ISLAMABAD, Jan 8: The government has decided in principle to reject a demand for 25 per cent increase in gas production prices recently put forth by petroleum companies operating in the country, it is learnt. “There is no justification to open binding pricing contracts in isolation. There has to be a fiscal balance through pricing and tax rates, for which the stakeholders should wait for the new petroleum policy”, a senior government official told this correspondent.
“The petroleum companies are always against opening of the contracts to their disadvantage and, hence, they should also abide by the same principle to maintain sanctity of the agreements,” he said.
The official said some local private companies, perhaps with the backing of a couple of US companies, were behind the move.
The Pakistan Petroleum Exploration and Production Companies’ Association (PPEPCA) - an umbrella organization of 26 petroleum companies in Pakistan - has asked the government to increase the production price of their existing fields by at least 25 per cent ‘because its members are either not ready to make fresh investments or planning to sell their existing businesses owing to a cap on their selling price at $36 a per barrel against a prevailing international price of $60-70 a barrel.’
When contacted, Petroleum Secretary Ahmad Waqar said it was wrong to say that petroleum companies were not ready to make new investment in Pakistan. He said an internal exercise had revealed that Pakistan was still among the top 10 competitive countries in terms of overall petroleum sector environment.
He said the ENI, Shell and many new companies from different parts of the world were signing new contracts under the existing policy.
Pakistan’s gas wellhead prices are linked to international prices of crude and furnace oil under the 1994 and 1997 petroleum policies.
However, the government through negotiations with the producers has introduced a new clause that provides discounts to the government in case of price going beyond $16 a barrel. Under this clause, the wellhead gas prices can not go beyond $36 per barrel even if international prices reach $70 a barrel.
The PPEPCA has sought 25 per cent increase in their wellhead price to encourage them produce higher quantities and reduce dependence on imported fuels, as the government estimates to face major gas shortfalls by 2007-08.
The government plans to import gas from Iran, Qatar or Turkmenistan to meet energy shortages.
The local industry is of the opinion that the government should announce a new incentive package for the local operators to maximize their production as a priority instead of depending on the import of fuel oil and proposed gas imports which has a higher economic cost.
Under the 2,001 petroleum policy, gas pricing entails soft discounts and a hard ceiling of $36 per barrel at which the maximum gas price is $2.65 per million British thermal unit (mmbtu) or $15 per barrel of oil equivalent (BOE).
At the prevailing oil price of $70 a barrel, local gas price came to only 21 per cent of the oil price, the PPEPCA says.
At 25 per cent increase proposed by the industry, the gas prices are estimated to go up to $3.31 per mmbtu at a crude oil price of $50 a barrel as against $2.65 per mmbtu calculated on the basis of an existing capped price of $36 per barrel.
At this price of crude oil, foreign exchange cost of imported fuel oil would be about $6.26 per mmbtu as against $3.31 per mmbtu for the revised cost of local gas production - still 53 per cent lower than fuel oil price, the industry argues.
The industry is of the opinion that the pricing mechanism restricts the producers’ profit beyond economic principles though cost of doing business has gone up due to 44 per cent depreciation of US dollar against Euro, about 140 per cent rise in the prices of major input, besides drilling and equipment costs.
The local industry has asked the government to offer incentives on maximum output of the gas fields on upfront basis instead of currently longer delivery schedules spread over 10-30 years. They have also demanded that an integrated gas transmission system should be developed for the whole country so that producers could inject their output into the system.
Currently, there are areas where gas is in surplus whereas in some areas there is a shortage of gas.
