AKD Quotidian about — Gas Pricing GoP making the right moves

Karachi: Pakistan’s natural gas production is -4bcfd while demand is 6cfd- 8bcfd.

According to AKD Securities, in AKD Securities’ view, this imbalance is partly due to the very low prices of natural gas, where FO costs -US$20/mmbtu against gas price ranging from US$5-US$6/mmbtu. Now however, the Ministry of Petroleum (MoP) is rightly looking to address the issues of both gas shortage and gas pricing. In this regard, planned gas import (LNG/IP/TAPI) together with support for greater production (tight/shale gas) will not only bridge the supply-demand imbalance but also raise prices considering TAPI gas will cost an estimated US$1O.85/mmbtu, IP gas will cost -US$14/mmbtu, imported LNG may be at least 3x more expensive than gas provided to industry and tight gas reserves may be priced at US$7-US$8/mmbtu.

Even these higher gas prices will be lower than FO prices, where the MoP is rightly adopting a forward-looking approach. Nevertheless, the GoP could do well to gradually prepare the public for the upcoming inflationary increase in gas prices. Case in point is Iran, which successfully increased energy and agricultural prices by up to 20x in late 2010 after taking the public and the corporate sector on board.

Gas prices vs. POL products

 

Gas rates (PKR/mmbtu) POL Products  Price  (PKR/mmbtu)
Domestic users 145 MS (PKR/ltr)  84.91  2,576
Commercial  527 HSD (PKR/ltr)  94.15 2,554
Industries 434 HSFO (PKR/ton) 74,020 1,815
CNG 572
Feed stock (Fertilizer old plants)  102
Feed stock (Fertilizer new plants) 60
IPPs 377

 

GoP finally looking into gas mispricing: In AKD Securities’ view, the energy mix in Pakistan is inefficient (disproportionate reliance on FO) and misprices energy resources particularly gas. Now however, the Ministry of Petroleum is appropriately looking to bridge the gas demand-supply imbalance through gas import/development of indigenous gas reserves, while also looking to set right the gas pricing mechanism. In this regard, assuming oil at US$100/bbl, TAPI gas will be priced at US$l085/mmbtu which is -70% of equivalent crude oil price while this benchmark may also be utilized to downward revise the IP gas tariff (currently priced at -78% of oil).

All in all, the cumulative benefit of these two projects in terms of foreign exchange savings (substitute for FO) should exceed US$2bn. These should couple with incentives for development of tight/shale gas reserves on the home front (new Petroleum Policy expected shortly). At the same time, imposition of gas infrastructure development cess (which aims to raise PKR34bn) and PL on LPG should distribute some of the costs for the aforementioned projects. If these proposals are executed, the MoP needs to be credited with the foresight to implement these important and much-needed structural reforms.

Leave a Reply