ISLAMABAD:
The Competition Commission of Pakistan (CCP) has identified several barriers in the liquefied natural gas (LNG) sector that are blocking competition and has urged the government to unbundle gas utilities, introduce stronger regulations and ensure entry of the private sector.
In its report, the CCP proposes a “One-Stop Shop” concept for LNG imports in the short term and the establishment of a central coordination committee (CCC) to streamline coordination among stakeholders. It calls for addressing licensing issues and amending the LNG Policy 2011 to empower the CCC.
The commission, in its detailed review of the LNG sector, recommends sweeping reforms to dismantle structural monopolies, promote private investment and strengthen regulatory oversight.
The report aligns with the International Monetary Fund’s Public Investment Management Assessment Report 2023 and the State-Owned Enterprises (SOEs) Triage: Reforms and Way Forward Report 2021, both of which emphasise the need to liberalise markets where SOEs dominate.
In order to address challenges, the CCP outlines a set of recommendations to boost competition. It stresses the need for enhancing the role of transporters in access arrangements. “The Pakistan Gas Network Code is amended from time to time, as required. However, it is needed that all the relevant stakeholders including the private sector are consulted while making amendments,” it says.
The CCP calls for ensuring timely and equitable access to pipelines for new entrants, adhering to the Third Party Access (TPA) Rules 2018 and the Implementation of Third Party Access Rules for Terminals (short term). It urges improvement in demand planning and forecasting capabilities, and enhancement in the Oil and Gas Regulatory Authority’s (Ogra) capabilities for better demand forecasting protocols.
Unbundling SOEs
The competition body proposes unbundling Sui gas companies in the long term and amendments to the Ogra Ordinance 2002 to support the unbundling by separating SOEs’ transmission and distribution functions.
It underlines the need for drawing up a three-year plan to reduce unaccounted-for-gas (UFG) losses, with annual reduction targets and specific plans for areas facing law and order situation.
Pakistan’s LNG sector is at a crucial juncture, where strategic interventions and regulatory reforms are necessary to transition towards a more liberalised and competitive market.
It says that addressing the identified barriers through specified regulatory changes and policy amendments will enhance the sector’s efficiency, contribute to long-term energy security and help align with international best practices.
These steps are essential for fostering a competitive environment that drives innovation, reduces costs and benefits consumers and the overall economy.
Pakistan has resorted to LNG imports since 2015, which now constitute about 23% of the country’s natural gas consumption. The LNG market features a mix of SOEs and private entities, with the SOEs playing a dominant role in imports and distribution.
SOEs namely Pakistan State Oil (PSO), Pakistan LNG Limited (PLL), Pakistan LNG Terminals Limited, Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL) significantly impact market dynamics and competition.
These entities are deeply integrated into core operations of the LNG sector, from imports to transmission and distribution. Consequently, the SOEs exhibit a certain level of monopolistic market structure. At the same time, there seems to be reluctance on the part of the private sector to execute projects beyond proposals.
Several factors are responsible for this state of affairs and the lack of competition, which are further explored in the report. Long-term contracts are a thumb rule in the global LNG trade. This has pros and cons for both suppliers and customers. For instance, the supplier gets ensured demand for huge capital-intensive infrastructure. Customers, on the other hand, get ensured availability of LNG at a stable price.
Likewise, the Pakistani market is heavily reliant on long-term contracts, particularly with suppliers like Qatar. For a country like Pakistan, it seems crucial to keep a balance between long-term contracts and spot purchases. This will allow for greater market fluidity and responsiveness to price signals. The present model limits price flexibility and competitive market behaviour.
Obstacles to competition
The CCP report identifies several barriers to competition. The Ogra Ordinance 2002 imposes stringent licensing requirements, deterring new market players. Also, Ogra’s tariff settings often favour the SOEs.
Moreover, low fixed profit margins for LNG-importing SOEs, regulated by Ogra, lead to uncompetitive import pricing, making it an unattractive market for private firms to enter.
Moreover, government guidelines frequently prioritise the SOEs through regulatory support, making it difficult for potential entrants from the private sector to enter and compete. Alongside, stringent tariff settings have led to financial losses to the SOEs.
The report explores any such inconsistencies in the regulatory framework, which hinder growth of the industry. SOEs like SSGC and SNGPL control major infrastructure, restricting access for private entities. High capital costs favour SOEs with government backing, deterring new entrants. Market concentration among entities like PLL and PSO limits competition.
Additionally, circular debt in the gas sector, which rose to Rs2,866 billion by January 2024, exacerbates these barriers. This debt accumulation is due to delayed tariff adjustments (no tariff increase in the last three years), sector inefficiencies (UFG losses) and the diversion of costly re-gasified LNG to domestic consumers in winter.
Long-term contracts secured by the SOEs may limit market liquidity and competition. Likewise, preferential treatment through subsidies and access to government-backed financing may create an uneven playing field for potential new market entrants.
