SINDH’S HIGH STAKES IN OIL AND GAS

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While off-shore exploration for oil and gas brings potential tidings of prosperity for Pakistan, it also raises questions about relationships within the federation
While off-shore exploration for oil and gas brings potential tidings of prosperity for Pakistan, it also raises questions about relationships within the federation

In the midst of a gas supply crisis across Sindh in December last year, Chief Minister (CM) Murad Ali Shah lambasted the federal government in a press conference outside the Sindh Assembly.

“How is it possible in a welfare state ... that the people of Sindh are first deprived of water and now being denied gas supply,” he boomed. Ministers accompanying the CM added the federal government was committing a “flagrant violation” of Article 158 of the Constitution, arguing that it was either incompetent or it was wittingly deviating from the Constitution.

The crisis rumbled into this year.

In January, Shah would go on to call for revisiting the criteria of the National Finance Commission (NFC) Award — the instrument used to distribute taxes collected among the provinces. The CM argued that more weightage ought to be given to the quantum of revenue generation rather than the provinces’ population.

Till now, no formula has been agreed upon on a revision of the NFC Award and the status quo persists.

Sindh’s claim over a greater share in the NFC Award is bedded in its oil and gas reserves. With the province already supplying 23 percent of Pakistan’s oil and 67 percent of its gas, future discoveries can reopen constitutional questions

But the matter of oil and gas exploration and production in Sindh has come to the fore once again after Prime Minister Imran Khan (perhaps prematurely) made the claim that Asia’s largest gas and oil reserves might soon be discovered near Karachi.

The claim of better days ahead ought to have provided a silver lining in the distance, but it also set alarm bells ringing: will Sindh even get its due share if these reserves were successfully explored? Will the NFC Award still enjoy constitutional protection? And is the idea of rolling back the 18th Amendment linked to potential discovery of new oil and gas reserves? Will the balance of power between the centre and provinces once again be altered?

NFC AWARD, OIL AND GAS

The Pakistani constitution stipulates that whatever grows or exists above ground level is an asset of the province, and what is found beneath the core of the earth is considered to be the asset of the federal government. In the same manner, whatever exists within 30 nautical miles of the coast is under the jurisdiction of the provincial government but the centre stakes claim to whatever lies beyond that.

This creates a substantial dichotomy, particularly with regards to the 18th Amendment to the constitution.

The 18th Amendment stipulates that the collective provincial shares in the divisible pool may not be reduced from 57.5 percent. The amendment, of course, provided unprecedented protection for the provinces but it also put pressure on the centre’s finances — how will it foot the substantial wage bill of the bureaucracy, the armed services as well as federal debt servicing?

Of late, the government in Islamabad has been broadcasting the financial crunch it finds itself in. One way out of the mess — and arguably what the government is banking on — is if large oil and gas reserves are successfully found off the Karachi shore. And while there is great prosperity to look forward to if this situation turns into reality, there are finer matters also at play.

Potential oil and gas discovery in Sindh directly impacts the power relationship between the centre and the provinces. The 18th Amendment left in its wake some unresolved political questions — for example, in the event of successful oil and gas exploration, what would be the respective mandates of the centre and the provinces?

At present, things are shrouded in confusion. At the centre, matters pertaining to oil and gas are dealt with by the Ministry of Petroleum and Natural Resources. Sindh, however, has no dedicated mechanism. It currently has an energy department that deals with these matters which is dealt with by the CM.

With Karachi’s population and internal migration towards the city increasing at a great pace, the matter of who can and who cannot benefit from oil and gas resources will surely come into sharp focus. Central to that is power: who wields what and how much. Fears in Sindh about the rollback of the 18th Amendment are premised on the assumption that power and finances may once again be stolen from provincial and local administrations.

Then there are issues of how the NFC Award is calculated.

Consider, for example, the fact that taxation falls in the realm of the NFC Award but profits do not. So, taxes collected from the sales of oil and gas shall be distributed among provinces. While Sindh would ultimately be managing and operating oil and gas operations, it has no legal claim over resources found beyond 30 nautical miles and therefore, no claim to a share in the profits.

It is for this reason that CM Shah, after the last meeting of the Council of Common Interests (CCI), has been emphasising more on the fate of oil and gas than the NFC Award itself. The province’s position now is that more refineries need to be built in Sindh’s cities other than Karachi. This reflects the province’s direct interest in the matter of exploration, production and consumption of oil and gas. If large oil and gas reserves do become a reality, then Pakistan needs to attempt to harmonise the distribution of power, resources and jurisdiction between the centre and the provinces.

DISCOVERING OIL Off-shore

Source: Khan, Nasim A., Energy Resources and their Utilisation in Pakistan (Karachi: Hamdard University Press, 2010)
Source: Khan, Nasim A., Energy Resources and their Utilisation in Pakistan (Karachi: Hamdard University Press, 2010)

Off-shore Pakistan is divided into two basins: the Indus Basin and the Makran Basin, separated by the Murray Ridge.

Mainly driven by its similar geology with other deltas rich in hydrocarbons, off-shore areas of the Indus Delta have indicated a tremendous potential of oil and gas in seismic surveys. The interest in the Indus Delta is more recent — only since 1961 — but the poor success rate off-shore in this delta has been a cause of discouragement.

Moreover, the cost of such projects is enormously high — a single exploration well off-shore can cost in the range of 60 million to 200 million dollars. (The high costs and low yield resulted in British Petroleum making an exit from Pakistan.) A list of major exploratory wells that had been drilled off-shore in Pakistan until 2010 is shown in Table 2 [see overleaf]. The spud dates and completion dates are also mentioned. None of these resulted in any substantial discovery.

As of 2013, the Ministry of Petroleum and Natural Resources has given 16 licenses for gas exploration in the Indus Basin, while no licensees are working in Makran. Private companies are still interested in exploring, but the high risk and cost, and the time required relative to onshore exploration, repels potential investors. If the government wants to exploit off-shore areas, it must encourage public-private partnerships and share the risks.

SORTING THE WRANGLES

Any potential discovery of oil and gas will inevitably open a can of constitutional worms. And while debates will generate polar responses, the solution perhaps lies somewhere in the middle. What is perhaps non-negotiable and enjoys constitutional protection is the share of province in the divisible pool. But what of the other money earned? What kind of benefits can the province of Sindh, in particular, receive from any potential new discoveries?

Many matters are linked to the centralisation of power and the decentralisation of finances.

But problems exist in corporate taxation, for example. Karachi often claims that it enjoys the lion’s share in generating finances for the country. But the devil in the detail is that corporate agreements are often signed in Karachi but the corporate entity has a footprint across the country. Taxes generated, therefore, might technically not be from Karachi.

Then there is the question of staff and labour hired. In places such as Dadu and Khairpur, locals are often excluded from employment in oil and gas projects. Such complex details have often evoked sentiments of disenfranchisement, be it in Sindh, Khyber Pakhtunkhwa or Balochistan — will the locals be considered part and parcel of the bounty we are being promised exists?

Sindh is already making moves to secure a favourable outcome. CM Shah has been insisting, for example, that the NFC Award should also include a stipulation for yet-to-be-discovered resources. But the answer to many of these queries is bedded in sorting out the respective mandates of the centre and provinces. A harmonious outcome to the question of power might be a necessary pre-condition for the exploration of oil and gas because that is what will ultimately breed trust among the centre and the provinces.

Nadeem Hussain is a research fellow at the Institute of Business Administration, Karachi.

Ahmed Yusuf is a member of staff.
He tweets @ASYusuf

Published in Dawn, EOS, May 5th, 2019