High-Level Committee Urges Reassessment of Circular Debt and Energy Sector Reforms

Islamabad: A high-level Inter-Ministerial Committee (IMC) on the petroleum sector, chaired by Foreign Minister and Deputy Prime Minister Senator Ishaq Dar, has directed the Petroleum and Power Divisions to reassess the settlement plan for circular debt. This evaluation is expected to explore the potential for cash and non-cash adjustments to help clear up balance sheets, according to sources close to the Petroleum Minister.

The committee meeting took place on August 17, 2024, at the Ministry of Foreign Affairs and included key public and private sector figures. These attendees ranged from ministers overseeing petroleum, finance, and power to the heads of various Exploration and Production (E&P) companies and high-ranking officials from relevant government divisions.

A Previous Plan Rejected by the IMF

A previous effort to address circular debt was crafted by Muhammad Ali, the caretaker Minister for Power and Petroleum, now serving as Special Assistant to the Prime Minister (SAPM) on Power. However, this proposal was rejected by the International Monetary Fund (IMF), necessitating a fresh approach from the current administration.

Key Issues and Areas of Concern

The Petroleum Division provided an in-depth briefing during the meeting, highlighting various critical issues. These included:

• The persistent problem of circular debt.
• The need for integrated energy planning.
• Challenges in easing the regulatory environment.
• Amendments in the on-shore and off-shore fiscal regimes.
• Problems related to current LNG (Liquefied Natural Gas) imports.

One major challenge is the rising circular debt, with Distribution Companies (Discos) contributing an additional Rs596 billion to the growing debt burden.

Decisions Taken by the Committee

Following extensive discussions, the IMC made a series of important decisions aimed at reforming Pakistan’s petroleum and power sectors. These decisions include:

1. Development of an Integrated Energy Plan
   The Petroleum and Power Divisions are to collaborate with international consultants to develop a comprehensive Integrated Energy Plan. This plan is expected to be completed by December 2024.
2. Amendments to OGRA Ordinance
   The Petroleum Division has been instructed to propose suitable amendments to the OGRA (Oil and Gas Regulatory Authority) Ordinance. The goal is to introduce a mechanism that allows gas tariff adjustments either monthly or quarterly, in a bid to prevent further circular debt accumulation in the gas sector.
3. Reassessment of Circular Debt Settlement Plans
   The committee directed the Petroleum and Power Divisions to reassess plans for the settlement of circular debt. The goal is to consider both cash and non-cash adjustments where possible to clean up balance sheets. The revised plan will be presented at the next committee meeting within two weeks.
4. Shared Use of Gas from Dedicated Fields
   The Petroleum and Power Divisions are tasked with jointly evaluating the shared use of gas from dedicated fields. This is aimed at optimizing resource utilization.
5. Restructuring of Sui Companies
   The committee has also directed the Petroleum Division to formulate a restructuring plan for the Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL). The aim is to exit the current asset-based fixed return regime, which is considered outdated and inefficient.
6. Enhanced Security for E&P Activities
   The Interior Division was tasked with working closely with E&P companies and other stakeholders to establish a robust security framework. This framework will ensure that exploration activities, especially in challenging areas, can proceed without unnecessary delays. The costs associated with security measures must also be rationalized.
7. One-Window Facilitation for Security
   A one-window facilitation mechanism will be introduced at both the federal and provincial levels to streamline security procedures for operations in challenging areas.
8. Digitization of Petroleum Processes
   The Directorate General of Petroleum Concessions is expected to develop a detailed plan for digitizing its processes. This strategy must be presented within the next 45 days.
9. Streamlining Regulatory Approvals
   The committee emphasized the importance of simplifying regulatory processes. The Petroleum Division was instructed to implement automation and digitization at all levels to enhance the ease of doing business.
10. Consultation on Offshore Fiscal Regime
    The Petroleum Division has been directed to consult with the E&P industry on proposed amendments to the offshore fiscal regime. Final recommendations must be brought before the committee within 30 days.
11. Government-to-Government (G2G) Engagement
    The committee also urged the Petroleum Division to pursue government-to-government (G2G) engagement with friendly countries. This strategy is expected to be incorporated into the Deputy Prime Minister’s international interactions as part of Pakistan’s economic diplomacy efforts.
12. Third-Party Sales Framework for E&P Companies
    A framework is to be developed for allowing E&P companies to sell up to 35% of their gas production to third parties. This framework will be reviewed and finalized by the committee.
13. Review of Port Charges by Ministry of Maritime Affairs
    The Ministry of Maritime Affairs, along with the Port Qasim Authority, was tasked with reviewing and rationalizing port charges. The objective is to ensure that these charges are competitive with international standards. The findings must be submitted within the next 60 days.
14. Avoid RLNG Diversion to Domestic Sector
    One of the most critical directives from the committee was to ensure that Regasified Liquefied Natural Gas (RLNG) is not diverted to the domestic sector. Instead, RLNG usage should be prioritized for the power sector, which is facing a significant energy shortfall.
15. Exploration of RLNG Sales to Third Parties
    The Petroleum Division was also asked to explore the possibility of packaging some volumes of RLNG with third-party sales. This move could help reduce the financial burden on public sector entities.

Conclusion

The high-level IMC’s decisions reflect the urgent need to address critical issues within Pakistan’s energy petroleum and power sectors. The focus on circular debt, regulatory reforms, security, and enhanced ease of doing business underscores the government’s commitment to strengthening the energy infrastructure. The upcoming months will be crucial as these reforms are expected to bring long-awaited stability to the energy landscape.

FAQs

1. What is circular debt in Pakistan’s energy sector?
   Circular debt refers to the accumulation of unpaid bills within the energy supply chain, particularly between distribution companies, power producers, and fuel suppliers, causing a financial crisis.
2. Why did the IMF reject the previous circular debt settlement plan?
   The IMF rejected the previous plan due to concerns about its sustainability and lack of effective financial controls.
3. What is the purpose of the Integrated Energy Plan?
   The Integrated Energy Plan aims to create a comprehensive strategy for Pakistan’s energy needs, ensuring coordinated efforts across the petroleum and power sectors.
4. Why is RLNG important for Pakistan’s power sector?
   RLNG is a critical fuel source for Pakistan’s power plants. Ensuring its availability for the power sector helps mitigate energy shortages.
5. What is the role of the Petroleum Division in the reforms?
   The Petroleum Division is responsible for overseeing regulatory reforms, restructuring of gas companies, and ensuring the efficient use of natural resources through initiatives like third-party gas sales.