As the debate rages on social media regarding oil prices, the time bomb of growing circular gas debt is conspicuous by its absence in these discussions. Consumers are addicted to cheap gas even though a reliable supply (at throwaway prices) is rarely available to the poor. This is clear from the fact that the Sui companies (SNGP and SSGC) have 11 million gas connections – or one-third of households in the country – while the rest depend on expensive LPG and other sources. Even those in the higher income segments bemoan the revised gas prices, even though they comfortably pay a higher bill (compared to their monthly gas bill) for two people dining in a decent restaurant.
The supply of cheap gas to households was manageable in an era when domestically produced gas was plentiful to meet the needs of local consumption, and non-residential consumers (paying higher tariffs) were numerous enough to subsidize l national supply. With the exhaustion of the natural gas supply, the slightly higher price customer (industrial, transport and commercial) has turned to imported RLNG, and the remaining good customers are not enough to subsidize the domestic market. Thus, the receivables start to accumulate due to the difference in costs and income of the Sui companies. In addition, supplying expensive LNG to domestic consumers in winter at a small fraction of the total cost further exacerbates the claims.
When Sui companies are unable to collect sufficient revenue from consumers, they cannot pay their gas suppliers – mainly two state-owned E&P (Exploration and Production) companies – OGDC and PPL. And when these Sui companies do not recover the cost of the imported RLNG from their customers, they do not pay to the state companies that supply the LNG – PSO and PPL. This chain of non-payments is known as the gas circular debt. It’s similar to the electricity sector’s circular debt that has become a monster over the past two decades. Now another monster is in the making. Circular electricity debt stands at over 2.5 trillion rupees while circular gas debt fluctuates between 600 and 700 billion rupees and is increasing.
E&P companies are generally cash rich and spend on exploration for oil and gas wells and fields. A few of these explorations are successful and produce oil and gas for decades. Due to the accumulation of circular energy debt, the exploration capacity of exploration and production companies is hampered because they do not have sufficient cash flow. A few foreign E&P companies have left Pakistan; while national (state-owned) enterprises have survived but are far from prospering. Now circular gas debt is hurting companies like OGDC and PPL more. And because of this, the country’s energy security is in question and its dependence on imported fuels is increasing.
The issue of circular gas debt is not as complex as that of electricity. Gas prices for domestic consumers in Pakistan are cheap and its use is inefficient. With higher electricity prices, the energy-saving lighting and air conditioning market has grown, and today it is difficult to find old style window air conditioners installed in homes and offices. Today, even high-end architects are incorporating energy conservation into their design. Likewise, the use of solar panels is growing. However, in the case of gas, the use of extremely inefficient geysers, heaters and stoves is common among home consumers who are otherwise concerned with conserving electricity. Price has an impact on consumer behavior.
The government needs to articulate a narrative for the proper use of energy and should use pricing to signal consumers that the country is running out of gas supply. One element is to encourage the use of electricity during winters in homes and offices for space and water heating. The government has announced that the additional use of electricity in winter (compared to the use of previous years in the same months) will be provided at marginal cost. At the same time, the government needs to increase gas prices for Sui businesses in order to generate enough revenue to match costs. Advertising campaigns should be broadcast on the media to educate the public and purchase reversible reverse air conditioners, electric heaters and efficient geysers. The government should reduce taxes on these devices to make them affordable.
These steps are necessary to shut off the gas circular debt flow valve. It is above all a question of erasing the outstanding debt already accumulated. This not only hinders the exploration activities of E&P companies, but also affects the non-tax government revenues of these companies in the form of dividends, and negatively affects the performance of the stock market as these listed companies are heavy but underperforming entities. .
The government owns 75 percent of the shares of PPL and 85 percent of the shares of OGDC. The combined unallocated profits of these two companies (retained earnings) amounted to over Rs 900 billion (PPL Rs 215 billion; OGDC Rs 689 billion) in March 2021. But due to cash flow problems, they do not pay enough dividends. If the Sui companies pay them their due share, these E&P companies can pay the majority in the form of a dividend to the government. Then the government will also earn on the dividend tax payable by private shareholders. In addition, it will revive the fundamental stocks of PSX, where these two companies are trading at a price / earnings (P / E) multiple of less than 4. The stock price can easily double because the historical P / E multiple out of 10. years is greater than 8..
As of July 31, 2021, SNGP’s debts to these two companies amounted to Rs 272 billion (OGDC: Rs 128 billion; PPL: Rs 144 billion) and SSGC debts to Rs 257 billion (OGDC: Rs 150 billion; PPL: Rs 107 billion)). These differences concern the circular gas debt on the domestic supply of natural gas and are on the principal amount (without accrued interest). Then, SNGPL has debts towards LNG supplies – at Rs 105 billion – due to PSO and PPL. These are all tariff differential figures – the difference between the cost and the tariff determined by the regulator.
One proposal is to partially convert these tariff differentials on LNG and domestic gas into public debt – in the form of GDP and Sukuk. For example, issue Rs 150 billion SNGP to pay – Rs 50 billion RLNG and Rs 100 billion domestic natural gas – and Rs 50 billion SSGC on natural gas. Use those Rs 200 billion from the Sui companies to pay Rs 100 billion each on the pending claims to OGDC and PPL. And let these E&P companies pay dividends – Rs 160 billion will go directly to the government and part of the rest will come back in the form of withholding tax on dividends from private shareholders.
These steps are obvious to facilitate the liquidity of the blocked system. Circular debt should eventually be on the government’s books. Better to do it now, to bring these businesses back to life. But more importantly, the government must make tough decisions to upward gas prices to turn off the tap. These decisions are difficult because the nation is addicted to cheap natural gas. Otherwise, these decisions make full economic and commercial sense. But we all know it is not an easy task to deal with addictions.
Copyright Business Recorder, 2021