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Exploring new energy reservoirs

The new policy promises considerable incentives to investors, whether it will make a difference remains to be seen

By Shujauddin Qureshi 

Marred with slow economic growth due to severe energy crisis across the country, the government on August 8, 2012 got approval of yet another Petroleum Exploration and Production Policy (2012) from Council of Common Interests (CCI), the constitutional supreme body for decision making.

This is the second petroleum policy of the present PPP-led coalition government and eighth of the country since 1991, followed by Petroleum Policies of 1993, 1994, 1997, 2001 and 2007 and 2009. The question arises why yet another policy within three years?

The government has tried to answer this question in the policy document that the 2009 Policy had to be amended “as the new market conditions warranted urgent changes required for investment promotion in view of increasing international energy prices.”

While looking at the documents of both 2009 and 2012 policies, one can realise that most of the objectives are almost the same; however, two additional objectives have been inserted in 2012 policy – to decrease reliance on imported energy by providing additional incentives to exploration and production companies for enhancing indigenous production and to undertake exploitation of oil and gas resources in a socially, economically and environmentally sustainable manner.

“There has been a paradigm shift in the natural gas scenario due to higher trend of consumption of natural gas in the country and overall energy requirement was changing, therefore, there was great need to bring new policy with additives.”

The new policy, as usual, mostly provides and discusses the licensing issues as well as pricing and taxation on gas and oil exploration and production. It also fixes the rates of royalties, production bonus, windfall levy, etc, and providing guidance how to get licence.

The government has enhanced the rates of windfall levy in 2012 policy, whereas the royalty rates and production bonus rates kept the same as of 2009 policy. For the windfall levy, the base price for crude oil and condensate has been fixed at US$ 40 per barrel (bbl), whereas it was US$ 30 in 2009 policy.

The base price for crude and condensate will escalate each calendar year by US$ 0.5 per bbl (0.25 in 2009) starting from the date of first commercial production in contract areas. Government’s take in windfall levy has been reduced from 50 percent to 40 percent which is applicable on the domestic crude oil price exceeding base price.

In the event Market Price of Crude Oil/Condensate exceeds US$ 110/bbl ($100/barrel in 2009), the 100 percent benefit of Windfall Levy will pass on to the government. The ceiling would be reviewed as and when the pricing dynamics significantly change in the international market, the policy stated.

Pakistan is facing acute shortage of energy (electricity and gas) for the last many years and both domestic and industrial subscribers are bearing the entire brunt. Pakistan’s average daily production of crude oil and gas in 2009-10 was 65,000 barrels and 4,063, million cubic feet, respectively, which were 53 percent of the country’s total demand whereas other indigenous sources provided 19 percent of the energy, rest of the demand gap was filled through 27 percent imports of oil and gas.

Steep rise in balance of trade due to growing import bill and declining exports has already strained the economy and any further increase in imports, mainly due to growing fuel demand would further aggravate the economic situation.

Due to its failure to kick start the much publicised Iran gas pipeline project to import gas from Iran (owing to strong opposition by the US, backing out of India and increasing oil prices in the international market), Pakistan is left with no other choice but to tap its local reservoirs, many of already explored ones are depleting fast.

There is a need to explore more fields offshore as well as onshore by granting new licences to overseas as well as local companies. The new petroleum policy provides impetus to this growing demand of fuel and the government expects it would increase the chances of new discoveries both in the sea and in the land and would attract foreign direct investment.

The government has provided attractive incentives to the overseas and local investors in the new petroleum policy by enhancing the prices of the wellhead gas price from US$ 4.5 per Million British Thermal Unit (MMBTU) to $6 to $9 per MMBTU. Similarly, a price bonanza of $ 1 per MMBTU has been offered for the first time to investors for the first three discoveries in offshore areas.

This increase in the wellhead gas price is likely to increase the weighted average price of gas and, thus, is bound to have corresponding increase in the domestic gas prices for local consumers. The local prices of gas are already lower as compared to neighbouring India or other countries, but due to poverty and mostly reluctance of the consumers to pay more the price impact would create hardships among the population.

The industrial sector, especially fertilizer, cement, and textile mills are the main consumers of natural gas besides commercial use of natural gas in the form of CNG. There are still many areas where natural gas has still not reached. The government provides cheaper gas to local fertilizer manufacturing plants in order to subsidize the local farmers.

The government is also providing gas to power generating units in order to generate cost-effective electricity and reduce the imported furnace oil bill. “The new policy would encourage foreign investment in exploration and production as attractive prices are offered for oil and gas and discounts are less (5 percent against 10 percent in 2009 policy),” says Khurram Shahzad, senior analysts at InvestCap Securities. He says new explorations were virtually halted because of uncompetitive prices and law and order situation in many areas.

Interestingly, after the 18th Amendment in the Pakistani Constitution, the role of provinces should have been increased particularly after abolition of the concurrent list. Under the policy, one office of Director General Petroleum Concessions, DG (PC) is empowered to implement the policy, whereas Federal Minister for Petroleum and Natural Resources is the Chairman of the implementation committee.

After insertion of Article 172(3) now the provinces have equal and joint ownership on mineral oil and natural gas. The Article 172 mainly deals with ownerless property in a particular province. 172(1) states any property which has no rightful owner shall, if located in a province, vest in the government of that province, and in every other case, in the federal government, whereas 172 (2) states all lands, minerals and other things of value within the continental shelf or underlying the ocean beyond the territorial waters of Pakistan shall vest in the Federal Government.

“Effective from 19th April 2010 when 18th Amendment in the Constitution has been enforced, now the 172 (3) is also effective which states: ‘Subject to the existing commitments and obligations, mineral oil and natural gas within the Province or the territorial waters adjacent thereto shall vest jointly and equally in that Province and the Federal Government,” says Muhammad Arif, President, Energy Lawyers Association of Pakistan.

Talking to The News on Sunday Arif says because of 18thAmendment, the say of the provinces in the policy formulation role has increased as has been proven during the process of the new Petroleum Policy formulation. He says insertion of 172(3) has, however, created a contradiction with Article 161 which provides for the payment of 100 percent of the royalty on natural gas to the provinces.

“Because of misinterpretation of the new Article 172(3), the provinces had started asking for regulatory and administrative control on the day to day administration of the licensing and related affairs. This halted the award of new exploration blocks since June 2010,” he adds. Arif believes that “this new 2012 Policy provides substantial fiscal incentives but these alone may not be sufficient to attract desired level of investment unless sufficient attention was paid to create enabling environments as well. Another big challenge for the federal government would be to implement the policy as soon as possible which also seems quite difficult due to serious capacity constraints of the office of DG (PC),” Arif, adds.

The new policy has provided a provision of setting up of a Technical Committee under the chairmanship of Secretary Petroleum and Natural Resources and comprising of a nominee each of all the Provinces, Director General Petroleum Concessions, DG (Gas), Oil and Gas Regulatory Authority (OGRA), distribution and transmission companies, Pakistan Petroleum Exploration and Production Companies Association (PPEPCA) and the concerned E&P companies and this committee will be empowered to resolve the key issues between E&P and gas marketing companies.

Arif believes creation of such a big committee is likely to cause substantial delays in the implementation of the policy measures which the country cannot afford at this juncture of energy crisis.

Under the policy the government has also committed to bring appropriate changes in relevant rules, regulations and model agreements for its effective implementation.

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