OGRA's recommendation- Upside risks to Circular Debt?

July 15, 2020 (MLN): Oil and Gas Regulatory Authority (OGRA) reduced the gas prices by 6% and 2% for Sui Northern Gas Pipelines Limited (SNGP) and Sui Southern Gas Company Limited (SSGC) respectively for FY21. However, SNGP and SSGC had demanded an increase in prices to PKR 1,287.19/mmbtu and PKR 881.53/mmbtu, respectively.

This OGRA’s decision on Estimated Revenue Requirement (ERR) is attributed to lower international crude oil prices along with other disallowances in respect of revenue & capital expenditures.

The Authority sent the prescribed gas prices to the Federal Government for advice in respect of each category of consumers under Section 8(3) of said Ordinance.

According to the research by Topline, in May 2020, SSGC had submitted its revised ERR to OGRA projecting a shortfall of Rs 31bn, down from an earlier Rs 50bn due to revised Crude Oil and Furnace Oil (FO) price assumptions. The year FY21 was expected to generate a surplus of Rs 42bn (at current price), which was largely offsetting the previous year shortfall of Rs73bn, resulting in a net deficit of Rs 31bn (seeking a hike of Rs 85/mmbtu).

On the other hand, SNGP also had submitted a revised petition after revising oil price assumptions, wherein projecting a shortfall of Rs 27bn for FY21 (Rs199bn including old shortfall) vs. earlier Rs43bn (Rs 217bn including old shortfall) and seeking a hike of Rs 623/mmbtu, the research added.

Ironically and historically, a reduction in prescribed prices may not translate to a reduction in consumer gas prices (actually charged to domestic, commercial and industrial consumers) by the government, another research by Arif Habib Limited said.

Going forward, any reduction in consumer gas prices, up to the extent of reduction in prescribed prices, will be neutral for SNGP and SSGC, the report said further.

According to the research analysts of Topline, OGRA’s decision looks negative for SNGP as a delayed collection of Late Payment Surcharge can overshadow the improved liquidity from falling oil prices. However, OGRA’s assumption is based on a conservative oil price assumption of US$35/barrel (for 2HFY21), which portrays upside risk to gas prices and circular debt going forward.

Copyright Mettis Link News