Fresh incentives to attract investment

Bureau Chief, Islamabad

Aug 06 - 12, 2007

The Economic Coordination Committee of the Cabinet (ECC) has approved the Petroleum policy 2007 with fresh incentives to attract investors and enhance output.

Announcing the new policy at a press conference after its approval by the ECC, Secretary Ministry of Petroleum and Natural Resources, Ahmed Waqar said that the new petroleum policy will attract foreign investment, enhance petroleum exploration and production activities besides benefiting consumers. "We have formulated the best possible policy and it will help increase indigenous oil and gas production in the country". He said that the present oil production is 70,000 barrels per day, which fulfills 20 percent requirement of the country. "We have to import petroleum products to meet the 80 percent of our requirements", he said adding that Of the 70,000 barrel per day, Sindh produces 50 percent oil and Punjab 40 percent. And the rest 10 percent oil is being produced in NWFP and Balochistan.

Waqar said the country was producing 4 billion cubic feet gas per day, which was 2.1 billion cubic feet per day in 2001. He said Sindh was producing 70 percent, Balochistan 20 percent and Punjab and the NWFP 10 percent.

In the new policy, the Secretary said that the government has lifted the cap of $ 36 per barrel (bbl) on wellhead gas price and has offered 100 percent international crude price to domestic production of crude oil, natural gas, condensate and liquefied petroleum gas in a bid to allure quality investors in oil and gas exploration and production activities.

Unveiling he salient features of the new petroleum Policy 2007, Ahmad Waqar, He said under the new policy and with the removal of cap on wellhead priced, gas production prices would increase by 6-8 percent but after 4-5 years.


He said the government had decided to introduce an incentive oriented policy to aggressively initiate indigenous oil and gas exploration and production activities. He said the government also wanted to import gas from Iran and Tajikistan. In addition, the government was working on the import of LNG to meet the increasing energy demand in the country in the wake of 7% economic growth rate which the country was experiencing.

The existing gas production price in Pakistan ranged between $ 2.51 and $ 2.61 per mmbtu, which will increase to $ 2.84 to $ 3.30 per mmbtu if the crude oil price is assumed at $ 60 per bbl (barrel). The government had introduced gas price Gradient formula under which it would ensure protection to both investor and consumer interests.

However, the government would not pass on the massive impact to gas consumers in case oil prices surged up to unaffordable level in the global market, as the government planned to introduce the new concept of Gas Price Gradient (GPG) that would ensure protection to both investor and consumer interests. He explained in case oil prices in international market surged to the maximum level and crossed certain limit, then consumers would be protected under the GPG concept, and likewise, if price of POL products went down in the international market, and it kept declining and crossed certain limit, then investors would be protected.

Under the new petroleum policy, every bid for any block for oil and gas exploration and production activities would comprise i) work program that the bidder intends to follow of quick development of the block in terms of total work units carrying 80% weighting and ii) Gas Price Gradient (GPG that the bidder deems necessary to balance its risk, when the reference crude price is above $ 45 bbl which would be a 20% weighting..

Bid evaluation would be based in weighted average of work units and CPG. The bidder quoting higher CPG would get lower score in bid evaluation and as such the bidder would need to give higher work program to make his bid competitive. The bidding system is designed to allow companies which offer the most competitive work program it out with the higher GPG to be received if they discover commercial quantities of gas and oil prices stay higher that $ 45 per barrel. The rationale for giving high weighting to the work program is to enhance exploration activity to locally produce much needed energy at comparatively lower prices vis-a-vis import options.


The new policy also allows E&P companies to export their share of crude oil and condensate as well as their gas based on export licenses subject to the considerations of international requirements and national emergencies. For the purpose of the grant of such export licenses for gas, the export volumes will be determined in accordance with 'L15' concept provided a fair market value for such gas is realized at the export point. The Petroleum Secretary further said that the ECC has also approved windfall levy on exploration so t hat the investor could share in the profit with government in case he hands over well to any other party. The investors would have to lay down 25 km pipeline for the field itself and if the company intends to extend it more, its tariff would be determined by the Oil and Gas Regulatory Authority (PGRA).

The new reference crude price would be assumed at $ 45 per barrel and the producer gas prices would then the calculated using a three linear formula for Zone III, commonly known as lower Indus basin.

The formula ensures that gas production price never falls below $ 2.70 per mmbtu even in case of crude pricing falling below $ 30 per barrel but goes beyond $ 3.06 if crude prices are above $ 45 and so on. As a result, the average wellhead price known in the layman terms as production price will increase from an average of $ 2.85 per mmbtu (million British Thermal Unit) to more than $ 3 and less than $ 4 per mmbtu when the 2007 policy comes into effect. The companies would also be allowed to sell their gas to SSGC and SNGPL after establishment of production test at 15 percent discount. Waqar said that the fruits of new policy would be delivered after five years but gas prices for consumers would go up to some extent.