The latest natural gas price determination by OGRA


The Oil and Gas Regulatory Authority (OGRA) carries out the natural gas price determination for Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL), inter alia, in the light of next Fiscal Year revenue requirements. It is well within the ambit of the Government of Pakistan (GOP) to advise OGRA of any concessions / special price regimes for specific sectors to be considered while determining the sale price.The latest OGRA gas price determination issued on 10 December 2019 is under active consideration by the Ministry of Energy. This recommendation is for increase in natural gas prices for the consumers all across the spectrum. The purported increase in the fertilizer feedstock price is over 236% from Rs. 300/MMBTU to over Rs. 706/MMBTU. At the same time the fuel price increase is also on the cards, though nowhere close to the unjust and uncalled for increase in the feedstock prices. The GOP has forty days to act / decide on the advice of OGRA. It is given to understand that the latest agreement between GOP and International Monetary Fund (IMF) necessitates that GOP fulfills this obligation, says a press release.
The price impact works out to be roughly Rs. 600per 50 kg bag of urea. This translates into a new price of Rs. 2,600 per 50 kg bag of urea. If such a price determination is to see the light of the day, the agriculture sector would be hit hard. The country wouldwitness unparalleled turmoil in it and undoubtedly it would become the worst performing sector of the already fragile economy that is reeling from recent input energy price hikes. This is going to hit the farmers and the farm economics in a way never seen before. The government seems to be on a path of self-destruction and is heeding to advices of the unseen villains,hell bent on destroying the very livelihood and backbone of Pakistan’s poor farmers.
It is worth noting that over the years GOP has raised the raw material cost such that the gas component of the urea produced has gone up historically from roughly 30% to 55% at present. This would further escalate to 85% of the total urea bag price if the new prices are implemented as proposed and producers are not allowed to raise prices impacted due to this unjust gas price increase. The impact of fertilizer use on the yield of major crops, wheat and rice, has been to the tune of 250% and 160% respectively in the last fifty years. Any abrupt changes in the fertilizer price would have direct negative impact on the food security of the country.
There is a way out of this situation, a win-win solution for all the stake holders. One plausible solution is to make the fertilizer fuel price adjustments (increase) so as to minimize or no feedstock price increase. To maintain a certain level of revenue for the Gas Companies, only the fuel prices may be increased. This would have the following benefits:
a- Minimal increase in the fertilizer prices
b- Would promote healthy competition among the fertilizer industry
c- Instead of windfall profits for the new fertilizer plants – that enjoy a fixed dollarized feed price for 10 years – the relatively less price increase would benefit the farming community at large having low negative impact on farm economics
Another important factor that needs urgent attention of the GOP is the settlement of the long outstanding Gas Infrastructure Development Cess (GIDC). Fertilizer sector has been subjected to the highest rate of Rs. 300/MMBTU GIDC on the feedstock and Rs. 150/MMBTU for the fuel gas.
If the GOP wants to improve the farm economics, it should implement the already agreed formula of reduction in feedstock and fuel GIDC to 50%. This too would be a win-win solution for all the stakeholders. Mari Petroleum Company Limited (MPCL) based fertilizer plants have spentbillions on developing theirgas infrastructure just to sustain the current production levels. In an ideal world, the gas suppliers / GOP should have footed the bill for such infrastructure development.
On one hand, the government is contemplating unjust increase in gas feedstock prices and on the other hand, a high-poweredministerial committee has been formed to negotiate with the fertilizer manufacturers to bring down the existing urea prices, which are already substantially lower than international prices. This is a negation of laissez faire and bound to backfire. At the same time, various statements by public office holders about “windfall profits by the fertilizer producers” purports to maligning an industry which has been one of the highest tax payers and one of the best governed in the country with substantial number of public& private shareholders.
The GOP is urged to proactively consider the above suggestions. Doing so, the government would not lose its revenues, the IMF obligations would be met, the gas producers would be happy, and above all the farm economics would be least hit.—PR