In a move that makes some progress towards tackling rising circular debt in Pakistan’s gas sector, the Oil and Gas Regulatory Authority (OGRA) has approved significant price increases for the country’s two major gas distribution companies. The decision, announced on December 18, 2024, allows Sui Northern Gas Pipelines (SNGP) and Sui Southern Gas Company (SSGC) to raise gas prices by 8.8% and 26%, respectively.
This regulatory action is part of a broader strategy to address the complex problem of circular debt that has plagued Pakistan’s energy sector for years. The price hike is expected to help these state-owned companies reduce their receivables and improve their financial health, which could ease pressure on the country’s economy.
OGRA’s decision comes in response to review requests submitted by both Sui companies on their revenue requirements for fiscal year 2025. The regulator has recommended these price increases as part of ongoing efforts to align gas tariffs with the actual cost of supply.
For SNGP, OGRA has allowed average operating assets (AOA) of Rs 108.6 billion, which is broadly in line with the previously approved figure as of May 20, 2024. The required return on assets has been set at 25.9%. In addition, OGRA has now allowed 50% of the financing cost to be passed through to finance management, an increase from the previous approval of 25%.
These amendments are expected to have a significant impact on the financial performance of SNGP. With the approved assets and rate of return, SNGP’s return on assets is expected to reach Rs 37.8 billion, including a return of Rs 9.7 billion on RLNG assets. After accounting for unaccounted gas (UFG) disallowance and financing costs, analysts at Topline Securities estimate that SNGP’s earnings could reach Rs 17.3 per share, with the potential to increase to Rs 28.2 per share if 100% financing cost is allowed on the ongoing financing.
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To fully appreciate the importance of this decision, it helps to understand the concept of circular debt and its impact on the energy sector in Pakistan. Circular debt occurs in the gas sector when the total cost of gas delivery exceeds revenues generated from gas sales and government subsidies. These shortfalls accumulate over time, creating a cycle of unpaid bills that extends across the entire energy supply chain.
The problem has worsened significantly in recent years. By September 2024, total circular debt in Pakistan’s oil sector had swelled to a staggering level of 2,897 billion rupees, including 814 billion rupees of interest. This number represents a significant portion of Pakistan’s GDP and poses a major challenge to the country’s economic stability.
The roots of this crisis can be traced back to 2013 when gas prices were not allowed to rise despite rising production costs. This resulted in unfunded subsidies because gas sales revenues were insufficient to cover the increased expenses. The situation was further aggravated by the introduction of expensive liquefied natural gas into the system without a corresponding increase in consumer tariffs.
Historical context: SNGP and SSGC
To better understand the current situation, it is useful to consider the history and roles of SNGP and SSGC in the Pakistani gas sector.
Sui Northern Gas Pipelines Limited (SNGP) was incorporated as a private limited company in 1963 and converted into a public limited company in 1964. It has since grown to become the largest integrated gas company in Pakistan, serving over 7.22 million consumers across Punjab , Khyber Pakhtunkhwa and Azad Jammu and Kashmir.
SNGP’s extensive network includes more than 9,320 km of transmission pipelines and 142,998 km of distribution pipelines. The company’s operations extend across 16 regional offices, covering 5,284 major cities and neighboring villages. In fiscal year 2019-20, SNGP’s annual gas sales to consumers amounted to 623.724 million cubic feet.
On the other hand, Sui Southern Gas Company (SSGC) has a longer history. Established in 1954, it is the oldest gas distribution company in Pakistan. SSGC’s operations cover the southern regions of the country, primarily Sindh and Balochistan. The company’s transportation system consists of more than 3,220 kilometers of high-pressure pipelines, and its distribution activities extend to more than 1,200 cities.
The two companies play critical roles in Pakistan’s energy infrastructure, but have also been at the heart of the circular debt crisis. The financial pressures imposed on these companies have implications not only for their operations, but for the entire energy sector, and thus for the national economy.
The repercussions of rising prices
The approved price increases are expected to have impacts on various stakeholders in the gas sector.
- Consumers: Consumers will feel the most immediate impact, as they will see an increase in their gas bills. While this may cause financial pressure in the short term, this is said to be essential for the long-term sustainability of the gas sector.
- Sui companies: SNGP and SSGC, rising prices represent a much-needed financial boost. The increased revenue is expected to help them reduce their receivables to gas producers and LNG suppliers, which could ease their circular debt burden.
- Upstream companies: Gas exploration and production companies, such as Oil and Gas Development Company Limited (OGDCL) and Pakistan Petroleum Limited (PPL), which have been bearing the brunt of unpaid bills, may see improvements in their receivables position.
- Pakistan State Oil Company (PSO): As a major supplier of LNG, PSO has been heavily impacted by circular debt. Higher prices could help reduce PSO’s receivables, improve its financial health and ability to meet its obligations to foreign LNG suppliers.
- The energy sector in general: By addressing one of the root causes of circular debt, these price adjustments can contribute to the overall stability and sustainability of Pakistan’s energy sector.
While many experts consider higher prices a necessary step, it is not without challenges and criticism.
High gas prices could contribute to overall inflation, which could affect the cost of living and industrial production costs. There are concerns that increasing energy costs could affect the competitiveness of Pakistani industries in the global market. High prices may disproportionately affect low-income households, raising questions about energy affordability and social justice. Given the potential unpopularity of price increases, there may be political resistance to fully implementing these measures.
While the approved rate increases are an important step, they are part of a broader set of reforms needed to comprehensively address the issue of circular debt. In its latest update on circular debt, the World Bank stressed the need to continue electricity and gas sector tariff reform to align tariffs with the cost of supply.
Other recommended measures include:
- WACOG implementation: Full implementation of the Weighted Average Cost of Gas (WACOG) law to rationalize gas pricing.
- Abolition of cross-subsidies: Phasing out cross-subsidies between different categories of consumers to reflect real costs.
- Distribution restructuring: Consider restructuring the gas distribution business to improve efficiency.
- Stimulating local exploration and production: Providing better prices to local exploration and production companies to boost local gas production.
- Gas storage development: Invest in gas storage facilities to manage supply fluctuations more effectively.
The approval to increase gas prices for both SNGP and SSGC is part of Pakistan’s ongoing efforts to address its energy sector challenges. Although it may cause inconvenience to consumers in the short term, it is seen as a necessary measure to ensure the long-term sustainability of the gas sector and address the ongoing problem of circular debt.
As Pakistan continues to confront its energy challenges, balancing the needs of consumers, industry and the broader economy will be critical. The success of these measures will depend not only on their implementation, but also on complementary reforms across the energy sector.