July 13, 2022 (MLN): Following the approval of the Economic Coordination Committee (ECC) related to the hike in gas prices by 43% to 235%, the weighted average gas price is estimated to increase by 46% from $4.5 to $5 per MMBTU, a research note issued by Topline Securities on Wednesday noted.
However, the said approval by ECC is likely to be approved by Federal Cabinet which will later be notified by Oil & Gas Regulatory Authority (OGRA).
Based on the latest available data of Pakistan Energy Yearbook 2020, the weighted average selling price of gas in Pakistan is estimated at around $3 to $3.5 per MMBTU as against the cost of gas of around $3.6 to $4 per MMBTU thus creating a differential.
The increase in gas tariffs will help bridge revenue shortfall for the gas utility companies for the current year and prior years as Pakistan last increased gas prices in October 2020 by 0-8% for different sectors, the report added.
The said increase will help to generate additional revenue requirements of Rs400 billion to Rs600 billion for gas utility companies including Sui Southern Gas Pipeline (SSGC) and Sui Northern Gas Pipeline (SNGP). It will also prevent accumulation in gas circular debt which has piled up to Rs1.5 trillion (around 2% of GDP) as per the Petroleum Division.
In FY20, total gas revenues stood at around Rs1trn where total gas units sold (including LNG) stood at around 4,499mmcfd.
IMF has also been a key proponent of reducing circular debt by increasing gas tariffs as it is increasing a huge burden on the government’s fiscal account. Along with rationalization of power tariff, this hike will take Pakistan closer to the revival of the IMF program.
The report further highlighted that the Pakistan Bureau of Statistics (PBS) considers the weighted average gas prices for consumers for calculating the impact on CPI. Hence, with a 1% weight in the CPI basket, CPI inflation could be impacted in the range of 50-100bps.
As far as the implication of this hike on sectors is concerned, Gas companies, the E&P sector, and OMCs will be in a sweet spot as the increase in gas tariffs will reduce gas tariff differentials for SSGC and SNGP which will be cash flow positive for the companies. Meanwhile, the gas price hike will be cash flow positive for exploration companies including Oil & Gas Development Company (OGDC) and Pakistan Petroleum (PPL) as gas circular debt reduces. ECC has also proposed an increase in gas prices for dedicated MARI consumers which will be positive for the company.
On the other hand, the textile sector will have to earn impact of 5-20% on the back of gas price hike for both South and North-based players. If approved by the cabinet, the Punjab-based export industry will be charged at $8.5 per MMBTU (Earlier: $6.5 per MMBTU) and South based export industry will be charged at $6.5 per MMBTU (Earlier: US$4 per MMBTU), the report noted.
Due to extensive gas requirements, companies like Gul Ahmed and Nishat Mills are likely to be impacted the most.
In addition, the steel, cement, and chemical sectors will also witness the brunt of the gas price hike while fertilizers and IPP will remain neutral to this hike.
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