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

Remaining Reform Agenda

•Powers of Regulator

•Unbundling

•Third Party Access (TPA)

•Tariffs

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)

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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