End of gas subsidies to help develop an efficient LNG market: SBP.

LAHORE -- The State Bank of Pakistan (SBP) has recommended to the government to eliminate gas subsidies to ward off formation of circular debt and encourage greater participation of the private sector in LNG trade to develop an efficient LNG market to cope with the growing gas shortages in the country.

In a special section on LNG sector inserted in its quarterly report on the state of the economy, the central bank pointed out that the procedural bottlenecks causing delay at the import, transmission and distribution stages not only lead to recurring supply shortages but also result in cost escalation, which ultimately feeds into consumer tariffs or accumulation of arrears. It said imports of LNG by the private sector largely depend on construction of transmission and distribution infrastructure.

According to the report, nearly 23pc of the country's natural gas consumption is being met through imported LNG at present. The import of LNG has also helped reduce the overall electricity generation cost in the country by around Rs234bn during FY2017-20, it said.

But, it says, private participation alone will not solve the sector's broad operational and financial problems. 'Specifically, without addressing the fundamental issues associated with natural gas pricing, governance in distribution companies, and uncertainties at the end of the gas supply-chain, the domestic LNG market and the overall gas sector would continue to operate sub-optimally.

'While addressing bottlenecks in the existing import, re-gasification and pipeline infrastructure is necessary, it is equally important to expand the LNG user-base to reduce the per unit terminal capacity charges. Yet this expansion appears challenging, given the prevailing mindset of cheap/subsidised access to natural gas, which has seen users (especially industries) vying for a greater share in the indigenous natural gas pie instead of shifting to LNG.'

'The magnitude of future LNG requirements, if natural gas exploration levels and the pricing policy remain unchanged, would remain high over the short- to-medium-term. Pakistan's indigenous supplies would only fulfill 22.3pc of the estimated demand by 2030. If the long-delayed Iran-Pakistan (IP) and Turkmenistan-AfghanA!istan-Pakistan-India (TAPI) gas pipeline projects do not become operational, the average annual net gas shortfall during 2021-30 is projected to be 2,593mmcfd. To put this deficit in context, it is 2.7 times the volume of LNG the country...