Macro Analysis /
Pakistan

Pakistan Strategy: Energy reforms

  • Government has approved sharp gas price rationalization, hiking gas prices upto 235% and removing subsidies

  • The gas prices are now near weighted average and will help reduce circular debt accumulation while unlocking valuations

  • Albeit inflationary in nature, legacy subsidies will now be removed as Pakistan re-tracks IMF loan

Contributors
Yusra Beg
Ali Aziz Soorty
Abdul Ghani Mianoor
Rahul Hans
Intermarket Securities
10 July 2022

Pakistan nears WACOG implementation as higher prices are notified

The government has attempted to leapfrog gas price rationalization. Gas consumers are likely to face a price hike of up to 235% after authorities approved the recently proposed hike, bringing average gas prices closer to the Weighted Average Cost of Gas (WACOG) while removing elements of cross-subsidization. A move that will not only help overcome the revenue requirement of GasCos (SNGP and SSGC), but also slowdown gas-based circular debt generation; the current stock of PKR1.2tn is nearly half of total circular debt. We believe, most producers will pass on this gas price hike, albeit adding heat to the high-inflation environment, and this also brings us closer to IMF program as legacy subsidies are removed.

Much-needed move after OGRA Amendment

During Feb’22, two key amendments were made in OGRA Ordinance 2002, in order to 1) remove ring-fencing of RLNG prices and add it to the calculation of WACOG, and 2) empower OGRA for gas price hikes to ensure smoother transmission of cost of gas into notified gas prices. Back in Feb’22, when amendments were made, the prequel to the removal of ring-fencing of RLNG prices had assumed a gas price hike in a piecemeal fashion. However, authorities have approved an abrupt hike, effective from 01Jul’22.

Both SNGP and SSGC cannot ideally have a separate measurement mechanism for RLNG prices, since it is comingled and supplied through the same network and consumer meters as the indigenous gas. Consequently, the gas tariff differential added to the woes of GasCos, as the revenue requirements were not being fulfilled by the existing tariff regime. This also kept ring-fencing of RLNG price only limited to accounting judgments and systems, which can only be sufficient to estimate billing and distribution loss. Not only this undermined the concept of ring-fencing, but also gave rise to an overarching problem of Pakistan’s economy i.e. gas-based circular debt. This will largely be removed as Pakistan nears the WACOG implementation.

This is in line with our expectation of greater Energy sector reforms during 2022, which will lead to a turnaround of payouts from companies in the Energy chain, and in turn better price discovery in Energy sector stocks.