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Regulating hydrocarbons

Updated January 07, 2019

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Pakistan has formidable energy requirements that are catered through imports mostly.

As of 2016-17, the consumption of petroleum products was 26.4 million tonnes whereas indigenous crude processed during the same period was only 3.9m tonnes. It implies that only 15 per cent of total requirements were met domestically.

The rest were met through imports in the shape of crude oil (9m tonnes) and refined petroleum products (14-15m tonnes).

Unlike the rest of the world, the regulatory and policy-making functions are not separate in Pakistan

What is further alarming is the decline that hydrocarbons suffered in terms of foreign direct investment (FDI). Historically, Pakistan has had high FDI in oil and gas exploration. About 77pc of all FDI in 2012 was in hydrocarbons. Their share decreased to 5pc in 2016-17.

During the last five years, the country also witnessed the divestment of major international oil and gas companies, including UK-based Tullow and Premier Oil, Anglo-Australian BHP Billiton and Austrian OMV. Their exit has a spill-over effect on other international companies, which are believed to have contracted operations significantly.

The good news is that ExxonMobil is coming back after nearly three decades to pursue opportunities in Pakistan’s largely untapped market. Nonetheless, significant reforms are required to foster re-investments in oil and gas exploration, starting from the most important one of splitting the role of regulatory and policy decision-making.

The regulatory function is separate from the policy-making function worldwide. In Pakistan, however, the upstream sector is both governed and regulated by the Director General of Petroleum Concession (DGPC), which has created an enormous conflict of interest.

In its hierarchy, the DGPC reports to the Ministry of Energy (Petroleum Division), which raises questions about its regulatory powers. For international investors to ‘trust’ the system, it is paramount that they see an independent, autonomous and strong regulator capable of taking balanced decisions in the interests of both consumers and investors.

The separation between the policy-maker and the regulator is vital. Investors like to see that the regulator is capable of taking decisions with funding and policy agencies not instructing or seeking to influence regulatory decisions.

Moreover, there are proper structural arrangements that ensure the regulatory decisions are not subject to approval by a senior officer in the policy or funding agency. Lastly, investors want that policy-makers should not be a part of hiring and firing of regulatory personnel.

Moving away from separate activity-based regulatory approvals to a single application system can bring improvements

The flip side of the policy-maker not knowing the regulations have also proved detrimental to the sector. It can be seen in the way foreign companies have left Pakistan on one pretext or the other. Policy-makers, especially the bureaucracy, did not encourage effective and accountable use of policy.

Regulations often evolved as short-term instruments rather than long-term views. Vested interests blocked the much-needed reforms to provide the elite, instead of larger populace, with benefits. Most government officials are just not policy-makers and cannot assess the hidden cost of regulation or ensure that regulatory powers are used coherently.

It results in a convoluted, activity-based regulation process. The complex web of regulatory procedures means that companies spend more time in paper filing instead of focusing on core business activities.

Many parts of the world have seen a frictionless regulatory procedure that involves the highest levels of standards while keeping their costs low. There is a strong need to simplify upstream regulatory rules in Pakistan since the extent of documentation required at each stage of oil exploration and production is much higher than the worldwide average.

All operations, such as spudding a well, moving machinery and laying a pipeline, require a separate regulatory approval from the DGPC’s office. This may be changed into a more robust compliance-based regulation, which combines the multitude of separate regulatory activities into a single application and review process around a specific ‘trigger event’ like the yearly reporting or critical exploration and production update.

Moving from separate activity-based regulatory approvals to a single application, single review and single approval system around a specific ‘event’ can result in significant improvements. The simplification of regulatory practices will allow exploration and production companies to focus on core business activities.

The DGPC should be made a long-term regulator of upstream oil and gas exploration and production activities while the policy-making function should be transferred to Ministry of Energy officials.

Capacity building is essential for the DGPC to act as a viable regulator.

An understaffed regulator without sufficient regulatory instruments can ruin a sector. The hydrocarbon regulation in the 21st century requires leadership in safety, emergency preparedness, technology, operations and maintenance, logistics, supply chain, management systems etc.

Pakistan needs to do away with import-dependent, cost-heavy oil and gas addiction. It can do so only by investing in indigenous resources and creating an environment that facilitates investments. Despite a renewables revolution, Pakistan’s energy policy in the 21st century will still fundamentally be about hydrocarbons. No improvement will be possible without reforming the DGPC and separating policy-making and regulatory functions.

The writer is an energy policy consultant
khurramklalani@gmail.com

Published in Dawn, The Business and Finance Weekly, January 7th, 2019