their argument for environmental reasons. However, in Europe where the environmental lobby is the strongest, Diesel is priced lower than gasoline. Are we trying to be more loyal than the king? No wonder we have galloping inflation, especially in the sensitive price index. Pricing although very important, however, is not the focus of this article, which has been discussed at length in an earlier piece in this newspaper by this scribe. The issue is lacking transparency and persistent attitude of the ministry of petroleum against regulation and transparency. OGRA declares no Petroleum Levy on Diesel and no dealer margin and people believe it so. But the ministry circular builds in Rs 5.00 per liter as Petroleum Levy in the basic price and adds up another Rs 14.00 to a Liter for all kinds of margins All of which outside the not so watchful eyes of our OGRA. Transparency is in order.

Ideally all prices should be determined through unhindered market forces and their competition. It requires a large number of buyers and sellers. In Pakistan and other similar developing countries, sellers are usually not in high numbers and usually collude in price fixing and hoarding and manipulation of all kind. Sugar is a good testimony to the afore-mentioned. In the case of utilities such as electric power and oil and gas, there is a strong case of due regulatory process due to the monopolistic character of this sector. NEPRA and OGRA have been formed in this perspective.

Transparency in regulated sectors is measured by the following factors;

1) Independence and reasonable domain of the regulatory agencies.

1) Written and publicly available policies, rules and regulations.

2) Public participation in Tariff and pricing.

3) Un- restricted publishing of data

Measured on the above yardsticks, Oil and gas sector in Pakistan appears to be quite lacking. On the other hand, Pakistan’s electricity sector and NEPRA’s performance in this respect appear to be far better. An examination of the websites of NEPRA and OGRA would amply demonstrate this. While NEPRA website is full of petitions and determinations, public hearings and data, OGRA website publishes tariff without any pretension of public process. We will examine transparency issues in oil and gas sector and OGRA’s role and performance in some detail in this article.

OGRA’s regulatory process seems to be only concerned with the determination of Tariff for the Transmission and Distribution of natural gas that is supplied by the two companies, SSGC and SNGPL. Measured on the above transparency criteria, the performance in this limited respect appears to be relatively much more acceptable. On the technical side (standards) also, there appears to be a reasonable OGRA activity and performance.

Oil and gas sector is worth more than twenty billion US dollar in terms of sales and output. Except for the aforementioned exception of Gas T&D and mere posting of petroleum retail prices and gas wellhead prices, there isn’t much to show by OGRA. The sector is almost totally regulated, except LPG where there is confusion as to the regulatory domain. Admittedly OGRA works within the framework of the role assigned to it by Ministry of Petroleum (MPNR) and the GOP. It cannot arrogate powers to itself, although it can build pressure towards higher domain and role for itself. The due process is lacking in the following areas: Surely there are and must be rules in the following areas which in itself is not enough. The actual application and adjudication of those rules is to be the subject of due public process, where price is not determined by the market forces. International transparency moves and initiatives these days even go beyond public tariff and pricing determinations. They are demanding Publish what you pay(PWYP)policies and regime, for it has been found that the actual payments vis-à-vis publically determine tariff may be deviating for legitimate and not so legitimate reasons. Following areas should come under some process of public input and scrutiny through the regulatory process of OGRA and the latter should not restrict to posting of results but invoke the whole regulatory input and process into these.

1) Well-head prices of oil and gas.

2) Ex-refinery prices of petroleum products such as gasoline and diesel, including crude oil imports

3) Oil pipeline tariff

4) PSO imports of petroleum products (50% of the total demand is met through imports valued at around 8 billion dollars)

5) Furnace oil pricing despite claims of being in the open sector; and most importantly

6) High Speed Diesel (HSD) pricing.

On the other hand, what little powers have been granted to OGRA, successive leadership of that organization have not chosen to make use of those. For example who stops OGRA in holding public hearing for discussions on the other constituents of petroleum prices, if the ex-refinery (wholesale or producer price) is made an untouchable tree for it?

MPNR has traditionally being reluctant to cede powers to OGRA. In all the above areas, the closed offices of oil bureaucracy have the sway. There has been much controversy regarding the self pricing role of OCAC (Oil Companies Advisory Committee) which has since been disbanded or depowered. It is ironic that OGRA is not considered adequate enough for the role of OCAC .Who does not like power and authority? Public process absolves responsibility and implication of public servants in scams and others in a highly skeptic Pakistani society today. They should support the expansion of public process. Transparency would also encourage and promoted much needed direct foreign investment in this vital sector. And finally, it is the responsibility of legislature and public representatives to intervene and write laws and require regulation in this respect.

The writer is a former Harvard University fellow and is the author of ,”Pakistan’s Energy Development; the road ahead”.

The role and performance of regulatory bodies like OGRA

The role and performance of regulating agencies like OGRA

OGRA is in news these days. Its parent ministry MPNR is criticizing it in public and other senior parliamentary leaders from the ruling party have led onslaught on it. Earlier OGRA chairman came into limelight when public heard of its board members being fired by the latter. Is it a personality syndrome or conflict and infighting or there is something more germane into it. ? What is the role of OGRA and for that matter any regulatory agency of this kind. What role it has been given and what role it could have carved out itself by creative maneuvering and internal negotiations with its main stake-holder which is the Ministry of Petroleum and Natural Resources itself. Its counterpart NEPRA has been more successful in having a working relationship with its parent ministry.

