Government is set to increase gas prices by 5-7% in order to adjust the losses incurred by Sui gas companies. The decision has been made on the recommendations of the Petroleum Division.
Petroleum Division recommended a price hike to raise Rs 18 billion that have been lost since 2012-13 due to several reasons including court cases.
The decision will most likely take effect after the upcoming meeting of Economic Coordination Committee (ECC). OGRA will be issued directives to make up for any losses to gas companies that have occurred since 2012-13. The losses will be adjusted by increasing gas tariff, otherwise, the government will have to allocate the money for gas companies from the budget.
Reason Behind the Price Increase
As per the latest proposal of the petroleum division, performance standards set by OGRA need to be updated. The proposal says that these standards need to be in-line with the latest independent Unaccounted For Gas-UFG study. This study recommends the provincial benchmarks to be set at 7.6% so the gas companies can remain financially stable. The proposal says;
This division proposes that Ogra may finalise the provisional benchmarks set from 2012-13 to 2016-17 in line with recommendations of the UFG study ie the benchmark at 7.6pc (fixed rate of 5pc UFG plus 2.6pc for local conditions) so as to ensure that gas companies continue to remain financially viable and sustainable.
For now, the two gas companies, Sui Southern Gas Company Ltd (SSGCL) and Sui Northern Gas Pipeline Ltd (SNGPL), will be given Rs 11.257 billion and Rs 6.535 billion respectively. The money will then be adjusted by taxing the consumers and increasing the gas price by 5-7%.
These losses were incurred through line losses, gas theft and gas loss in areas with poor law and order situation.
The gas companies have asked OGRA to adjust the losses that occurred before 2012 too. However, OGRA has taken the position that those losses can’t be adjusted based on the current UFG study. This is what the gas companies’ representatives had to say;
[Such a] treatment is going to cause adverse financial conditions for SSGCL as only Rs2.4bn equity would be left as of Jun 30, 2016 cannot provide sustainability to account for leftover unabsorbed loss of Rs18bn occurred due to the decision of Sindh High Court.
The case went to court after a series of decisions by former OGRA chairman Tauqir Sadiq. Sadiq changed UFG from 5% to 7% in 2009. He then changed it back to 5.625% for 2010-11 and then updated it again to 4.5%.
This led a political scandal and the case eventually went to court. Courts initially allowed the companies to work at 7% UFG but later upheld OGRA’s decision to decrease the UFG to around 5%. Court’s decision was challenged in the Supreme Court but due to stays and long trials the financial liability increased to Rs 16.2 billion, the companies told.
The gas companies further say that if previous losses aren’t adjusted then gas supply to millions of consumers will be jeopardized.