KPMG study proposes relaxation in UFG allowance

Oil & Gas Regulatory Authority (OGRA) had requested KPMG to conduct a study to determine appropriate Unaccounted for Gas Losses (UFG) level for gas distribution companies including Sui Northern Gas Pipeline (SNGP) and Sui Southern Gas Pipeline (SSGC). KPMG has submitted the second draft of the study to OGRA and it is now publicly available.

The purpose of the study was to evaluate the UFG system in the country and to assist OGRA in regulating the UFG related matters for gas utility companies i.e. SNGPL and SSGP.

As per the study, KPMG has proposed two UFG allowances including Technical Component and Local Conditions Component. The Technical component is proposed to be at 5% based on best international practices and comparison with comparable countries. This compares favourably to the prevailing benchmark of 4.5% currently being used by OGRA for Sui companies.

The Local Condition Component proposes an additional maximum relief of 4.05% which will be linked to the achievement of key performance indicators (KPIs) and key monitoring indicators (KMIs) by the Sui companies. In other words, if companies fail to achieve the KPIs and KMIs, relief will not be provided.

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It is to be noted that the local condition component is due to concerns raised by Sui companies on the impact of the shift from bulk to retail consumers (making it prone to thefts and leakages) and non-recovery of bills due to law and order situation.

Some of the KPIs and KMIs include the reduction of data & metering errors, reduction in leakages and gas losses, improvement and enhancement in capacity.

According to analysts at Insight Securities, the suggestions of the study could reshape the sector dynamics and provide a way forward for the Sui companies, especially, Sui Southern Gas Company which is incurring UFG losses of about 14-15%.

They also highlighted that 1% reduction in UFG losses/1% higher UFG benchmark means an additional profit of Rs 2billion (Rs 3.15/share) for SNGP and Rs 2b (Rs 2.27/share) for SSGC.

If approved, analysts at Topline Securities believe that this could be a major positive development for SNGP as it not only allows SNGP some additional UFG allowance benefit, but also provides an incentive to the company to reduce UFG losses through increased vigilance and strict control measures.

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