Pakistan’s Gas Sector Under Pressure as Domestic Production Declines

Local gas output projected to more than halve by FY34, while weak LNG demand and liquidity constraints add to sector challenges

 

KARACHI: Pakistan’s gas sector continues to face significant challenges as domestic production declines, LNG demand remains subdued and gas distribution companies grapple with worsening liquidity pressures.

 

A recent sector study by the Pakistan Credit Rating Agency (Pacra) projects indigenous gas production to fall from around 2,634 million cubic feet per day (mmcfd) in FY24 to approximately 1,266 mmcfd by FY34.

 

As domestic production declines, the share of locally produced gas in the country’s overall supply is expected to drop sharply from about 73% to only 25% over the same period.

 

LNG demand remains weak

 

In the short term, demand for imported LNG is also expected to remain relatively low.

 

According to the study, LNG imports declined from around six million tonnes to approximately 3.7 million tonnes during the first nine months of FY26, as industrial and power-sector consumers increasingly turned to solar energy and other alternative sources.

 

Over the longer term, projects such as the Turkmenistan-Afghanistan-Pakistan-India (TAPI) pipeline and Iran-Pakistan gas pipeline could diversify Pakistan’s gas supply sources. However, persistent delays have created uncertainty over their ability to address the country’s immediate energy requirements.

 

Distribution companies face liquidity strain

 

The financial health of gas distribution companies remains another major concern.

 

Working-capital requirements have increased amid delays in tariff adjustments and weak recoveries, putting additional pressure on the liquidity position of the companies and potentially increasing their reliance on borrowing.

 

The sector also remains burdened by substantial circular debt, estimated at around Rs3.4 trillion.

 

LPG provides some relief

 

The LPG market presents a relatively more positive picture. Domestic LPG production increased by approximately 15.5% during FY26, while imports fell 12% year-on-year to around 1.5 million tonnes.

 

Additional domestic production capacity of roughly 136,000 tonnes annually could provide further support to local supplies.

 

Despite this, Pakistan is expected to remain heavily dependent on imports, with the government setting an FY27 LPG import target of approximately 1.6 million tonnes.

 

LPG prices and industry margins remain exposed to movements in Saudi Aramco’s contract price, geopolitical developments, international freight costs and fluctuations in the rupee-dollar exchange rate.

 

Government considers major gas-sector restructuring

 

The government, with support from the World Bank, is considering a major restructuring of Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company Limited (SSGCL).

 

Under the proposed framework, transmission and distribution operations would be separated, potentially resulting in the establishment of a single National Gas Transmission Company and four provincial distribution companies.

 

The reform package also proposes a multi-year tariff system, third-party access to gas pipelines and a gradual opening of gas trading to private-sector participants.

 

Under the proposed model, around 20% of gas volumes could potentially be made available to private-sector players during the first year.

 

According to the Pacra study, these reforms could improve cost transparency, reduce unaccounted-for gas losses and strengthen revenue recovery, potentially helping address the sector’s large circular debt.

 

However, the report cautioned that the benefits are unlikely to materialise immediately.

 

Resistance from existing gas companies and delays in implementing the restructuring plan remain key risks. The changes could also alter the way SNGPL and SSGCL calculate and report their margins, making comparisons with historical financial performance more difficult.

 

Greater private-sector participation could gradually introduce competition into a market currently dominated by the two major gas utilities and challenge their traditional monopoly positions.

 

Near-term outlook remains difficult

 

Overall, Pakistan’s gas sector faces a challenging near-term outlook, with falling indigenous production, weak liquidity, high circular debt and uncertainty surrounding major gas infrastructure projects continuing to weigh on the industry.

 

While restructuring, improved efficiency and greater private-sector participation could strengthen the sector over the long term, the study suggests these measures are unlikely to bring a significant improvement in the sector’s credit profile in the immediate future.