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”.

Provincial governments demand transparency in Electrical pricing

Yesterdays newspapers reported that provincial governments have expressed dissatisfaction over fuel charges being levied by the electricity system , which they call non-transparent.Ministry of finance Has reportedly demanded from NEPRA to require audit of fuel purchased and consumed by the generation companies.This writer earlier had also misgivings on fuel adjustment charges levied by the utilities.Earlier NEPRA used to reveal fuel charges in one line statement issued monthly.Lately NEPRA has started publishing some details in this respect.Perhaps more is required towards this end,and detailed tabulation in this respect may satisfy the concerns and skepticism of the stakeholders.

On a larger plane Government has taken an institutional step to bring more order into the electrical system by organizing CPPA-Central Power Purchasing Authority.Readers may know that CPPA 's function is to purchase electricity from various generating companies like IPPs,WAPDA,GENCOs etc at formula previously determined by NEPRA.NEPRA,however,determines reference unit fuel charges and annual fixed charges under a cost-plus system.Actual prices paid by CPPA are ,however, according to a price escalation formula reflecting the changes in fuel prices.Meters have been installed at the required points to record electricity received.I am sure there is audit for all such payments,which although doesnot enjoy confidence of the governments themselves and other stakeholders.Hence the demand for transparency and publishing details on the net ,if not,by CPPA ,then by NEPRA.

Organizing CPPA as a company(under government guarantee) is expected to bring normalcy and the required transparency.Currently,the authority seems to have the status of a cell under NTDC.Company laws would require CPPA to make the required declarations.Advertisements have appeared in the newspaper for induction of a chief executive of CPPA.It is hoped that a candidate is found in time who meets all the requirements.

The criticism regarding fuel charge variations partly stems from lack of knowledge .It is perfectly all right that different generators would consume different quantities of fuel to produce same quantity of electricity,as there are differences in vintage,capital cost,technology etc.However there may be issues when the same producer charges for varying quantities of fuel for the same quantities of electricity.There may be variations of fuel mix,load factor.number of starts and offs etc that may cause variations.Hence that may require discretion on the part of buyer and seller.And hence the scope for abuse.Some measures towards declaring and transparency towards this aspect may satisfy the related skepticism from various quarters. However it may be only fair to also acknowledge that NEPRA publishes relatively much more data and info than other bodies like OGRA-Oil and Gas Regulatory Authority.

KESC Tariff difficulties;Shun constant Tariff formula

There seem to be difficulties again with the implementation of a rather unique tariff system given by foreign privatization consultants. I have not been closely following KESC tariff issues over the past many months.However my cursory following indicates to me that there are implementation issues involved in KESC tariff.There was earlier some kind of a divide on KESC issue at NEPRA board ,wherein two of the honorable members either wrote a note of dissent or withheld signature altogether.Now there are difficulties in awarding fuel price and O&M adjustments.NEPRA member Tariff,who reportedly presided over three member public hearing on KESC tariff,ordered physical verification of fuel expenditure invoices from the KESC. Let me give the reader some background on the tariff setting systems.

There are broadly two system:one of cost-plus,where all costs of the utilities are paid as these occur,and a fixed or variable Return on Investment(ROI) or Equity(ROE) is paid,generally related to the on-going interest rates.All IPPS are paid based on this cost-plus approach.There is a reference tariff determined through regulatory process,escalation above which is provided based on agreed formula and current fuel and other variable prices.It is relatively fair and simple.In case of distribution companies,with highly depreciated assets and often negative equity,Return on Asset(ROA) approach is used.OGRA is also doing the same with the gas distribution companies.

