Pakistan Reader# 303, 5 March 2022
On 17 February, the Senate passed a new bill titled – “Weighted Average Cost of Gas (WACOG) Bill 2022.” The bill paves way for moving from ring-fenced pricing of natural gas in Pakistan. Another supplementary bill, OGRA (Amendment) Bill has given the autonomy to OGRA (Oil and Gas Regulatory Authority) to determine and notify the RLNG (Regasified Liquified Natural Gas) prices, a power that resided with the government earlier.
The WACOG Bill will empower the OGRA to average the price per unit of domestic gas produced and imported natural gas, as there is a huge price anomaly between domestic and imported gas. Before the WACOG bill, Pakistan’s provinces and industrial sectors would pay the differential amount on natural gas based on its source. Hammad Azhar, Pakistan’s Energy Minister, stated that the ratio between indigenous gas and imported RLNG would be 50:50 in the next two years. The fertilisers and electricity industries eventually passed on the charges of expensive imported gas to consumers.
The bill is applauded for its initiative towards putting Pakistan on the path of price levelling of dependent commodities eventually as Pakistan provides huge subsidies to industries to shield the poorer section of the population.
WACOG Bill 2022: Four major takeaways
First, the ever-increasing circular debt of the gas sector, at the current exchange rate, the circular gas debt stands at approximately USD 4 million. For instance, local system gas costs around PKR 700 per MMBTU (million metric British Thermal Unit) while RLNG costs around PKR 2400 per MMBTU. The bill would enable the average price of around PKR 1400 per MMBTU and hence a larger revenue collection utilized that can be eventually utilised to minimise gas sector debt. Around 30 per cent of domestic consumers are reliant on the gas pipeline for their energy usage and the consumption is going to increase further while the reserves in Pakistan are depleting. The rationalisation of the demand mechanism would reduce the disproportionality in affordability and give scope for further investment in exploration and expanding Pakistan’s gas pipeline network.
Second, the blended price will allow for easier import of LNG due to price parity in the country; suppliers from Central Asia and Russia are likely to increase the diversity of suppliers catering to the increasing demand and price stabilisation. Pakistan can then increase its quantity of Floating Storage Regasification Unit, a special floating surface for transporting natural gas. The gas shortage could be dealt with by seeing the increased capacity infrastructure; this will enable n building a case for increasing the onshore capacity of the LNG. The increased capacity and storage would help the country deal with demand in peak seasons of winter.
Third, the bill will bring uniformity in gas prices, as there is sectoral wise pricing for industries. The fertiliser industry, dominant in Punjab, would experience a relative decrease in gas pricing while export-oriented sector industries of other provinces would have to pay a higher price. With Punjab being the most densely populated province, has massive consumption and relies on imported gas. The bill was passed without the consent of the Council of Common Interests, a parliamentary body to overlook principles of the Eighteenth Amendment. The Sindh province is set to challenge the bill in judicial courts. Sindh Minister for Energy Imtiaz Ahmed Shaikh said: “Approval of the controversial bill cannot avert the ongoing gas crisis in the country and the government is creating a hostile situation between the provinces.”
Fourth, an indirect IMF angle. In its Article IV consultation report, the IMF had put forward a condition to rationalize domestic prices to phase out the circular debt of the power and gas sector. This has always been an IMF condition, and this time, the assessment has included indicative targets of ineffective revenue mobilisation and sustainable debt management. There was no direct call for legislation; however, Pakistan has initiated the reform. This initiative will also enable cross-subsidisation and targeted subsidies for consumers. Pakistan has conceded its inability in targeted subsidization. Still, the bill will provide the platform to devise mechanisms in developing effective utilisation of subsidies given by the government through targeted subsidies.
Khaleeq Qiani, “‘Political consensus’ urged for average gas pricing,” Dawn, 26 July 2021
Zafar Bhutta, “Punjab to receive cheaper gas,” The Express Tribune, 18 February 2022
“WACOG – implementation is the key,” Business Recorder, 22 February 2022
Ali Ahmed, “WACOG details: Pakistan's move towards gas pricing reform,” Business Recorder, 21 February 2022
Ali Khizar, “WACOG: about time!,” Business Recorder, 21 February 2022
Zafar Bhutta, “Sindh set to challenge Wacog bill,” The Express Tribune, 20 February 2022