Under IMF programme: PD will soon start issuing notices to CPPs for disconnecting gas supply

ISLAMABAD: The Petroleum Division (PD) through gas companies is all set to start giving notices to Captive Power Plants (CPPs) from this week for disconnecting gas supplies under the $7 billion IMF loan program as the process is to be completed by the end of January 2025. It is one of the main structural benchmarks of the Fund program.

“If we do not initiate the process and complete it by the end of January, the loan program will be scuttled,” a senior official of the Energy Ministry told The News.

However, this will expose the gas sector to a surge of Rs400 billion per annum in the existing circular debt of Rs2,700 billion. The industrial sector, which is thriving on captive power plants, is currently purchasing blended gas at Rs3,200-3,400 per MMBTU and it is also cross-subsidizing Rs103 billion protected domestic gas consumers. If they are disconnected, then the government would have to either provide Rs103 billion per annum as subsidy against the cross-subsidy that the industrial sector is right now giving or hike the gas tariff for protected consumers.

More importantly, the country will brave $13 billion loss in exports if CPPs are disconnected from the gas supply. “Exporters would further lose confidence of global buyers due to a highly uncertain situation in Pakistan. Exports of industrial manufactured sectors will decline resulting in loss of foreign exchange, employment, services and revenue to FBR.”

He said there was also a potential risk of production losses as a direct consequence of unstable electricity supply from the national grid subject to variations in respect of voltage, frequency or supply of electricity, halting the entire production process.

However, he said, functionaries of the Petroleum Division during the last visit of the IMF mission from November 11-15 agitated the issue, arguing it would not only inflict damage of Rs392-400 billion in revenue to the gas companies but would also cause a decrease of $13 billion in exports.

The IMF was told that captive power plants are currently being supplied blended gas in the north of the country at Rs3,400 per mmbtu and in the south at Rs3,200 per unit.

The export sector uses 350mmcfd gas per day through CPPs. If this sector is disconnected, gas companies would not be able to sell this huge volume of gas to another sector at the current rate. “This huge loss would also multiply the financial miseries of gas sector as all categories of consumers have also reduced gas consumption about 150 mmcf per month due to which the government has already asked Qatar authorities to shift 5 RLNG cargoes to be imported in 2025 to 2026.”

“The Fund mission didn’t reciprocate positively but showed its willingness to discuss the matter. The IMF had included shifting of the industry to grid electricity for increasing the use of grid electricity in a bid to cope with capacity payments.”

The industrial sector says it requires stable and consistent power through reliable sources like natural gas to combined heat and power (CHP) systems to avoid jerks disruption in critical operations. Discos are unable to cope with outages and fluctuations to maintain stable and consistent power to the industrial sector, which may jeopardize the processing.

Their investment on units will become sunk cost, and they will need to make additional investments for grid connectivity in case they decide to shift to power instead of opting for alternate fuels.

Given the sensitivity of the issue, on the directives of the prime minister, four federal ministers put their heads together on November 29, 2024 on how to handle the structural benchmark of the IMF program loan of $7 billion. The federal ministers of commerce and trade, petroleum and power attended a meeting chaired by Finance Minister Senator Muhammad Aurangzeb to work out the way forward for a solution to captive power plants issue.

“In the inter-ministerial meeting, the finance minister asked the Power and Petroleum divisions to come up with updated and correct data on the impact of severing captive power plants from gas supply so that it could take up the issue with IMF. The structural benchmark of the loan program cannot be changed at the staff level meetings of IMF, it can only be reverted by the IMF executive board.”

However, the official said that shifting the industrial sector to grid electricity is not possible by the end of January as the Power Division has to install many grid stations and it requires at least one and a half years with liquidity of Rs25 billion to complete the process. He expressed optimism that the government may succeed in getting an extension by 6-12 months in cutting off the gas supply and shifting industry to grid electricity.

The government would inform the IMF that from January 1, 2025, the gas tariff for captive power plants would further increase at par with the cost of RLNG and they would not be provided with blended gas.