November 26, 2003	Wednesday	Shawwal 1, 1424

ISLAMABAD, Nov 25: The World Bank has asked Pakistan to increase significantly taxation on natural gas to enhance its revenue contribution and raise petroleum levy on oil products in case of reduction in international prices.

In a recent communication to the government of Pakistan, the World Bank said the two fuels (POL and Gas) have disproportionate levels of taxation although both have similar market share. The contribution of POL products and natural gas in annual revenue is around Rs45 billion and Rs15 billion respectively.

“This suggests rationalization of taxation on these two energy sources is called for, in particular there appears to be some scope for higher taxation of natural gas.”

The bank has advised Pakistan that it should use petroleum levy to stabilize the tax receipts from petroleum and natural gas like it had done in 1999 to help cushion the budget against extreme fluctuations in international oil prices.

The bank believes the government could earn much more through increased taxation on natural gas than what it was collecting on POL products.

Petroleum products and natural gas account for approximately 80 per cent of modern energy supply in Pakistan while electricity 15 per cent and LPG and coal constitute the balance. Domestic reserves of crude are small and the balance recoverable reserves are 300 million barrels.

By contrast, Pakistan has extensive gas reserves of about 27 tcf (trillion cubic feet). Annual gas production is around 900 bcf (billion cubic feet) and the reserve to production ratio is over 25 years. There is scope for a substantial increase in gas production.

The bank considered that petroleum products prices were considerably higher than import parity levels, thanks to the taxation regime. Petroleum levies exceeded Rs50 billion in fiscal year 1991 as the government raised surcharges when oil prices fell in 1998-99 and kept end-user prices fairly constant. The bank says that this practice should continue in future.

Revenues from the gas development surcharge (GDS) were less than Rs10 billion per annum during the late 1990s but surged to more than Rs25 billion primarily due to a lag in adjustment of gas well-head prices to the decline in international oil prices during fiscal 1999. Total revenues collected from POL and gas per annum range between Rs60 to Rs65 billion. The highest revenue contribution from oil and gas sector was registered at Rs76 billion in 1999.

The world Bank is of the view that Pakistan should diversify its sources of energy supply, particularly reduce its dependence on imported furnace oil. Accelerated development of domestic gas, development of coal resources — particularly for power generation — should be pursued vigorously.

Pakistan relies on imports — 85 per cent of total supply — to meet its liquid fuel requirements. The import bill has risen in excess of $3 billion in the recent years. Developments in recent years suggest that fluctuations in international oil prices have a bigger impact on the import bill than the variations in volumes.

Annual petroleum imports represented 27-31 per cent of total imports and 30-36 per cent of export earnings during the last three years. By contrast, in earlier years when international prices were lower, the share of POL imports was below 20 per centre of total imports and 18-27 per cent of total export earnings.