PAKISTAN: Structure is in place to sell off the gas sector

14 April 2000
SPECIAL REPORT OIL & GAS

PAKISTAN's new government is under fire from many quarters for everything from suspending democracy to its use of emergency powers. In one area, at least, it has acted promptly to pursue a policy set in train by its predecessor. In a presidential decree in January, a new regulator for the gas sector was established in a move that is expected to boost foreign involvement in the industry and enhance prospects for privatising the gas distribution companies.

Natural gas is a major source of fuel in Pakistan, accounting for 38 per cent of total energy supply. Apart from being an affordable source of energy for domestic consumers, it is also a feedstock for fertiliser production, thermal power generators and cement plants. Gas production currently stands at 18,000 million cubic feet a day (mcf/d). The main producers include state-owned companies Pakistan Petroleum and Oil & Gas Development Company (OGDC), the UK's Lasmo, BHP Petroleum of Australia and OMV of Austria.

Pakistan now plans to make gas the fuel of choice for future electric power generation projects. This will require a sharp rise in production of natural gas or an increase in imports. Demand is already outstripping supply by 500 mcf/d, and the gap is projected to widen to 800 mcf/d by 2009/10. Another aspect of the gas strategy is the planned privatisation of the state-owned gas distributors, which need to expand their capacity significantly. The establishment of an independent natural gas regulatory authority (NGRA) is seen as a prerequisite for these plans.

The NGRA will be responsible for setting wellhead gas prices, which producers say determine the worth of unprocessed gas from a discovered field. Incentives offered under the petroleum policy of 1994 resulted in a sharp rise in exploration activity and more than 6 trillion cubic feet (tcf) of gas reserves have been discovered over the last three years.

OMV's 1998 discovery at Sawan is expected to produce 450 mcf/d by 2001. Lasmo reported a new find last March in the western Sind province that is expected to produce 20 mcf/d. The UK's Hardy Oil & Gas also reported a new discovery last year in the Middle Indus region of Sind, which tested at an initial 58 mcf/d.

The eagerly awaited development of many of these new discoveries has been hindered by delays in concluding gas sales agreements. The problem stems from the sharp rise in imported oil prices, which has prompted the government to revise its original 1994 petroleum policy. That policy linked gas prices to prevailing international oil prices, but does not oblige the government to purchase the gas from the producers. This has enabled it to pressure the operators to accept a new framework as oil prices have surged to record highs. Industry sources say negotiations between the government and producers have focused on a revised pricing formula which sets oil price bands for gas prices.

State-owned gas distributor Sui Southern Gas Company (SSGC) is understood to have recently signed sales agreements with the operators of Miano, Daru, Zamzama and Badin 11 gas fields, under this modified price formula, paving the way for substantial investment in distribution infrastructure.

However, agreements with OMV, Lasmo and Pakistan Petroleum are still being negotiated. Besides stimulating significant foreign direct investment, these deals will have other economic benefits. The additional gas from these fields would lower imported fuel oil requirements, thereby easing pressure on the balance of payments. It would increase government revenues, through royalty payments and tax.

Essential for privatisation

The lack of a satisfactory regulatory and tariff framework governing the activities of gas distribution and production companies has been a major impediment to progress on privatising the sector. The creation of the NGRA is seen as vital for the government's new sell-off agenda.

First on the list is OGDC - the country's most active gas explorer. The government is also seeking to divest its interests in nine oil and gas fields. The largest concession on offer is a 40 per cent stake in the Badin gas fields, in Sind, which are operated by Union Texas Pakistan. Production from the concession in 1998 averaged about 153 mcf/d. Upon successful completion of the sell-offs, the government is expected to put up for sale its interests in a further nine-12 major oil and gas fields.

The government also plans to privatise distribution companies SSGC and Sui Northern Gas Pipelines, whose tariffs are regulated by the Petroleum & Natural Resources Ministry. Profits are capped to a maximum return on fixed assets. Earnings of any amount over and above the fixed return go to the government in the form of a gas development surcharge.

'The problem is that the owners - the government - are also the regulators. Once you have set aside regulation, and then on the corporate level when you have a divorce between management and owners, then you have the right equation for privatisation,' says Ibrahim Masud of local investment house Khadim Ali Shah Bukhari, which is bidding to advise on the transactions.

The creation of the NGRA has been welcomed by industry analysts, who say it will help focus the decision-making processes. However, they say that the implementation of the bill will be crucial in determining its effectiveness. The quality of its staff and the strength of the mandate remains to be seen, says one.

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