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Pakistan Market : Another Gas Price Hike in the offing

 

• As per one of the prior actions to secure IMF bailout package, the Ministry of Energy (Petroleum Division) has drafted a summary to increase domestic and industrial gas prices to limit and curtail previously accumulated circular debt in the gas sector. The summary, if approved by Economic Coordination Committee (ECC) and federal cabinet, will come into effect from July 1st 2019.
• Oil & Gas Regulatory Authority (OGRA) has recommended increasing gas tariff by approximately 31% and 20% for the consumers of SNGPL and SSGC respectively except for domestic sector where the rationalization of tariff is based on indexation of each slab tariff with weighted average Prescribed Price.
• The suggestive increase would collectively increase Sui Companies revenues to Rs508bn (FY20: Rs487bn target plus  Rs21bn account for backlog) and is expected to wane already accumulated circular debt in 5-6 years.
• We believe higher gas tariff will reduce the demand of household consumers that were getting gas at a huge discount to LNG rates. Consequently, Pakistan dependency on high cost imported gas (RLNG) should come down in medium to long term, thus lowering the burden on external accounts.
• It is pertinent to note that the government have assumed the international crude price of US$70/bbl and Rs150/US$ for the said calculations; however, we believe that US-PKR parity is expected to remain in the range of Rs160-165 hence posing risk of further increase and accumulation of circular debt (provided crude remains at given levels).
• Gas prices for consumers falling in the first slab will see no change, while consumers between 0.5-1.0 hm3 may see a hike of 63%. Similarly, gas prices for the remaining slabs will be adjusted upward by 68-123%.
• On CPI inflation, our estimates suggest an uptick of 70-90bps directly, which is incorporated in our FY20 inflation target of 11%.