Hike in gas prices to follow after WACOG Bill

WACOG is a new method of fixing the price by blending the costs of both locally produced and imported gas to help rationalize gas prices by developing a new final mix product.

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Pakistan started importing LNG around seven years ago, and the country has since become the ninth largest importer of LNG. The recent uptick in gas prices globally and the country’s depleting gas resources have forced Pakistan to look for other cheaper avenues to import gas. However, the country did not have favorable laws in place to support the import of gas.

Hence, in an attempt to mitigate the effects of the inflationary gas prices and to support the import of gas, the energy ministry team jotted up a bill to introduce favorable laws for the purpose. Following relentless efforts by the energy ministry, Energy Minister Hammad Azhar revealed the introduction of the WACOG bill.

In a tweet, the energy minister, Hammad Azhar, said that the “WACOG bill has been passed today ( 17th February, 2022) by the senate as well. It is a historic and long-pending reform that will ensure the energy security of Pakistan. We are now able to embark upon the reform of the gas pricing structure, remove anomalies and enhance supplies of imported gas.”

What is WACOG Bill

WACOG is a new method of fixing the price by blending the costs of both locally produced and imported gas to help rationalize gas prices by developing a new final mix product. The bill also aims to reduce gas shortage in Pakistan.

According to Ali Khizar Aslam, head of research at Business Recorder, “gas shortage is more of a supply-side problem but this (WACOG) will help in developing in the gas pipeline network, develop new gas connections, increase gas consumers. Currently, 30 percent of the domestic consumers are on pipeline gas.” Moreover, as the recovery of domestic gas is very low, the Sui companies are cash hampered, and they cannot invest in infrastructure development.

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Currently, Pakistan has two FSRUs (Floating Storage Regasification Unit) and plans to develop two more. Complete dependence on FSRU’s is also very risky as you’re exposed to a steep and sudden price incline in the international market. As the global gas prices are skyrocketing and because we have no onshore capacity, we have to buy on the spot or face a gas shortage. Onshore storages help store gas in the shoulder months, which can later be used in the peak season.

The WACOG bill will allow the import of more LNG, which can later be sold at a blended price where there is more demand. In that way, it might help reduce the gas shortages, but the domestic gas shortage is a separate problem.

Why is WACOG important?

The WACOG bill is an important bill and will help reduce the circular debt of gas. According to the research head at business recorder “the gas circular debt has increased to 700 billion rupees and out of that 550 billion are gas development surcharges that is non recovery of the domestic guide by the SUI companies and 150 billion is about the diversion of the LNG to the domestic consumers.”

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With the WACOG bill, the weighted average cost of gas, both imported and local gas, would be able to blend and price in a mix. Before the introduction of the WACOG bill, the progress in the power sector was also hampered as industries with low yields would benefit from a low cost of gas and vice versa. With the introduction of the WACOG bill, the same prices would now be offered across the board.

Increase in gas prices?

Resultantly, the domestic price would go up invariably. Right now, the domestic sector price is as low as 121 rupees and as high as 1400 rupees, and there are different prices for the other sectors.

The circular debt originating from the domestic sector alone went up by Rs100bn over the last three years, according to Tabish Gauhar, a former aide to the premier on power and petroleum. With the WACOG bill, everyone would have to pay for the weighted mix of gas, thus helping reduce the circular gas debt.

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During a consultative session held by the government for the weighted average gas formula in 2020, Balochistan, KPK, and Sindh refused to bear the brunt of the expensive imported gas. Compared to these provinces, Punjab has a lot more consumption and a lot less production, and the province mainly depended on imported gas to support the industries.

Following the WACOG bill Punjab is most likely to benefit from this new amendment as competitive prices would be offered to all the provinces, rolling down a lot of cost for Punjab – which preciously relied mainly on imported gas- to support its industry.
In a statement, the Sindh Minister for Energy Imtiaz Ahmed Shaikh said that the new bill would obligate the gas-producing areas of the country to pay the same price for natural gas as non-producing ones.

Although the bill attracts a lot of controversy and resentment from gas-producing provinces who deem it unfair that they should bear the burden for inflationary gas prices, the bill seems like the only way to control the gas shortage and help reduce the current gas deficit of the country.

Furthermore Prime Minister Imran Khan’s in his visit to Russia is expected to push for a gas pipeline deal with Kazakhstan, which would further bolster import activity of gas in the country and help reduce gas shortage.