NATURAL GAS PRICE HIKES TURN BACK REFORMS

UNCLAS SECTION 01 OF 02 ISLAMABAD 002587

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG EFIN ECON EINV PREL PK
SUBJECT: NATURAL GAS PRICE HIKES TURN BACK REFORMS


1. (SBU) SUMMARY: By turning back previous reform measures, the
Government of Pakistan (GOP) has created new categories and
sub-categories of natural gas consumers with variable pricing rates.
With over 95 percent of all domestic automobiles fueled by
compressed natural gas (CNG),increases at the pump are hitting an
already cash poor public particularly hard. END SUMMARY.
DOMESTIC NATURAL GAS CONSUMPTION
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2. (U) Pakistan is one of the largest natural gas consumers in the
world and domestic consumption accounts for 50 percent of Pakistan's
total energy use. Pakistan consumes all of its domestic gas
production and domestic needs mandate expanded production. Only 60
percent of Pakistani households currently have electricity, and only
18 percent have access to pipeline gas for heating. Over 95 percent
of all automobiles in Pakistan are fueled by CNG. There are
approximately 2,060 CNG stations operating in the country to fuel
the 1.7 million light vehicles that have been converted to CNG. Of
these, 1,590 stations are owned by private individuals and the
remainder are operated by oil manufacturing companies.


3. (U) Energy demand in Pakistan is expected to increase 250 percent
over the next 20 years. To meet expected demand, electrical
generating capacity must grow by 50 percent from 20.4 gigawatts in
2008 to 30.6 gigawatts in 2010. Pakistanis have begun to feel the
energy crunch more than ever as blackouts have increased across the
country and exceed 15 hours per day in some areas.

DIFFERENTIATION IN PRICE STRUCTURES: CREATING CONFUSION
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4. (U) The GOP divides natural gas consumers into six main
categories: industrial, commercial, domestic, fertilizer, transport
and power. The GOP claims that the differing tariff structure for
each category of customers is set according to economic priority.
The natural gas tariff in Pakistan is progressive in nature and
rises with higher consumption. Some of the six categories are
further divided into sub-categories. For instance, domestic
consumers are now divided into seven sub-categories.


5. (U) Domestic: The poorest "lifeline" consumers, using less than
50 cubic meters per month, are subsidized in sub-category one and
charged the lowest rates. According to an Oil and Gas Regulatory
Authority (OGRA) notification issued on June 30, the number of
sub-categories for domestic users were increased from five to seven
to enable the GOP to charge more from upper middle class consumers
using above 200 cubic meters per month. No increase was announced
for domestic users in the first three sub-categories. Domestic
consumers in the fourth through seventh sub-categories will see a 31
percent price increase in their monthly bills. Mr. Qureshi admitted
that only 0.5 million domestic consumers out of the total 5.4
million would be effected by the gas price hike and therefore the
domestic rate increase will not significantly impact government
coffers.

6. (U) Transport: The price increase has pushed the retail price of
CNG, used in the majority of motor vehicles, to Rs 47.25-48.80 per
kilogram. Consumption for most motor vehicles is nine kg for the
average tank and requires more frequent fill ups than gas fueled
cars. CNG prices were raised a day after the government also raised
petroleum and diesel prices by 10 percent and kerosene prices by 30
percent.


7. (U) Commercial: The rate has been raised from Rs. 283.05 to Rs
370.80 per million British Thermal Units (MMBTU). The minimum
monthly charges for commercial consumers have been fixed at Rs
1,750.44, up from Rs 1336.21. Commercial consumers have been
defined as cafes, bakeries, milk shops, tea stalls, canteens, barber
shops, laundries, tandoors (gas ovens for baking staple chapattis),
cinemas, clubs, theatres, clinics, maternity homes and private
offices.


8. (SBU) As an example of the randomness of the price increases and
category creation, a special commercial section has been introduced
for chapatti tandoors. Under the category, consumers using up to
300 cubic meters will be billed in accordance with the domestic
mechanism whereas those consuming above 300 cubic meters will be
billed at normal commercial rates.


9. (U) Industrial: The sale price for natural gas to all industrial

ISLAMABAD 00002587 002 OF 002


consumers, including the textiles and apparel sector, has been
increased from Rs 251.55 to Rs 329.54 per MMBTU, showing an increase
of 31 percent. The sale price for CNG has been increased from Rs
291.36 to Rs 388.32 per MMBTU, a rise of 33.2 percent.


10. (SBU) Most of the textile sector converted to self generating
electricity using natural gas due to the gross inefficiencies in
Pakistan's electric power generation and transmission system.
Industrialists complain that they are being unfairly taxed with
these price increases since they were forced to individually bear
the expense of creating their own power due to the inefficiency of
Pakistan's electricity production. They further note that Pakistani
textile competitiveness will be further eroded by these natural gas
increases and that Pakistan has its own domestic supply of natural
gas so the price should not be so high for domestic industry.


11. (U) Other Miscellaneous Increases: The tariff for ice factories
has been increased to Rs 370.80 per MMBTU from Rs 283.05, an
increase of 31 percent. The gas tariff for the cement industry has
been increased to Rs 428.89 per MMBTU from Rs 335.67, an increase of
28 percent.

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COMMENT
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12. (SBU) Comment. It is unclear how collection of these
differentiated tariff rates will be possible. There are already
reports that commercial users located in and around residential
areas are switching to illegal domestic connections. Likewise,
domestic consumers are trying to conceal consumption by getting more
than one gas meter. The GOP does not have mechanisms to verify or
prevent this theft.


13. (SBU) Comment continued. However well intended, the expansion of
sub-categories and differentiations in pricing schemes for consumers
drives Pakistan further from the reforms to put market pricing
mechanisms in place. These reforms were intended to have a single
market based pricing mechanism, driven by the marginal cost of
production, for all users of natural gas. These measures are a
regression from previous commitments with the World Bank, made by
then Prime Minister Shaukat Aziz. Elimination of the sub-categories
was in the "first phase" of reform plans. End Comment.

ARCHIBALD