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World Bank
Oil and Gas Sector Review WorkshopDecember 17-18, 2003
The Gas Sector
Franz GernerEnergy Specialist
Accomplishments (1)• Pakistan has made impressive progress in reforming
and restructuring its gas sector:– Established independent regulator (OGRA)– Started to reform tariff structures (planned to phase out
subsidies within 3 years)– Committed to establish a third party access (TPA) regime
that allows for competition to develop – Doubled gas production within a decade– Increased percentage of population with access to natural
gas to 18 percent– Diversified energy sources and improved security of supply – Increased gas consumption per capita
Accomplishments (2)
Annual Natural Gas Consumption in Bcm
0
20
40
60
80
100
120A
rgen
tina
Bra
zil
Fra
nce
Ger
man
y
Ital
y
Spa
in
UK
Iran
Ban
glad
esh
Indi
a
Chi
na
Pak
ista
n
Tha
iland
Nor
way
Tur
key
Bil
lion
Cub
ic M
eter
s
19922002
Source: British Petroleum Statistical Yearbook 2003
Accomplishments (3)Natural Gas Consumption per Capita (2002)
0
0.2
0.4
0.6
0.8
1
1.2
Argenti
na
Brazil
Iran
Bangla
desh
India
China
Pakista
nThai
land
Turkey
Indon
esia
Malaysi
aTh
ousa
nd C
ubic
Mete
rs
Source: British Petroleum Statistical Yearbook 2003
Powers of Regulator (1)• The development of fair and effective competition
requires ‘independent’ economic regulation that– Balances the interests between government, companies and
consumers– Reduces the risks for all parties, attracts private investors,
reduces costs of capital and lowers final tariffs• To achieve independence, economic regulator must
carry out key regulatory functions including– Granting and enforcing of license conditions– Tariff regulation (network and retail)– Network access conditions– Network investment approval– Dispute resolution– Technical regulation
Powers of Regulator (2)
• Key regulatory functions are ‘shared’ between– OGRA (Oil and Gas Regulatory Authority)
• tariffs (prescribed rates for T & D)• third party access (ensure open access)• network development (not specifically addressed)
– GoP (Government of Pakistan)• tariffs (sets retail tariffs) • third party access (curtailment guidelines)• planning for network development (guidelines)
• Creates regulatory overlaps hinders implementation of efficient regulation
Powers of Regulator (3)International Experience
Countries Tariffs Network Access Disputes Network Invest. LicensesMalaysia M n.a. M M MChina M n.a. M M MThailand R n.a. R R RBangladesh M n.a. M M MPakistan tbd tbd tbd tbd tbdIndia R n.a. R R RFrance R Re R R RGermany tbd Ne C tbd tbdIreland R Re R R RItaly R Re R R RSweden R Re R R RUK R Re R R RUnited States R Hybrid R R n.a.Australia R Hybrid R R RSingapore R Re R R RM-Ministry, R-Regulator, C-Competition Authority, Ne-Negotiated TPA, Re-Regulated TPA, n.a. - not applicable
Unbundling (1)• Development of competitive gas markets
– From vertically integrated monopoly providing ‘bundled’ services at single tariffs
– To competitive markets with separated monopoly and competitive activities and separate tariffs for each service
• Unbundling – Avoids potential conflict of interest for integrated utilities– Prevents utility to shift costs between regulated and
unregulated businesses– Enables OGRA to determine and regulated tariffs– Enables utilities to identify the cost structure of their business
activities– Allows for separate costing of services and introduction of
competition
Unbundling (2)
• SNGPL and SSGC continues to be vertically integrated, state-owned utilities providing bundled services
• Unbundling requires separation of – Natural monopoly network function from potentially
competitive supply activities– Contractual arrangements for ‘commodity’ and ‘transportation’
services
• Unbundling optionsSeparation
Financial Physical Legal Ownership
Unbundling (3)
• Unbundling option – Determines level of regulation required in market– Is key element for creating a competitive market structure
• International practices vary– UK gas market fully unbundled (Transporter no conflict)– US, Australia and most other markets network businesses
carry out merchant functions but stringent ‘ring-fencing’ requirements
• FERC Order on unbundling of ‘commodity’ and ‘service’ for gas transportation
– Financial (accounting) separation minimum requirement under EU Gas Directive
Unbundling (4)International Experience
Unbundling Method Published AccountsSeparate Corporate
IdentitySeparate HQ
LocationCountriesBangladeshChinaHong KongMalaysiaPakistanSingaporeAustralia (Victoria)BelgiumGermanyFranceItalySwedenUKN-No, Y-Yes, TSO - Transmission System Operator, DSO - Distribution System Operator
TSO TSO TSO TSODSO DSO DSO DSO
Financial FinancialN N N N N N
Legal Legal Y N Y Y N N
Legal Legal Y Y Y N Y NFinanical Financial Y Y N N N NOwn Own Y Y Y Y Y Y
tbd tbd tbd tbd tbd tbd tbd tbd
Own Own Y Y Y Y Y YY Y Y Y YYOwn Own
Financial Financial N N NN N N
NN
N
NN
N
NN
N
NN
N
NN
N
NN
N
N NN N
N N
Financial FinancialN N N N N N
Third Party Access (1)
• Introducing competition (multiple buyers and sellers) requires open, transparent and non-discriminatory access to network irrespective of unbundling strategy adopted
• Current Access Situation– OGRA Ordinance
• provides that GoP set guidelines• establishes that OGRA ensures open access
– To date, closed access regime with no separate capacity and commodity contracts
– Detailed access rules and guidelines lacking
Third Party Access (2)• Key economic issues in relation to TPA
– Open, non-discrimination and cost-reflective– Separate ‘commodity’ and ‘capacity’ charge– Regulated TPA versus negotiated TPA– Capacity rules
• calculation of existing capacity • allocation of capacity rights• minimum periods for capacity booking• Capacity hoarding and ‘use-it-or-lose-it provisions• public databank• secondary market for trading capacity
– Ancillary services (storage, balancing, interruptible service)• Introducing TPA requires a detailed set of market
rules and regulations
Third Party Access (3)
Countries Acess RegimeMinimum
Booking PeriodUse it or lose it?
