ISLAMABAD, Dec 11: The government has decided in principle to increase gas production price to $45 per barrel – an increase of about $10 – to attract new investments in the exploration and production sectors.

A senior official told Dawn that the consulting firm IHS of Canada has submitted its third draft to the Ministry of Petroleum and Natural Resources after prolonged discussions with the industry and other stakeholders. The new prices would be applicable to future investments only and existing operators would continue to get current rates.

However, fields currently in the development phase were likely to be offered to adopt either the existing policy or convert to the new one, subject to some conditions, he said. Pakistan used to be among the top 10 investment destinations for exploration and production companies a few years ago because of attractive returns but many countries improved their petroleum policies and resultantly Pakistan’s ranking fell to the 40s.

The new petroleum policy, said the official, was a mix of uncapping the upper limit and introducing a gas price gradient concept that would improve Pakistan’s position to among the top 25 attractions for the industry. The official said the government through negotiations with E&P companies had capped the gas production price equivalent of $36 per barrel of international oil price but oil prices had gone up and the companies now did not find enough attraction in Pakistan.

On ground, however, a review of the level of exploration and production activity over the past five years shows improving trends – in 2005, 33 licences were signed covering a total area of 72,750 square kilometres against an average of 11 licences in four previous years, and private firms spudded 10 exploration wells and 24 development wells.

The seismic activity was also at a record level that year. Nevertheless, the OGDC dominated the activity with 23 exploration wells drilled, a record for the company.

Informed sources said the consulting firm HIS had proposed major changes in the existing policy in a way that it provided more discretionary powers to officials of the petroleum ministry and its sub-ordinate agencies.

The sources said the World Bank had, on the other hand, proposed to introduce a production sharing formula on the pattern of offshore exploration to provide better return to companies. The bank believed that the price cap of $45 per barrel would not be sufficient to attract fresh investment.

Given the large rate of growth of demand, notwithstanding increasing production of gas in recent years, gas shortages are anticipated from 2010 onwards, requiring Pakistan to attempt gas imports.

A key issue is the price of gas at the wellhead. At present, this price is linked to that of crude with the producer receiving a declining share of the increment in the oil price with a $36/bbl cap such that the price of gas is then equivalent to US$3/MMBTU.

The proposals also involve new concepts such as “frontier area price incentive” or “gas price gradient”, which would be negotiable. In return, the government is unlikely to guarantee purchase of more than 70-80 per cent of gas production.