NEW GAS POLICY TO OPEN NEW VISTA

HUGE UNTAPPED 33 TCF OF TIGHT GAS RESERVES INVITE FOREIGN INVESTORS

AMANULLAH BASHAR
(feedback@pgeconomist.com)
July 12 - 18, 20
10

The huge untapped reserves of over 33 trillion cubic feet of Tight Gas Reserves are attracting foreign investors for development under the new gas policy which is in the pipeline. It is hoped that the new policy will open new vista of foreign investment in Pakistan.

To make the forthcoming policy a great success the misuse of policy has to be avoided for early development of over 33 trillion cubic feet of Tight Gas Reserves (TGF) estimated at upper and middle Indus, Kirthar areas

It may be interesting to note that the tight gas reserves are 120 per cent of Pakistan's existing reserves where development process has to be accelerated in the face of persisting energy crisis.

Energy experts however feel that besides government's seriousness in developing untapped resources, the situation also calls for the institutional capacity of the regulator body to ensure fast decision making on TGR and avoid misuse of the policy. However in order to minimize the chances of policy misuse, the government has introduced third-party auditing, sources said.

The US pressure against Iran gas pipeline is likely to accelerate the pace of development of domestic gas resources to meet the growing demand for energy in the country, sources said.

Besides the measured gas resources, the TGR potential of lower Indus, Potwar, Kohat and offshore areas is yet to be established. It is expected that the new policy on TGR which is in the pipeline will open a new vista of investment and reserve additions in unconventional but highly promising areas.

Active players in the exploration sector are of the view that the pricing and fiscal incentives are not exactly in line with industry demand, notwithstanding small requisite changes in policy are recommended as introduction of new technology/skills, which could prove challenging and may leave the field open for foreign E&P companies in the initial stages.

If current gas production is as a guide, companies with gas production concentrated in Sindh should benefit most. Miano and Sawan, two producing fields operated by OMV, reportedly carry cumulative 400mmcfd gas production potential.

It may be noted that the thrust of the policy seems to be on early production from known TGR fields. Companies too are likely to focus on existing fields for TGR potential in order to meet the rising energy demand.

As far as the incentive offered in the policy was concerned it provides a 40 per cent premium over 2009 policy prices, which translates into US$3.4-6.2mmbtu, significantly below industry demand of 80 per cent of imported gas cost of US$4.6-11.6/bbl.

Sources said that the areas in the policy need improvement are gas price incentives which are only available at the appraisal stage after audit by a third party, which minimizes incentives for active exploration for TGR.

While gas sales to a third party can only be made on prices at a maximum 50 per cent discount to the 2009 policy, which once again discourages exploration in areas where gas transmission network is unavailable. Under the proposed formula, the effective floor-ceiling on gas prices is at US$3.4-6.2/mmbtu at US$20-100/bbl oil prices. The floor on gas prices based on a proposed formula of US$3.4/mmbtu warrants attention given the high drilling and operating costs involved.

Another area that requires revision is early production incentives. Any companies that develop a TGR field within two years after approval will be subject to a further 10 per cent additional premium over 2009 policy prices (total 50 per cent premium).

Unlike other polices for conventional fields, the proposed TGR policy allows Exemption from windfall levies. Similarly, the delivery point for supply of gas is defined as the outer flung of the gas processing facility, which effectively transfers the burden of constructing pipeline to government-nominated parties.

LNG TERMINAL AT GWADAR

If the much-needed Iran Gas pipeline project fails to materialise the government is considering setting up an LNG Terminal at Gwadar port as an alternative to mitigate the persisting energy crisis in the country.

In case the project does not materialise, an LNG terminal will be set up at Gwadar port to allow re-gasified LNG to the system. Under the Iran Gas pipeline project, Pakistan will be required to construct about 780-km, 42 diameter pipeline from its border, traversing along the Makran Coastal Highway to connect with its existing gas transmission network at Nawabshah.

Almost 665-km of the pipeline will pass through Balochistan while about 115-km of the pipeline will be laid in the Sindh province. The project is quite attractive for luring foreign investment provided it goes smoothly uninterrupted by the foreign pressures.

The estimated cost of Pakistan segment is US$ 1.2billion to be incurred over a 4-year period. The project is planned to be funded at a debt-equity ratio of 70:30 requiring an equity investment of US$373 million and debt financing of US$872 million.

The project's debt portion is expected to be secured from a combination of domestic and international financiers including Sindh and Balochistan governments, SSGC, SNGPL, OGDCL, PPL, PARCO and NBP (whose contribution will be US$190 million or 51 per cent of equity structure) as well as potential private investors including Petronas and Gazprom (whose contribution will be US$183 million or 49 per cent of the equity structure). Pakistan will import 750 mmcfd gas with a provision to increase it to one billion cubic feet a day (bcfd).