Karachi, 11 Oct 2023:In light of a research report released by JS Securities Limited, the government is anticipated to give its nod to a significant proposed hike in gas prices, ranging between 5% and 193% across varied segments. This decision comes as part of an ongoing effort to navigate through the energy sector crisis engulfing the nation, as well as to align with the International Monetary Fund’s (IMF) guidelines ahead of its initial review under the Stand-By Arrangement scheduled for the approaching month.
In terms of the listed space, a deceleration in the augmentation of gas circular debt could potentially be favourable for unshackling valuations of Oil and Gas Development Company Limited (OGDC), Pakistan Petroleum Limited (PPL), Sui Northern Gas Pipelines Limited (SNGP), and Pakistan State Oil Company Limited (PSO). However, it's worth noting that various manufacturing sectors might witness a dent in earnings, especially considering the presumption that the capability to transfer the impact to end consumers may be constrained.
A notable portion of the proposal includes an increase in fertilizer feed and fuel rates, which is perceived to rectify existing ambiguities in gas prices for Mari-based fertilizer entities. To offset the proposed gas price elevation, Fauji Fertilizer Company Limited (FFC) would need to enhance Urea prices by Rs500/bag, whereas Engro Fertilizers Limited (EFERT) would require a more moderate increase of Rs80/bag, considering it is currently logging gas costs at the previously amended rates.
Further analysis revealed that limited cement players, specifically Lucky Cement Limited (LUCK) and Cherat Cement Company Limited (CHCC), may encounter impacts due to the proposed hike, potentially instigating a further transition to alternative energy sources.
The government’s expected approval of the proposed surge in gas prices, spanning from 5% to 193% for different segments, aims to address the prevailing energy sector crisis in Pakistan while also ensuring adherence to the IMF’s recommendations before its inaugural review under the Stand-By Arrangement in the upcoming month. Reportedly effective from 1st October 2023, albeit overdue since 1st July 2023, the price amplification is poised to aid in mitigating the accelerating pace of gas circular debt accumulation, aligning with one of the key recommendations put forth by the IMF.
While awaiting an official publication for confirmation by the Oil and Gas Regulatory Authority (OGRA), this move was notably anticipated as gas circular debt accumulation has been escalating over time. Currently, the outstanding gas circular debt is projected to reach Rs2.7 trillion by September 2023, up from an estimated Rs1.6 trillion in February 2023 and Rs620 billion in June 2021. The preceding gas price increment was declared in February 2023, oscillating between 10% and 69%.
The IMF, in its latest Staff Report, has cast light upon the burgeoning gas circular debt, advocating the formulation of reliable circular debt data, a Gas Circular Debt Management Plan (CDMP), and capacity for circular debt projection. In tandem, the IMF has also urged the government to collaborate with the World Bank in devising guidelines for OGRA to administer the weighted-average cost of gas pricing (WACOG) law, adopted in March 2022, in its subsequent regular OGRA determination.