Pakistan raises domestic natural gas prices for second time in four months

Pakistan's government has increased gas prices for the second time in just four months to improve the financial health of gas companies affected by subsidy-related debt and to satisfy conditions laid out by the International Monetary Fund to qualify for the next tranche of loans.

The price hikes are also part of a wider swathe of gas market reforms that will remove subsidy support for several gas-intensive sectors like fertilizers and captive power generation and pave the way for more regasified LNG to make its way into the energy mix in coming years.

The new domestic gas prices were approved by the country's federal cabinet in a meeting held Feb. 15. The meeting was chaired by the caretaker prime minister and attended by the ministers of finance, energy and commerce. The Oil and Gas Regulatory Authority issued the notification on the price hike effective Feb. 1, 2024.

The power sector accounts for the largest share of Pakistan's gas demand around 30%, followed by the domestic residential and fertilizer sectors around 23%-24%, industrial demand around 20% and the remaining from commercial, transport and cement sectors.

Out of these, the government has traditionally subsidized the domestic residential and fertilizer sectors heavily as they have a more direct impact on the population.

Gas prices for residential users, both in the protected and non-protected categories, remained low after the latest hike and only saw modest increases across the different slabs. Residential consumers across eight slabs, which are divided by volume, recorded price increases of 5% to 67%, but the prices for the protected slabs were still the lowest, between 72 cents/MMBtu and $1.26/MMBtu.

The largest increase in gas prices was for fertilizer companies by about 175% to Pakistani Rupees 1,597 ($5.75)/MMBtu, from around $2/MMBtu previously, according to the OGRA notification.

Most other categories saw minimal price hikes, with the exception of captive gas-fired power plants for whom gas prices rose 10% to 15% to Rupees 2,750 ($9.87)/MMBtu, according to the notice.

Gas market impact

Given the large share of gas demand from the fertilizer sector, the price hike is expected to have a significant impact on the ability of gas retailers to pass on fuel costs to companies and bring feedstock prices closer to global LNG prices, according to market participants.

In its letter to the IMF in January, Pakistan had said it would continue gas pricing reforms and revise prices at regular intervals. Its last price hike was implemented in November 2023 with large revisions across many sectors. It said gas provided to a section of the fertilizer sector receives a large cross-subsidy from the industry and once the current fixed tariff agreement expires, the cross-subsidy will end in March 2024, and the government will stop fertilizer subsidies from July 1, 2024.

The gas price hikes for captive power generation are also in line with Pakistan's goal of "directing scarce gas resources to more efficient assets, phasing out captive power in the near term, and transitioning captive power users to the electricity grid."

Pakistan plans to increase prices for captive power users already connected to the grid network and expects other captive power users to transition to the electricity grid within 12 months. Gas prices will then be increased to the equivalent of RLNG prices.

"To bring the use of captive power generation to a conclusive end by January 2025, we will announce a plan to make the use of this generation uneconomic by end-March 2024," the letter said. This would mean that gas prices for captive power are at parity with LNG prices.

"Any price adjustment will maintain the current progressive slab structure for domestic consumers and maintain protection for the most vulnerable household consumers, seek to reduce large preferential cross-subsidies across industrial and commercial users, and further disincentivize captive gas use," the letter said.

Another key upcoming development is the Ministry of Energy's guidelines to be issued to the OGRA to implement structural gas pricing changes under the weighted average cost of gas (WACOG) bill enacted in March 2022.

"Once implemented, the WACOG will allow full cost recovery of more expensive imported RLNG and provide a more adequate price signal to guide gas consumption across all sectors and help reduce power generation costs," the letter said.

The revision in consumer gas prices is expected to further curb mounting circular debt of exploration and production companies, and gas utilities like Sui Northern Gas and Sui Southern Gas, which have been stuck in a vicious circle of debt as previous governments failed to raised gas prices, Tahir Abbas, head of research at Karachi-based securities firm Arif Habib Ltd. said.

Table: Pakistan's natural gas prices by sector from Feb. 1

Source: Oil and Gas Regulatory Authority