Islamabad, July 15, 2020: Pakistan’s Oil and Gas Regulatory Authority (OGRA) has determined prescribed prices for FY21 at PKR 623.31/mmbtu and PKR 750.90/mmbtu for Sui Northern Gas Pipelines Limited (SNGP) and Sui Southern Gas Company Limited (SSGC), respectively.
This translates to a reduction of 6 percent and 2 percent against last year, while SNGP and SSGC had demanded an increase in prices to PKR 1,287.19/mmbtu and PKR 881.53/mmbtu, respectively.
According to Arif Habib Limited, this decision is based on lower international crude oil prices (local gas fields are linked to international oil prices and hence a decline in the same, renders a downwards revision in gas prices).
Additionally, the utilities had filled a petition for higher capex requirements in FY21 at PKR 48,115mn by SNGP and PKR 24,415 by SSGC but have only been allowed PKR 22,306bn and 8,776bn, respectively.
Meanwhile prior year adjustments (primary reason why gas utilities had demanded a hike in prices), have not been incorporated by the Authority at all.
Ideally, prescribed prices determined by OGRA should match the consumer gas prices (actually charged to domestic, commercial and industrial consumers).
However, since this has not been the case historically, a reduction in prescribed prices may not translate to a reduction in consumer gas prices by the government.
Moreover, since profitability of local utilities is subject to a fixed ROA (Assets x 17.43%), change in topline (given change in consumer gas prices), has no impact on company bottom-line.
Going forward, any reduction in consumer gas prices, up to the extent of reduction in prescribed prices, will be neutral for SNGP and SSGC.
AHL also highlight that OGRA has accepted the petitioners’ assumptions for average crude prices at USD 47/bbl. and USD 35/bbl, and the PKR-USD parity at PKR 168/USD and PKR 170/USD for first half and second half, respectively.
These appear reasonable as Arab light is currently hovering near USD 43/bbl. while we estimate the parity to average at PKR 170/USD in FY21.
However, if oil prices settle at higher levels for the year or the Pak Rupee loses more ground than expected, the reduction in prescribed prices may not materialize at the time of FRR (final revenue requirement) determination.
Pertinently, a major risk to earnings of SNGP for FY21 is OGRA’s decision to disallow late payment surcharge (LPS) of PKR 21,196mn in respect of payables by state-owned entities as part of revenue requirement.
Analysts at AHL said that this to be materially negative for SNGP.
Although the Authority has allowed the same in FRR for FY19, in its latest decision, it has advised the petitioner to engage with the Ministry of Energy regarding the same and find an amicable settlement since this relates to the circular debt issue.
Even though the matter will be considered once again at the time of FRR by the Authority, until the said amount is allowed, quarterly profitability may get axed, they added.
