KARACHI - In a bid to pass on the impact of expected surge in the wellhead gas prices, the government is considering to increase gas prices up to 18pc for all categories effective from January 1, 2010. This anticipation is in line with the expectation as the data calculated an increase of 17.6pc (excluding Qadirpur price resolution) in weighted average cost of gas effective from Jan 01, 2010. Major beneficiaries will be PPL and SSGC from this deal. Gas price hike carries both direct and indirect implications for inflation. Transport, fuel and lighting have 14.6pc weightage in the Consumer Price Index (CPI). However, the natural gas head has just 2.04pc representation in overall CPI basket. This means that every 1pc increase in gas price would result in 2bases points increase in CPI ceteris paribus. Meanwhile, the price hike also carries indirect impact on the other heads of CPI in the sense that this will result in higher production and transportation cost. At the moment, 11.8pc inflation target for FY10 is being maintained and ascertained. The proposal to increase the consumer gas prices is mainly in pursue of the expected surge in the wellhead prices effective Jan 1, 2010 that will increase the cost of purchase of gas transmission companies. The price of gas sold by energy and power sector is being determined on semi-annual basis (July and Jan) under the field-wise wellhead gas pricing agreement in light of the respective petroleum exploration policies. As such, energy and power wellhead prices are independent of consumer gas prices. Thus, this proposed increase in gas prices will have no impact on Energy and Power sector earnings. Having said that, the expected 20-23pc upward revision in the wellhead price of uncapped crude oil linked fields (Sui, Khadhkot, Sawan Miano, Pariwali, Pindori) on the back of 52pc hike in applicable crude oil prices. Moreover, currency decline would also result in a 2-3pc increase in the wellhead prices of the capped fields under gas price agreements. Given its higher concentration of gas sales in overall revenue pie, one can easily ascertain PPL would be the major beneficiary of 2HFY10 wellhead gas price revision. Whereas, in the absence of Qadirpur price revision, there will not be a material increase in the average gas realised price of OGDC in 2HFY10. For POL, production enhancement from Manzalai (capped field) would mitigate the impact of higher tariffs on Pindori, Pariwali and Turkwal gas sales as the average realised price of the company would not surge significantly. Gas distribution companies (SSGC & SNGPL) function under guaranteed return on their asset base. Hence, an increase in consumer gas price does not affect their profitability. In this regard, SNGPL is entitled to earn 17.5pc operating profit on the average net fixed assets while the SSGC is allowed to get 17pc return on its average net fixed assets. However, there will be a slightly positive impact in the form of improved cash flows for these two companies as this will reduce their working capital borrowing which will marginally lower their financial charges.