Proposal for restoring old cost criteria for gas companies – Alfalah Securities Limited

Karachi: The Ministry of Petroleum and Natural Resources (MPNR) has moved a summary to Economic Coordination Committee to either restore old gas supply cost criteria or offer soft loans at 5% mark-up to gas utility companies i.e. SNGP and SSGC for development projects.

According to Alfalah Securities Limited, MPNR has decided to seek amendment in the existing gas supply price criteria, which was notified in 2008 to bring the two state owned gas utility companies out of financial burden to undertake new projects. SSGC and SNGPL earn a guaranteed return on assets of 17% and 17.5% respectively on as determined by OGRA.

New criteria enhanced the consumer cost by 2.7 times, and consumer base assumption was raised from 30% to 60% which increased the cost criteria by 5.4 times. The criteria was revised by enhancing the per consumer cost from PKR20,000 to PKR 54000 for 13.5 km pipeline radius from gas fields in Punjab and Sindh, PKR 40,000 to PKR 108,000 in KP and PKR 100,000 to PKR 270,000 in Balochistan.

Share of SNGP under the old criteria would have been PKR 6.6 bn and SSGC PKR 1.3 bn. Increase in cost required gas utility companies to borrow funds to continue financing the ongoing capital expenditure, as OGRA determined operating cost did not include financial charges. If cost criteria are lowered or a soft loan at 5% is permitted, the utility companies would be relieved to some extent from the burden of finance cost to fund the capex which lowers their guaranteed return.