Abrupt policy shifts

Published January 17, 2022

The ongoing dispute between government and oil and gas exploration and production firms over post facto implementation of the windfall levy on the profits of the said companies is holding back commercial production of oil and gas from new discoveries.

“Foreign and local private companies are neither drilling new wells nor commercially producing anything from the new discoveries because of the dispute over the imposition of levy,” an executive from one of the two foreign exploration and production (E&P) firms operating in Pakistan told this correspondent on the condition of anonymity. He said no private firm is ready to make further investments without price guarantees from the government.

In 2015, the government encouraged the E&P companies to convert their existing contracts/licences to take the benefit of incentive of much higher prices under the 2012 Petroleum Policy Price than they were getting under the original contracts provided they agreed to invest additional capital in the exploration activities. Subsequently, the companies signed Supplemental Agreements with the government to benefit from the agreed commitments, and terms and conditions. Now the government is asking them to revert to their previous lower gas price contracts if they did not want to pay the windfall levy, creating confusion over their price guarantee.

The mistrust and ongoing litigation does not bode well for new foreign investment in the E&P industry in wake of the growing energy shortages in the country

The applicable provisions in the signed Supplemental Agreements provided the higher gas prices to E&P companies for the new discoveries made on or after August 30, 2012. However, the windfall levy of 40 per cent was not made part of the ‘mutually accepted’ supplemental or ‘conversion’ agreements (in spite of being part of the 2012 policy), according to the industry. The levy was not imposed in conversion agreements to encourage the companies to significantly increase their investments for new oil and gas discoveries in view of the depleting local reserves.

“Later, the government through a Council of Common Interests (CCI) decision extended the levy on the supplemental agreements in violation of the sanctity of contracts. Since the decision was unilateral and against the provisions of the signed conversion agreements, the affected companies challenged it in the Islamabad High Court back in 2018, obtaining a stay order against its implementation till the final outcome of the case,” the executive said while elaborating on the history of the issue. According to him, the energy ministry’s petroleum division or the government could not make unilateral changes as the rights granted under the Petroleum Concession Agreements are protected through stability clauses.

He says all the public, private and foreign E&P companies were unhappy with the abrupt change in the government’s policy. But, he adds, the public companies had later started both their exploration operations as well as commercial production from their new discoveries since the changes didn’t really matter to them because of them being government entities.

The executive quoted above says the mistrust and ongoing litigation does not bode well for new foreign investment in the E&P industry or the growing energy shortages in the country. “At a time when the country needs to encourage the E&P companies by providing them with a conducive and safe working environment to undertake highly risked exploration activities the dispute is sending negative signals in the market,” he asserts. He says at least seven foreign E&P companies had left Pakistan in recent years because of changes in the policies and coercion applied to them to accept those changes.

“The investors must be given incentives for moving to difficult and high-risk frontier areas instead of coercing them. The blocks, which await security clearance for years, maybe cleared for exploration activities, new blocks be auctioned on an annual basis, and other issues, including the dispute over the windfall levy, facing the E&P firms be resolved forthwith to increase exploration,” he contends.

Currently, the domestic production of oil, gas and LPG contributes about 50pc to the commercial primary energy mix of the country saving a substantial amount of foreign exchange. Likewise, out of the total sedimentary area of 827,268sqkm, only an area of 225,000sqkm is under exploration. Since the inception of E&P activities about 1,150 exploratory wells have been drilled so far with an average well drilling density of three wells per 1,000sqkm. These wells have resulted in over 400 discoveries giving a success ratio of 1:3.

About 90pc of these wells are concentrated in the Indus Basin whereas Balochistan, Khyber Pakhtunkhwa and offshore areas are virtually untapped. Likewise, the energy quantum and volume of oil and gas discovered so far can be divided into 90pc natural gas and 10pc crude oil/condensate, classifying Pakistan essentially as a gas prone country rather than oil prone.

According to technical evaluations, the original recoverable reserves were 1514.86 million barrels of oil and 61.355 trillion cubic feet (tcf) of gas. According to the petroleum division’s business development plan of the oil and gas industry, the balance recoverable reserves are estimated at 570.31m barrels of oil and 20.884tcf of gas. Besides these conventional hydrocarbon reserves, some studies and evaluations have indicated the availability of35-40tcf of tight gas, 95tcf of shale gas and 15 billion barrels of shale oil mostly in the lower Indus Basin.

“All these resources require a viable, stable and robust regulatory regime in place for encouraging the deployment of huge investments and use of the state-of-the-art technology to successfully exploit them,” the executive argues.

As against the present 6bcfd constrained demand of natural gas in the country, about 3.2bcfd is being produced by the local E&P industry. The total requirement of petroleum products including crude oil is about 450,000 barrels per day. Out of which about 75,000 barrels of oil per day, only 15pc of the primary energy mix, is being supplied by the local E&P industry.

If the current natural depletion trend of oil and gas reserves continues with no significant discoveries and replacement of reserves, the existing reserves would exhaust in the next 12-15 years making Pakistan totallyreliant on imported fuels. “That is not a sustainable situation; we need to exploit indigenously available hydrocarbon resources to meet our growing energy needs and save precious foreign exchange. Though the low hanging fruit has been plucked since we have already creamed out our discoveries in the known oil and gas corridor, now we must target frontier areas and such formations that are mostly unexplored.

“The discoveries made by Pakistan Petroleum Limited in Margand Block in Kalat plateau and by Oil & Gas Development Company in Wali Block in Hangu formation in Kohat plateau are very promising and indicative of the presence of significant untapped oil and gas reserves in the frontier areas and new formations.

“Therefore, there is a need to encourage local E&P companies and invite foreign companies to explore hydrocarbon resources into frontier areas where the risks are more and the cost is very high but the probability of new exploration successes is higher too. This demands that the government offer an attractive package of incentives including tax holidays and subsidies for the higher security cost and building of access roads to these difficult terrains rather than tax them further or scare them out of the country through abrupt policy changes,” the executive argues.

Published in Dawn, The Business and Finance Weekly, January 17th, 2022

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