First of all, a regulatory agency may be associated administratively with a ministry, but for all practical purposes it is independent. However, its independence may be circumscribed by the statutes and the rules that are usually made by the Ministry itself. Sometimes the issues are multi sectoral and multi-ministerial and are thus to be handled by the PM himself and his Cabinet Division. It is through the statutes that ministries can control or dictate their way and policies and not through administrative orders. Regulatory agencies can strengthen themselves by bringing in public discussions and hearings and oversight and making it more effective and integrated with their processes. Public consultation process may at times be overbearing and impeding speed and convenience in decision-making , but it is worthy enough to be welcome and built into the decision making process. It is perhaps the only defence and support the regulators have to fall back upon in performing their function.

As to the regulatory agency’s independence, it can vary greatly from country to country and its relevant legislation and from sector to sector. The most powerful regulatory agency in a country is normally the Central Bank or State Bank as we call it here in this country. Obviously, it is much less independent than its US counterpart, in theory and as well as practice. Energy regulatory agencies are more powerful in India than these are in Pakistan. Perhaps size and multi-polarity matters, and makes central organizations more powerful and effective. Even after 18^th amendment, all regulatory agencies and functions have been given under federal domain. Conflicts are going to arise, when the implementation begins .It would be highly debatable, if except for Punjab, any smaller province can have the resources to run these agencies, technical and financial both.

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It has been alleged that OGRA has not been able to perform its function. The latest case that is cited of is the unduly rising prices of LPG. A broader criticism, and perhaps legitimate, is that it has not been able to carve out space for itself. Space is granted by the legislation and statute but the statutes themselves are influenced by the lobbying and input of the regulatory agency itself. In Pakistan, perhaps it would be too much to expect from the retired bureaucrats for whom these positions are lucrative parking places. The salaries are too high to be risked? Ministries generally would like to maximize their power for legitimate and not very legitimate purposes and commercial interests would also not like to be constrained. The maximum support should therefore come from the legislature and the public.

Now coming to the two specific charges on OGRA; LPG prices and the charge that OCAC performed better. LPG is a fuel for the poor. Its prices have been going higher and higher, whether it is justified on some grounds, is a separate discussion. The real policy issue is that LPG has been kept out of the regulatory process and thus it is beyond OGRA’s purview. The culprit is the classical phony and naïve argument of freeing the pricing and the misconception that opening up prices leads to market efficiency and would ultimately lower the price. There are several reasons that these ideologies do not work in societies like ours, for the following reasons:

1) We are always supply scarce countries. Only population and demand is abundant .Supply is usually restricted by a germane shortage of capital. Price signals are not strong enough to attract foreign and local capital. There are other factors such as political instability and the law and order whish over-ride economic factors and signals.

2) The regulatory and legislative processes are weak. Consumer is poorly represented in the power structure. Producer is powerful and integrated into the power structure.

3) Anti-competition and price collusion behavior is rampant and generally well entrenched. Competition protection legislation is weak, ineffective and perpetually sabotaged as we have been observing in the case of Competition Commission of Pakistan.

4) We can not wait for the ultimate rationalization and resource allocative process to show its promised results. It may never happen or may be too little too late. Our consumer is poor. One-third of our people lives in abject poverty and cannot get the minimum nutritional requirement. And others are only marginally and slightly better off except for a very thin minority.

Thus the price unfreezing and letting it to be decided by the market and in fact by the producers does not seem to be working and resulting into lower prices. Price decontrol of such things as energy and LPG is a fools’ paradise. It should be shun at the first opportunity indeed immediately. Only when price decontrol is lifted by the ministry of petroleum, OGRA cannot do any thing in this respect. People can do it in the long run, but they rise only occasionally and randomly and such processes are only disruptive, as there is ample history to suggest.

Now coming to the case of oil pricing, it is alleged that OCAC (Oil Companies Advisory Committees) has performed and could perform better than OGRA. I have no mandate or axe to grind with OGRA to defend its performance. As for OCAC, there could not have been a more shameless and disgusting name for an entity that is to set prices; a producers club setting prices for consumers with the support of the ministry. This may have been valid in military oligarchies of the past but it is very disturbing to find support for this coming from the ministry of petroleum .Oil prices used to be set on a cost-plus basis earlier and supported an essential but basically inefficient oil industry which made huge profits in the past. Now that the more saner policy of oil pricing based on landed price parity with imports , the oil industry is crumbling .It would need support like many other inefficient but essential entities. OGRA’s’ job today is implementing a formula, calculate the price and publish it. There are many ifs and buts in it, which OGRA should have made a practice of discussing in broad day light in public hearings than adjudicating on these quietly and slipping into the pricing system. No wonder it has not managed to attract a lot of respect from the stake-holders and the public.