Yesterday, Ministry of Finance (MoF) released its data for budgetary operations in FY11. Surprisingly, the fiscal deficit was reported at 6.6 per cent of the GDP in FY11. However, excluding arrear payment of electricity subsidy, the deficit actually clocked in at 5.9 per cent of the GDP. We believe the electricity subsidy is a major cause of concern for the country as it has distorted the functions of all segments of the economy. It has adversely affected the power and the fertiliser sectors as the gas consumption mix in the country has been altered. Electricity shortfall in the country has reached 6,000MW against the demand of 18,000MW due to reduced furnace oil and gas supplies. Similarly, for the fertiliser industry urea off take in 8M2011 is also down 4 per cent YoY due to the gas curtailment.
Allocative inefficiency multiplying woes
As per the government’s gas allocation policy, power plants are to get gas supply after meeting requirements of domestic, commercial, fertiliser and industrial sectors. It has been noted that the production cost of electricity through gas is one third the cost of producing electricity through furnace oil. Historically, power sector has been the major consumer of gas in the country. Going back, we have seen the power sector consuming 43 per cent of the total gas production of the country in FY05 which has since declined to 28 per cent in FY10.
Consequently, the reliance on power production through furnace oil has resulted in mounting pressure on the government in the form of higher subsidies – resulting in swelling of the inter corporate debt. Government has recently announced to issue PIBs to the banks to somewhat solve the inter-corporate debt (currently at Rs283 billion including all accrued markup). “However, we believe reforms are still required in the form of cutting down power sector subsidies for solving such an issue or else the situation can rise again,” said Naveed Tehsin at JS.
Pakistan gas distribution mix
The total gas production of the country is 4,000mmcfd, of which energy-rich southern Pakistan is accountable for 90 per cent of the total production in the country. Fertiliser and power are amongst the major consumers of gas. Fertiliser sector consumes 18 per cent of total gas consumption compared to 28 per cent by the power sector. The declining share of the power sector has been eaten up by the domestic (Residential and CNG) and industrial sector which have grown in recent years.
Choking the fertiliser sector
Out of three main gas distribution companies, SNGPL is currently facing severe gas crisis. Dawood Hercules, Engro’s new urea plant and Agritech are catered by the SNGPL network while FFBL comes under the SSGC network. FFC, Fatima and Engro’s old urea plant comes under Mari network.
Major brunt of gas shortages is currently being faced by the fertiliser manufacturers being catered by the SNGPL network as they face gas curtailment of 20 per cent (as directed by the government). This has resulted in a shortfall in urea production. As per the latest numbers, urea sales have declined by 4 per cent in 8M2011. Engro’s new urea plant comes under the SNGPL network and is facing gas shortfall since the very beginning. Moreover, extended gas curtailment for winter is also on the cards. As a result of uncertainty on gas supply issue and its negative impact on its stock price, Engro has also shelved its plans for the fertiliser IPO for now. Fertiliser sector have been the blue eyed industry in governments view and have always received gas at subsidised rates.
Under the IMF Program, the government has been asked several times to abolish the gas subsidy enjoyed by fertiliser sector, however, the recommendations have not been fulfilled.
Future outlook
“We do not foresee the gas crisis coming to an end in the near future, therefore, we believe until gas shortages are eliminated, the government should allocate gas in the light of economic returns generated by them,” Naveed added. Moreover, subsidy should be eliminated from all sectors so as to pave way for a level playing field and the company or sectors that are efficient should stay.
