Gas sector circular debt doubles to Rs650bn in three years

ISLAMABAD: Circular debt for the cash bleeding gas sector has almost doubled in last three years (period ended on June 30, 2021) of PTI-led government to Rs650 billion against Rs350 billion in the FY2018, mainly on account of tariff status quo and unmanageable UFG (unaccounted for gas) losses.

When authorities shared this figure with the International Monetary Fund (IMF) it placed a structural benchmark for amending the Oil & Gas Regulatory Authority (ORGA) Ordinance 2002 for automatic adjustment of gas tariff with the approval of Parliament if the government did not notify the determined tariff through the sector regulator.

The circular debt in the gas sector was Rs350 billion at the end of the tenure of PML-N-led regime for the fiscal year 2017-18. One reason for its buildup was the then government’s deciding against a raise in gas tariff, while the other was its inability to keep Unaccounted for Gas (UFG) losses within the desired limits. However, the PTI-led regime increased the gas tariff but could not succeed in curbing UFG losses effectively.

Now the government has fulfilled another structural benchmark demanded by the IMF by getting Oil & Gas Regulatory Authority (OGRA) Bill 2022 approved from the Upper House of Parliament (Senate), which would allow OGRA automatically issue revised tariff within the stipulated timeframe.

Under the previous mechanism, the OGRA required permission through official notification for placing new gas tariff. With this grant of automaticity to OGRA, the gas tariffs are highly likely to rise 30-40 percent for domestic, industrial, and commercial consumers.

“The OGRA Bill, 2022 creates automaticity in issuing a new gas tariff. Under the new Bill, if a government is unable to advise new gas sale prices, OGRA within the time specified in subsection (3) of the OGRA Ordinance i.e. 40 days of its determination, may itself notify the new gas price. Whereas previously OGRA required permission from the government to issue a new determination,” said Dr Khaqan Najeeb, former Adviser to Ministry of Finance, while talking to The News.

“The governments have at times been unable to pass the impact of changing gas prices which has serious quasi-fiscal consequences. Whereas the power sector circular debt is the talk of the town, an equally serious situation prevails in the gas sector. It is now estimated, based on financial data of OGRA and gas sector companies, the circular debt stock in gas sector has risen to an uncomfortably high level of about Rs654 billion at the end of June 2021 split between Rs554 billion in system gas arrears and around Rs100 billion in RLNG arrears.”

Dr Khaqan said part of the circular debt buildup was coming from holding back tariffs for FY2022 since September 2021.

It is noteworthy that the last price adjustment was done in September 2020. Certainly, the Covid difficulties did not allow the government to burden the consumers over the last 16 months, the economist said.

“The situation is tough as with inflation at 13 percent in January passing the increased burden of gas prices will be an uphill task in the country. The OGRA bill 2022 can hopefully support the timely rationalisation of gas tariff determinations in the future,” Dr Najeeb added.

He said there also were some other causes of the unsustainable gas sector circular debt – especially the high unaccounted-for gas (UFG) losses.

“Concrete progress needs to be made to get to the benchmark of 7.5 percent of UFG allowed by OGRA to put brakes on circular debt accumulation. It is important to strengthen the transmission network to curtail gas theft by consumers and for this gas companies' financial and managerial functioning must be a priority of any government.”

Arguing that as gas sector operations in the country were primarily with the public sector, a healthy picture was nowhere in sight, he concluded.