Cutting off gas supply to CPPs: IMF asked to do away with benchmark

ISLAMABAD: Pakistan has asked visiting IMF mission to do away with structural benchmark of $7 billion Extended Fund Facility (EFF) programme under which government is bound to disconnect gas supplies to single and cogeneration captive power plants (CPPs) from January 2025.

“The government’s top functionaries in a two-hour meeting with the IMF mission, headed by Nathan Porter held here on Wednesday, pleaded cutting off captive power plants from gas supply and connecting industrial sector to grid electricity from January 2025 will be disastrous for gas sector. It would inflict revenue loss of Rs400 billion to the system which will cause massive surge in circular debt in gas sector that currently stands at Rs2700 billion”, senior government officials told The News.

Federal Minister for Power Division Sardar Ahmed Leghari, State Minister for Revenue Ali Pervaiz Malik, Secretary Petroleum Division, Additional Secretary Petroleum Division, Secretary Commence, Secretary Ministry of Industries and Additional Secretary Finance attended the meeting. Federal Minister for Petroleum Division Musadik Malik took part in the meeting from Baku via video.

Commerce ministry officials in the meeting said if captive power plants, having over 70pc efficiency, are disconnected, Pakistan would suffer a loss in exports of $13 billion.

The commerce ministry also pleaded it would lead to closure of over 1,400 large units and unlimited smaller units in the textile sector supply chain, leaving some 3 million people jobless. It would cause a drop of 6pc in export revenue, equal to a loss of around $3 billion in export earnings, the officials said.

Petroleum Division’s top officials told IMF captive power plants are currently being supplied blended gas in the north of country at Rs3,400 per mmbtu and in the south at Rs,3200 per unit.

The export sector uses 350mmcfd gas per day through CPPs. If this sector is disconnected, Sui gas companies would not be able to sell this huge volume of gas to another sector at the current rate, the IMF told.

The Fund was also told gas network system is currently facing a line pack pressure of over 5 billion cubic feet because of massive dip in gas consumption in country, putting whole gas network in jeopardy.

Under this scenario, Petroleum Division said, as per official sources, how government would consume 350mmcf of gas per day which would be spared after disconnecting captive power plants from gas supply. The Fund was briefed on how government has rescheduled arrival of five LNG cargoes to 2026 which were destined to reach in 2025 from Qatar. The Fund was sensitised the authorities have reduced gas outflows from local gas wells just to save national gas distribution network, as it cannot stop import of LNG cargoes from Qatar and ENI. The government has inked agreements with Qatar and ENI on take or pay basis with severing guarantees, the Fund told.

“The local E&P companies have sustained loss of Rs50 billion during 2021-24 because of sudden reduction in gas outflows by SNGPL to save gas network system as the gas wells nearing depletion. If compelled to reduce natural gas flows, it would cause irreparable damage, and the wells cannot be recharged to their original flow levels”, the IMF told.

They require capital-intensive investment through artificial lift methods to resume production, the officials said.

In the past, officials said, many wells braved huge damages because of reduction in their gas outflows, and they could not be recharged. This is how many E&P companies braved mammoth losses.

The Fund was told if this gas from captive power plants is diverted to domestic sector, the system would face a huge loss in recovery. The delta of loss would not be recovered from domestic consumers, as their tariff is too much lower if compared with current gas tariff of captive power plants.

Captive power plants and industrial sector are, according to official sources, providing cross-subsidy of Rs150 billion for protected domestic consumers which are 60 percent of total consumers.

The Petroleum Division officials argued if the Fund is adamant on cutting off gas supplies to captive power plants from January 2025, then ensure from government annual budgeted subsidy of Rs100 billion to maintain gas tariff for protected gas consumers in the domestic sector at the existing rates. Otherwise, the government would have to increase their tariffs, they said.

The Petroleum Division also said it is maintaining mini BISP (Benazir Income Support Programme) in gas sector, while keeping gas tariff of protected consumers at lower side through cross-subsidy from captive power plants and the industrial sector. The captive power plants are giving cross-subsidy of Rs103 billion per annum and industrial sector Rs47 per annum.

In the meeting, according to sources, Federal Minister for Power Division Ahmed Khan Leghari endorsed viewpoint of Petroleum Division. He said power sector is going through transition and facing issue of handling additional electricity generation capacity. Power sector is braving loss of Rs20 billion, as industrial sector having captive power plants is not connected to grid electricity. Powers Division requires Rs20-25 billion to build grid stations to provide electricity to industrial sector.

Leghari, however, said country would face a loss in revenue of Rs400 billion if captive power plants are disconnected from gas supply. This means country would face more loss in gas sector if CPPs are disconnected from gas supply than the loss of Rs20 billion in power sector.

The Power Division Minister asked the IMF not to disconnect gas supply of captive power plants in the interest of country.

“The Fund chief, however, agreed to further discuss this issue and asked for more data from Power Division to assess if the Fund should go for review of structure benchmark of cutting off captive power plants from gas from January 2025, official sources said. However, Petroleum Division has provided the data and details to the IMF so that it could reassess its decision.

Officials sources said the IMF was misled about captive power plants, saying in January 2021, Cabinet Committee on Energy (CCOE) decided to disconnect single-cycle captive power plants from gas, not double cycle—co-generation captive power plants—which are highly efficient. But, the Fund has included cutting off all captive power plants from gas supplies as the structural benchmark for the $7 billion loan programme.

Since it is the structural benchmark for the existing IMF programme, the IMF Board is the forum to do away with this benchmark.

However, the visiting mission and staff-level officials of the Fund, if convinced by government arguments, can recommend IMF Board for review. Otherwise, Pakistan would have to abide by the terms and conditions of existing loan programme.

As per sources, Petroleum Division is still on the same page with the Fund that the gas tariff for captive power plants would be further increased at par with RLNG price of 3700-3800 per mmbtu from January 1, 2025. The natural gas tariff for captive power plants has already been increased to Rs3,000 per mmbtu from Rs2,750 per mmbtu.