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”.

Case for a socially sensitive merit dispatch order for power plants

The Wasteful gas operated power plants:

Case for a social dispatch order in running power plants.

By Akhtar Ali

Too technical? Let me explain. Utilities or Electric System Operators have a merit list of power plants .The cheapest source/power plant is put at number one and the most expensive at the very last. As power demand increases, plants are ordered to send/dispatch electricity; the cheapest one comes on line first, and then the next cheapest, and so on and the most expensive one in the very end. The rationale is obvious; to buy minimum from the most expensive source and the maximum from the cheapest. There are two variants of this system, depending on whether it is a competitive market environment where market price is determined through demand and supply as determined in a real-time auction in electricity exchanges which these days operate in most developed economies. In these systems, total unit price of electricity (fuel +capital cost + O&M+ profit), is used as a criterion to decide as to which source is expensive or which one is cheaper. In cost-plus or regulated environments, long term pricing is agreed to according to a certain formula. Essentially, an electricity vendor or generator is paid for all his costs plus an agreed rate of return on his equity .Payments are made in two streams; one is the fixed annual costs paid usually in monthly installments. This stream of payments is to be made by the purchaser or the distribution companies or their agent, irrespective of whether , the purchaser orders electricity or not. It is a fixed liability on the buyer to be discharged as per agreed schedule. The buyer therefore treats these costs as sunk costs. Variable component of the price is to be paid at actual according to an agreed rate determined by a formula that includes fuel costs and O&M costs. Meters are installed , which record electricity units(kWh) received , and payments are made by the distribution companies to electricity vendor or generating companies , as an ordinary consumer pays for the electricity. This is the cost-plus system that operates in Pakistan, as it does in other developing countries, where electricity markets do not exist.

Coming back to the merit dispatch order, in cost- plus environments like ours, merit dispatch criterion is set at the unit variable cost. Purchaser would only compare his variable costs, (which for major part is actually fuel cost) for every incremental unit it buys, as his fixed costs are sunk costs.

There is another peculiarity in our energy and electricity systems .All fuels are not priced at their true worth and in this case their energy content, technically termed as Calorific Value. Oil may be inordinately expensive as it is mostly imported, while gas may be cheaper because it is locally produced. Reverse may be the case in most oil producing countries in the developing world, where often petrol prices are cheaper than crude oil.. to the extent of being literally free ,as is the case in Venezuela. False economies and comparative trade advantages and industrial base is established in such pricing regimes. On the other hand there are social constraints. Energy is an essential commodity and is required by the rich and poor alike, directly or indirectly. Usually some kind of trade offs is made. Normally, international financing agencies are opposed to these trades-offs and pressurize the policy makers to reduce or eliminate cheaper rates of energy than these are worth essentially, they argue for a uniform pricing. It is not the time and place here to examine the merits and demerits of uniform or optimal pricing in general and philosophical terms. We will examine here the implications of energy pricing policies on merit order dispatching, especially in Pakistan perspective.

What is happening in Pakistan is as following. In Pakistan, generally, gas is priced at half the rate of oil in terms of Rupees per unit of energy content, technically called Btu. There are a number of plants which are thermally very inefficient and consume a lot of gas , yet these plants are most frequently employed because the commercial cost is low due to cheap gas. Had gas been priced higher as per its energy content, these inefficient plants would only be used scarcely for peak requirements. Currently these double up as intermediary base load plants. Technically speaking, these come up higher in merit order.

Then what should be done. A simple and straight forward solution as would be practiced in rich countries would be to retire these inefficient gas guzzlers. We probably cannot do that , as we are already suffering from load shedding. But the irony is that due to pricing anomalies , even in the periods when there was no load-shedding , these inefficient plants were utilized much more ,and the most efficient and new and costly power plant like HUBCO remained under-utilized . It is now that there is a shortfall of 4000 MW that HUBCO is being utilized as per its availability and capacity. This is another matter that now there is funds issue and the circular debt that may prevent its fuller utilization. NEPRA has recently taken KESC to task for not utilizing its available capacity, which perhaps was for similar reasons.

Coming back, what to do then? Increase gas prices and thus hike electricity tariff, which the public is already crying horse against. More of tariff increase is in pipeline for other reasons, most important of which has been the recent Rupee devaluation. Our textile industry and exports are weaned on cheap gas prices and are quite used to wasting gas as well. Wasting habits go away gradually, but tariff increases may make the exports suffer causing unemployment and balance of payment difficulties.

Theoretically, price increase would discourage waste and bring about what the economists call optimal resource allocation, a Utopia indeed. Energy consumption is already quite low, and people are close to being pushed out of the energy market altogether. There are larger questions, but we would restrict ourselves to the problem of inefficient power plants wasting gas unnecessarily. We can’t throw these away and nor increase the gas prices to be brought in line with those of expensive oil. What to do ? Let us examine the following proposition.

The proposition is simple. Bring these plants out of the merit list and operate these for peak requirements and in emergencies as back up power. I wrote a long preface for this simple solution, but the effort perhaps would be well spent, if it makes our power sector operators respond to it positively.