Analysis of Natural Gas Diversion from Fertilizer Sector to Power Sector in Pakistan

Pakistan is facing an acute energy crisis. The crisis in natural gas sector is just a symptom of a much larger problem afflicting the country’s energy sector as a whole i.e., the demand for natural gas as well as other forms of energy is fast outstripping supply. Pakistan’s gas supplies can’t support the ever-growing demand as they feed power plants, fertilizer companies, domestic consumers, CNG stations and other industries that rely on this fuel. As the energy crisis has worsened over the past five years, the government has consciously curtailed the supply of natural gas to fertilizer sector diverting it to power generation. The gradual reduction in the supply of gas to the fertilizer sector has been accompanied by an increase in gas prices. These two measures have adversely affected this sector and the current study evaluates the economic effects of this policy shift. With the reduction in supply and increase in the price of gas, domestic production of fertilizers has declined whereas their imports have gone up. The PEST analysis including the economic appraisal of two policy options – whether to supply natural gas for either fertilizer production or power generation - makes it quite clear that the supply of gas to the fertilizer sector has higher economic returns. However this appraisal is limited to a cost-benefit analysis and does not take into account the exogenous factors which may have a stronger impact on gas allocation policy. In the end the paper presents different policy options and concludes with a recommendation to undertake wider reforms in the energy sector aimed at increased production of natural gas, enhanced efficiencies in the transmission system and a rationalised tariff structure. Keywords: Fertilizer sector, Economic analysis, Alternative uses of energy, PEST analysis