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RUEKJCS/SECDEF WASHDC
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 02 ISLAMABAD 002587 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:  N/A 
TAGS: ENRG EFIN ECON EINV PREL PK
SUBJECT: NATURAL GAS PRICE HIKES TURN BACK REFORMS 
 
¶1. (SBU) SUMMARY: By turning back previous reform measures, the 
Government of Pakistan (GOP) has created new categories and 
sub-categories of natural gas consumers with variable pricing rates. 
 With over 95 percent of all domestic automobiles fueled by 
compressed natural gas (CNG), increases at the pump are hitting an 
already cash poor public particularly hard. END SUMMARY. 
DOMESTIC NATURAL GAS CONSUMPTION 
- - - - - - - - - - - - - - - - 
 
¶2. (U) Pakistan is one of the largest natural gas consumers in the 
world and domestic consumption accounts for 50 percent of Pakistan's 
total energy use.  Pakistan consumes all of its domestic gas 
production and domestic needs mandate expanded production.  Only 60 
percent of Pakistani households currently have electricity, and only 
18 percent have access to pipeline gas for heating.  Over 95 percent 
of all automobiles in Pakistan are fueled by CNG.  There are 
approximately 2,060 CNG stations operating in the country to fuel 
the 1.7 million light vehicles that have been converted to CNG.  Of 
these, 1,590 stations are owned by private individuals and the 
remainder are operated by oil manufacturing companies. 
 
¶3. (U) Energy demand in Pakistan is expected to increase 250 percent 
over the next 20 years.  To meet expected demand, electrical 
generating capacity must grow by 50 percent from 20.4 gigawatts in 
2008 to 30.6 gigawatts in 2010.  Pakistanis have begun to feel the 
energy crunch more than ever as blackouts have increased across the 
country and exceed 15 hours per day in some areas. 
 
DIFFERENTIATION IN PRICE STRUCTURES: CREATING CONFUSION 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶4. (U) The GOP divides natural gas consumers into six main 
categories: industrial, commercial, domestic, fertilizer, transport 
and power. The GOP claims that the differing tariff structure for 
each category of customers is set according to economic priority. 
The natural gas tariff in Pakistan is progressive in nature and 
rises with higher consumption.  Some of the six categories are 
further divided into sub-categories.  For instance, domestic 
consumers are now divided into seven sub-categories. 
 
¶5. (U) Domestic: The poorest "lifeline" consumers, using less than 
50 cubic meters per month, are subsidized in sub-category one and 
charged the lowest rates.  According to an Oil and Gas Regulatory 
Authority (OGRA) notification issued on June 30, the number of 
sub-categories for domestic users were increased from five to seven 
to enable the GOP to charge more from upper middle class consumers 
using above 200 cubic meters per month.   No increase was announced 
for domestic users in the first three sub-categories.  Domestic 
consumers in the fourth through seventh sub-categories will see a 31 
percent price increase in their monthly bills.  Mr. Qureshi admitted 
that only 0.5 million domestic consumers out of the total 5.4 
million would be effected by the gas price hike and therefore the 
domestic rate increase will not significantly impact government 
coffers. 
¶6. (U) Transport: The price increase has pushed the retail price of 
CNG, used in the majority of motor vehicles, to Rs 47.25-48.80 per 
kilogram.  Consumption for most motor vehicles is nine kg for the 
average tank and requires more frequent fill ups than gas fueled 
cars.  CNG prices were raised a day after the government also raised 
petroleum and diesel prices by 10 percent and kerosene prices by 30 
percent. 
 
¶7. (U) Commercial: The rate has been raised from Rs. 283.05 to Rs 
370.80 per million British Thermal Units (MMBTU).  The minimum 
monthly charges for commercial consumers have been fixed at Rs 
1,750.44, up from Rs 1336.21.  Commercial consumers have been 
defined as cafes, bakeries, milk shops, tea stalls, canteens, barber 
shops, laundries, tandoors (gas ovens for baking staple chapattis), 
cinemas, clubs, theatres, clinics, maternity homes and private 
offices. 
 
¶8. (SBU) As an example of the randomness of the price increases and 
category creation, a special commercial section has been introduced 
for chapatti tandoors.  Under the category, consumers using up to 
300 cubic meters will be billed in accordance with the domestic 
mechanism whereas those consuming above 300 cubic meters will be 
billed at normal commercial rates. 
 
¶9. (U) Industrial: The sale price for natural gas to all industrial 
 
ISLAMABAD 00002587  002 OF 002 
 
 
consumers, including the textiles and apparel sector, has been 
increased from Rs 251.55 to Rs 329.54 per MMBTU, showing an increase 
of 31 percent.  The sale price for CNG has been increased from Rs 
291.36 to Rs 388.32 per MMBTU, a rise of 33.2 percent. 
 
¶10. (SBU) Most of the textile sector converted to self generating 
electricity using natural gas due to the gross inefficiencies in 
Pakistan's electric power generation and transmission system. 
Industrialists complain that they are being unfairly taxed with 
these price increases since they were forced to individually bear 
the expense of creating their own power due to the inefficiency of 
Pakistan's electricity production.  They further note that Pakistani 
textile competitiveness will be further eroded by these natural gas 
increases and that Pakistan has its own domestic supply of natural 
gas so the price should not be so high for domestic industry. 
 
¶11. (U) Other Miscellaneous Increases: The tariff for ice factories 
has been increased to Rs 370.80 per MMBTU from Rs 283.05, an 
increase of 31 percent. The gas tariff for the cement industry has 
been increased to Rs 428.89 per MMBTU from Rs 335.67, an increase of 
28 percent. 
 
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COMMENT 
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¶12. (SBU) Comment. It is unclear how collection of these 
differentiated tariff rates will be possible.  There are already 
reports that commercial users located in and around residential 
areas are switching to illegal domestic connections. Likewise, 
domestic consumers are trying to conceal consumption by getting more 
than one gas meter.  The GOP does not have mechanisms to verify or 
prevent this theft. 
 
¶13. (SBU) Comment continued. However well intended, the expansion of 
sub-categories and differentiations in pricing schemes for consumers 
drives Pakistan further from the reforms to put market pricing 
mechanisms in place.  These reforms were intended to have a single 
market based pricing mechanism, driven by the marginal cost of 
production, for all users of natural gas.  These measures are a 
regression from previous commitments with the World Bank, made by 
then Prime Minister Shaukat Aziz. Elimination of the sub-categories 
was in the "first phase" of reform plans. End Comment. 
 
ARCHIBALD