In case of KESC , a constant price tariff approach was adopted,however,with provision of escalations.The difficulty with KESC is that ,it is an integrated utility,with generation,transmission and distribution.Electricity is self generated by the KESC and is also supplied from WAPDA network.At the time of privatization, a certain mix of self generation,and purchase and an assumption of oil/gas mix was made.Depending on such assumption, a reference tariff was given with provision of escalation.At that reference price, there was an implicit loss to KESC, and the expectation was that the new KESC management would make the required investment and essentially earn through loss reduction.There were and still are Transmission and Distribution losses in the KESC system more than if compared with the

public owned companies like LESCO and IESCO etc.Also the thermal efficiency od most of its plants is very low,wasting a lot of expensive fuel oil.KESC has done some investments and is in the process of making more investments towards improving thermal efficiency and saving fuel cost.This saving ,however,will go towards reduction of losses,wiping out the accumulated losses and finally towards return on investment.These savings cannot be passed on to the public as some people seem to be demanding.

However the existing system of constant price with escalations has become very cumbersome and even lacking in terms of transparency due to its complexity.Traditionally,this constant price formula has been used in distribution companies only, and that also for up to three years,with no provision for escalation.

In most of the developed world, electricity generation is out of regulatory process.Whole sale electricity prices are set through demand and supply through an auction process through electricity exchanges on the lines of share bourses.Generation prices are relatively more stable in the OECD countries as most electricity generation is based on gas,coal and nuclear power,where price volatility has been lesser.Even in the neighboring India,the electricity prices are much more stable than here,due to the domestic and public controlled coal.In Pakistan,hydro and gas based electricity used to provide price and tariff stability,but due to increasing contribution of oil based generation.price volatility has increased.This oil dependence and the increasing trend on oil dependence is the single largest threat to Pakistan's economy and social stability.The earlier other sources such as hydel and coal are utilized the better.

Coming back to KESC,the very purpose of constant price system of offering simplicity and transparency seems to have been defeated due to so much variability and complexity.It is quite possible that the young men at NEPRA who do these calculations may sometime fail to appreciate the issues and commit mistakes.Even this writer often gets confused and finds himself at a loss as to how to separate permitted variabilities from the non permitted ones.The situation would get even more complex and complicated if and when KESC makes new investments in new generation capacity.Questions have already been raised by the stake-holders,casting doubt and feeling confused.

Our business community,which is not used to spending money on building institutional capacity in their representative organisation,has never managed to make a technically valid case and has relied more on delaying litigation to oppose tariff increases.If nothing else ,the KESC tariff system is becoming too cumbersome to be transparent.Recent load balancing practices and requirements ,and the consequent changes of oil and gas mix have further complicated the situation.

It would be only appropriate that the government and the regulatory bodies consider changing the KESC tariff system to a conventional simpler system of Cost-plus,which is being practiced with other IPPs ,and distribution companies.Even KESC management may feel at ease, if the stake-holder confidence in the system is improved.For this to happen,KESC tariff has to be a three part tariff, separately for generation ,transmission and distribution.In this case comparability with other similar companies would be available preventing abuse or error.This would be for regulatory body and the KESC: public would be having one tariff as usual and would not be burdened with such disaggregation.Foreign consultants as usual are to be appointed,as the requisite expertise and objectivity may not be available locally.

Targeting loss reduction and basing tariff on it is to make tariff contentious,controversial and fluid.KESC tariff system has this feature as well.It has been demonstrated now that the private sector has no special leverage in reducing T&D loss reduction.most of which is theft and pilferage.In fact private sector is susceptible to political and group pressure more than the government functionaries.As to the reduction of fuel cost and increasing thermal efficiency,it is a matter of attractiveness of investments in the sector and tariff stability.Third party investment for Karachi is being discouraged due to the existing system and KESC would itself be discouraged to make the requisite investments,if tariff issues remain fluid as these are at the moment.Lenders would also be hesitant as well.

And finally contemplating over these problems,one reaches a conclusion that after all,the idea of privatizing distribution utilities may not be a good one.Government would have to be around to take responsibility and to keep footing the bill,if there are losses,be it private or public sector.However,IPPs have been a successful innovation that must continue and in all probabilities would be sustaining into the long term future.