Sensing CNG uncommonly…
Syed Samime-ul-Hassan Kazmi traces the history of CNG crisis and relates it with the fundamentals of market economy.
Pakistan is the largest user of Compressed Natural Gas (CNG), as an alternate fuel used in vehicles, surpassing Iran, Argentina and Brazil. There are around 3331 CNG filling station operating throughout the country in year 2010. A conservative estimate reveals 3.7 million vehicles are rolling on CNG fuel in Pakistan. The CNG as an alternative fuel was introduced in 1992. The policy was pursued in order to reduce import bill of petroleum products by exploiting indigenous energy resources.
There are around twenty eight (27) private and public sector companies engaged in oil and gas exploration and production activities. Among them fifteen different (15) companies are producing natural gas of around 4.03 BCFD (2011) to meet the domestic demand of all sectors. CNG consumption accounts for 9.1% of total natural gas consumption as per Hydrocarbon Carbon Development Institute (HDIP). The total consumption of gas is around 1241 BCF, while CNG sector consumes 113 BCF. However, the crisis of CNG would have not arisen, if domestic demand has met adequately by local production.
In the period 2001-11, CNG sector witnessed an average growth of 39.5% culminating in year 2005-06 to 59.1%, while 2011-12 experienced growth rate of 10.8%. It can be observed clearly in the Figure 1. From 2001 to 2007 the growth in CNG was much higher as compared with growth in petroleum products. After 2007 the gap between growth in CNG and petroleum products narrowed down. In year 2010 the growth in petroleum products and CNG were almost same 15.8% and 14.2% respectively. The convergence set in.
The major reason of this tremendous growth and then subsequent decline was price differential between CNG and petrol, as CNG is a substitute fuel for petrol. However, there is positive price correlation between substitute products. The rise of petroleum products in international markets pulled the demand of CNG in domestic market. For example, price of Honda automobiles follow the trend if increase in price of Toyota happens in absence of any price regulation. So, when price of product increases then demand of substitute increases due to price differential benefit. Eventually, price of substitute comes to point of equilibrium. In case, when price differential is regulated (preserved) then demand of substitute remains the same or even increases. Thus, supply could not meet the demand and growth in demand decreases due to non availability of substitute product.
In case of CNG imbroglio, shortage of supply forced OGRA – as shortage of supply does in market – to raise the prices and reduce the difference between CNG and Petrol prices. In June, 2012, Petroleum Minister assured Save the Industry Forum regarding price differential between petrol and CNG would soon be reduced to 40 per cent from the existing 55 per cent. Apparently, the statement implied to ensure much needed gas supplies to power and fertilizer sector. Because the policy measure was to raise prices of CNG so, demand of CNG can be controlled and supply of natural gas to other sectors can ensured.
The apex court in its ruling dated October 25, 2012 raised objection over the linkage of CNG price with petrol price with differential as PKR 9.55 (CNG) and PKR17.48 (Petrol). The objection supports free-market principles – price differential should not be regulated rather price depends on difference of products utility. But, the court concern seems more pointed to weekly adjustment of petrol prices according to the International market trends. These adjustments raise prices of CNG due to price appreciation of petroleum products internationally. Even in absence of OGRA regulation prices of CNG would have gone up because of substitution effect.
Further, court advised OGRA, an alternative to fix the price of CNG at affordable level. The alternative suggests prices of CNG should be set on the basis of audited revenue estimates of CNG filling station. So, those filling stations making unjustified profits can be checked. Contrary to this concept, decision also questions OGRA’s authority to set profit margin and operating costs for CNG filling station operators. Perhaps, setting profit margin and costs on one hand and fixing price on basis of revenue on other is one and a same thing and depicts contradiction in court’s decision.
In response to Supreme Court decision government conceded to abandon weekly pricing of CNG relative to petrol. Rather, CNG prices shall be fixed by OGRA for the six months starting from 1-07-2012. The Federal Government annulled MoU signed between government and CNG association on the formula of working out operational cost of CNG stations. Instead, OGRA will develop new formula based on availability of gas, linkages with alternate fuel, discussion with stakeholders and scrutiny of audited accounts of CNG stations.
The court raises concern over the difference between prescribed price and the selling price (including Gas Development surcharge GDS) to CNG stations. The ruling noted difference of PKR15.68/kg and PKR 14.3/kg in region I and II respectively can be a reason for price hike. The government gives justification of GDS as means to finance exploration and production activities. However, court did not deem this reason satisfactory for the GDS.
In wake of Supreme Court decision the CNG issue has become enigma. The nucleus of issue lies in CNG prices and uninterrupted supply to consumers. No institution or any regulation can fix price while assuring consistent supply of the product. Fair prices can only be determined in market based on demand and supply principles. This is the only efficient alternative to increase public good. The profit is the right of the businessman and unjustified profit can only be controlled by promotion of fair competition and free market practices rather than scrutinizing financials of private enterprises.
6th December 2012
Author is a Research Associate at Policy Research Institute of Market Economy (PRIME). He may be contacted at: firstname.lastname@example.org