Gas price hike to boost Pakistan’s energy companies

The 17% increase in gas prices for Captive Power Plants (CPPs) is set to benefit the overall energy sector, particularly gas utilities as this would generate additional cash flows.

“However, the surge in gas prices poses a significant challenge for industries such as textiles and chemicals, as the increased costs will likely drive-up electricity expenses,” an analyst at Inter Market Securities.

Pakistan’s Oil & Gas Regulatory Authority (OGRA) recently announced a hike in gas tariffs for CPPs, increasing the rate by PKR 500/mmbtu to PKR 3,500/mmbtu ($12.5).

This revision aims to narrow the price gap between CPP tariffs and RLNG prices, which had averaged over $6.5/mmbtu in the past three years, fulfilling the International Monetary Fund's (IMF) guidelines for tariff alignment.

Despite the Petroleum Division's proposal to increase the unprotected residential consumer tariff by PKR 100/mmbtu, the government has opted to keep it unchanged, according to Shugufta Irshad, an analyst at JS Global Capital.

It may be mentioned here the Economic Coordination Committee (ECC) has outlined plans to gradually align gas tariffs for CPPs with RLNG rates and instructed the Petroleum Ministry to impose a grid transition levy on CPPs.

This decision aims to encourage industries to transition from less efficient captive plants to the national grid.

The Inter Market Securities analyst noted that this development would benefit the overall energy sector, especially gas utilities like Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines (SNGP), generating additional cash flows of PKR 21 billion for both companies.

This increase will also benefit E&Ps and RLNG suppliers, including Oil & Gas Development Company (OGDC), Pakistan Petroleum Limited (PPL), and Pakistan State Oil (PSO). However, it poses a significant challenge for industries such as textiles and chemicals, increasing electricity costs by about 15% or PKR 5.0-6.0/kWh, pushing the per-unit cost to around PKR 40/kWh.

With grid electricity rates already at 15.5 US cents per unit, the above revision brings the per-unit cost close to grid rates (c.14 cents).

This cost is significantly higher than that of regional competitors such as India (10 cents), Bangladesh (8.6 cents), and Vietnam (7.2 cents).

Analysts believe the higher energy costs are expected to weigh heavily on the energy-intensive segments of the value chain, including spinning and weaving.

Major vertically integrated textile producers, such as Interloop Pakistan and Gul Ahmed Textiles are likely to face trimmed margins; while Nishat Chunian should remain largely unaffected, owing to its investment in a coal-fired power plant.

The industry has arranged alternative fuel and power sources, including multi-fuel fired plants, increased solar power plant capacities, direct RLNG purchases from private companies, and power supply arrangements with respective power utilities.

Despite these measures, a complete disconnection remains a threat to the industry, especially with concerns about the reliability of uninterrupted power supply from the grid.

The cement sector has already made significant investments in low-cost energy sources to reduce reliance on expensive fuel oil (FO) and grid electricity.

In its last review, the IMF urged the government to disconnect the gas supply to CPPs and divert it to efficient power producers, shifting the industry to the national power grid. The ECC supported this proposal in its September 2024 meeting. However, the Commerce and Petroleum Ministries highlighted potential adverse effects on the export-oriented sector and the gas utilities sector.

All Pakistan Textile Mills Association (APTMA) proposed that the government renegotiate with the IMF and consider a tariff hike instead of a complete disconnection, arguing that the latter would undermine the industry's competitiveness and hinder export growth. After multiple discussions, the IMF has agreed to realign gas tariffs for CPPs with RLNG prices to meet revenue requirements, effective February 2025.