Flash Note: Sui Southern Gas Company (SSGC): ECC allows UFG on RLNG as pass through

• As per news reports, Economic Coordination Committee (ECC) has approved a summary sent by Petroleum Division on issue pertaining to higher Unaccounted for Gas Losses (UFG) on account of supply of RLNG by Sui Southern Gas (SSGC).
• Few of the key points pertaining to the summary included 1) SSGC may be allowed UFG based on RLNG handling basis (volumetric basis) in the sale price of RLNG in the form of distribution loss due to swapping arrangement and consumption of RLNG in its franchise area, 2) distribution loss to be determined and charged at actual including the losses due to swapping arrangements and consumption of RLNG in SSGC franchise area.
• To recall, Pakistan started importing RLNG from Mar 2015 when RLNG dedicated pipelines were not existent and it was decided that the existing infrastructure will be used for supply of RLNG. A swapping agreement between Sui companies was also signed where imported RLNG was being used in Sindh province and equivalent energy units of indigenous gas are transferred to SNGP by SSGC in lieu of RLNG.
• In the meanwhile, these Sui companies were designated to complete RLNG pipeline I & II by Dec 2016 from Karachi to Lahore that can be used for dedicated RLNG supply from SSGC to SNGP. However, a section of pipeline in Jamshoro, Sindh has not been completed due to land dispute and the RLNG pipeline II project has not been complete. As a result, RLNG is not supplied to SNGP through this dedicated pipeline.
• As a result of this swapping arrangement, SSGC has reported sharp increase in UFG losses due to low specific gravity of RLNG compared to indigenous gas. SSGC is using all RLNG into its Karachi distribution network and diverting indigenous gas in lieu of RLNG. SSGC had demanded concerned authorities to address the issue as ECC guidelines says that RLNG handling should not have any adverse impact on Sui companies, which has recently been approved by ECC.
• We believe this development could help SSGC curtail its losses as the company has to pay Rs18bn outstanding on account of UFG calculation at 4.5% in FY17 accounts. The company has already requested the regulator to allow staggered payment of this amount. The company as of now has not yet announced its FY17 financial accounts. 
• We wait for further details on the exact earnings impact as OGRA is anticipated to issue revised revenue requirement. However, this move by ECC could result in a retrospective one-time and recurring earnings impact on SSGC.