Overall Assessment
Austria Regulated 1 year planned moderateBelgium Regulated 1 month planned flexibleDenmark Regulated 1 year yes moderateFrance Regulated 1 year no inflexibleGermany Negotiated 1 year no inflexibleIreland Regulated 1 year yes flexiblePakistan tbd tbd tbd tbdItaly Regulated 1 month yes flexibleUnited Kingdom Regulated 1 day yes flexibleAustralia Hyprid unclear no moderateUnited States Hybrid 1 day yes flexibleSingapore Regulated tbd tbd tbdJapan Regulated tbd no inflexible
Third Party Access (4)• Lessons from International Experience
– Global trend towards RTPA, with shorter booking periods, and use-it or lose-it provisions as it reduces regulatory risks and enables efficient competition
– TPA in US• difference between interstate and intrastate• El Paso and holding back capacity
– TPA access in Europe • all RTPA (except Germany) • EC cases (Marathon and Gasunie and Thyssengas)
– Other countries that opt for RTPA Australia, Argentina, Singapore, and Japan
Existing Tariff Structure (1)
• Transmission and distribution tariffs– Prescribed rates for T & D (no separate T & D tariffs)– Half year review based on changes to wellhead prices– No separation of commodity and transportation component– Ensure guaranteed rate of return on net assets of 17 and 17.5 percent– Not cost-reflective and does not take into account quality of service – No efficiency incentives
• Industrial tariffs – Vary between customer categories– Commercial, industrial and power sector pays the highest tariffs– Fertilizer industry heavily subsidized (estimated at 14 Rs billion p.a.)
• Household tariffs– Not-cost reflective and lower than industrial tariffs– Subsidized (estimated at Rs 9 billion p.a.)– Unfair to 82 percent of population who are not connected
Existing Tariff Structure (2)
Retail Tariffs March 2003 (Rs/Million BTU)
Consumer Category Retail TariffHousehold up to 100 cubic meters (m3) 68.0 100-200 m3 102.4 200-300 m3 163.8 300-400 m3 213.1 400 m3 + 213.1Commercial 190.0Industry 168.9Fertilizer 36.8 - 66.4Power 168.9 -190.8
Existing Tariff Structure (3)
0123456789
10
Pakist
anAust
ralia
Italy
Poland
South
Africa
USA
US$
/MM
BTU
ResidentialIndustrial
Principles of Efficient Pricing (1)• Efficient tariff system
– Requires separate pricing of production, transmission, distribution and retail of gas
– Requires OGRA to set T, D and retail tariffs– Allows tariffs to recover costs and to reflect costs– Prevents monopoly power abuses (tariff above costs)– Ensures quality of service and creates efficiency incentives – Simple and easy to administer
• Tariff regimes (rate of return or price cap regulation)
• Network tariff methodologies (postal stamp, zonal pricing, entry/exit, path)
Principles of Efficient Pricing (2)
• Tariff paid by retail customers comprise of – gas wellhead price– transmission tariff– distribution tariff – retail margin– taxes
• Retail tariffs continue to be regulated until ‘effective’ competition has been established (UK retail tariffs not regulated anymore)
Priorities of Pakistan
• Pakistan has made great progress but further reform is required with– Empowering OGRA to carry out all key regulatory tasks
(including determination of retail tariffs)– Developing an unbundling strategy for SNGPL and SSGC
that allows for separate costing of monopoly and competitive services
– Developing an open, transparent and non-discriminatory TPA regime
– Introducing cost-reflective and efficient tariffs at all levels of the gas chain