PETROLEUM POLICY 2012
June 4 - 10, 2012
Petroleum Policy 2012 has been cleared by the council of common interest with some changes and adjustments. Overall, it is a good forward looking policy providing requisite incentives to the exploration companies. However, fast track implementation would be required in the face of the gravity of energy crisis that we are facing. The policy draft was actually prepared in 2011, and it took some time to elicit the views of the stakeholders. In this space, we would examine some of the crucial features of the policy and the allied issues.
The most significant aspect of the policy is the incentives given for exploration and production of local petroleum resources. And, the most important is the higher gas prices (almost 50 per cent higher) to the exploration and production (E&P) companies. There is a linkage with oil prices as usual, and at current prices of 110 USD per barrel, the onshore wellhead gas prices would be USD6 per MMBtu. For Offshore Gas, the wellhead prices would be from 7-9 USD depending on the depth of sea where the gas well is located.
It is expected that Shale gas and Tight gas would also receive rates comparable to the offshore gas. Recent gas glut in the US and lowered gas prices including that of Shale may give an erroneous impression that Shale gas production cost are low. In the US itself, the cost of production of Shale gas have been estimated at around USD6 and the prevailing prices are due to temporary market conditions. Some people may raise eyebrows, as it would lead to a corresponding increase in retail prices, although not immediately. On the other hand, this is the cheapest solution, if compared with imported energy projects like IP pipeline or LNG, which would cost between three to four times the current local gas prices.
The policy also provides for direct sales to large consumers out of the 10 per cent gas share of the E&P companies. This would create some market play and enable the buyers and sellers to negotiate mutually acceptable prices. It may be too futuristic and even foolhardy to expect totally unregulated gas sector in Pakistan. However, a limited portion of supplies could be permitted to discover its own price through such mechanisms. As the supply situation improves, this percentage could be increased gradually. Under the current market conditions, the net effect would be even higher prices to producers for this 10 per cent share, which may serve as an additional incentive.
Gas prices in Pakistan are not reflecting their scarcity value. In Europe, the whole sale gas prices are more than USD8 per unit (MMBTU), where gas can be taken as scarce and is largely imported either from Russia or LNG from North Africa. Our current wellhead gas prices at around USD4 per unit are more akin and comparable to the US prices where there is currently a gas glut due to the advent of Shale gases. There was a time some 5-6 years back, when the US gas prices were at USD8 per Unit.
In India, there is a two or even a multi- track gas market; public sector produced gas which is marketed at almost the same rates as that in Pakistan and the privately produced gas which has higher rates.
India has recently enhanced public sector (APM) rates to USD4.2 per MMBtu which is sold to power and fertilizer sectors. For other users, rates are around USD5.25 per MMBtu plus a transmission and distribution (T&D) margin. In Pakistan, fertilizer and home rates are very low (Rs116 or USD1.33); other rates converge at an indicative rate of Rs496(USD5.7). Thus, the gas rates in the two countries are roughly the same.
An interesting feature in South Asian energy markets are the incidence of comparatively lower distribution costs. In Europe and the US, distribution margins can be as much as 50 per cent of the retail price, of the order of USD2-4 per MMBtu, while both in India and Pakistan these margins are a fraction of a US dollar. †
It appears that we may have to eventually get to the USD8 level of gas wellhead prices in order to attract foreign investment and keep the local gas supplies flowing. For the moment, 50 per cent hike can be absorbed, as it would mix with the already discovered gas at the old rates and lead to a lower weighted average. Also, one would support even higher prices on offshore contracts approaching USD8. This writer is not fond of awarding unduly higher prices to energy companies and has often opposed it .
There is a strong case here, on many counts such as security environment, realizable potential, alternative prices, and even cost of exploration risk and production. Although the easiest bureaucratic process (difficult, however, for politicians) is to increase prices. This has to have collateral of efficiency and fast track implementation as we shall see later.
However, the single most worrying issue in Pakistan's energy scene is the low purchasing power of the consumer and his unwillingness to pay the real or true price, which may require subsidies over a significantly long time horizon. People want more supplies at the same controlled prices or even lower ones. Higher prices may cause political and social unrest. The stark reality is that retail prices would have to be raised in proportion to the producer prices, except for subsidized rates for low-income residence use, CNG for public transport and export sectors such as textile.
Fertilizer must shift either to Thar coal or be prepared to pay the real price. There is some thinking to shift fertilizer subsidy (in the form of cheap gas to fertilizer plants) to targeted subsidy to the poor farmers. It is ironic that fertilizer companies have recently made investments in new plants running on gas, knowing fully well that gas and cheap gas would not be available. They had the option (and good advice) to install coal-based plants initially perhaps to run on coal and eventually on the local Thar one. Alternatively, such investment could have been delayed till the availability of coal from Thar.
It has been estimated that there is a potential of 5-6 times more gas (250 TCF) than has been already discovered. Current supplies are around 1.4 billion TCF and the demand is more than two TCF per year. There were originally gas reserves of 56 TCF, half of which have already been consumed. It appears that the only short term and long term cheapest solution are the new local gas development even at the higher prices under the new policy. International forces are opposing the IP gas project from Iran. Although we are determined to implement it, we are financially dependent and in bad shape. One can only pray that the project gets through and also Iranis are persuaded eventually to more reasonable prices, although gas purchase and sale agreement (GPSA) has been signed and price finalized.
LNG is real short term and could be implemented in two years, but is almost as costly as oil and is relatively in a smaller volume. Thar coal is still in talking stage, although some progress has been reported. Chinese and Russians have shown interest that may be able to implement the project finally as has happened in the case of all the major projects except Tarbela. Thar coal and Bhasha dam may take 7-10 years to materialize.
The local gas resources development appear to be offering faster results at lower costs and rates .The new petroleum policy is to be seen and evaluated in this perspective. Fortunately, CCI has agreed to go ahead, amidst claims of provincial sovereignty over the natural resources and their right to make and implement policy in this respect in the wake of 18th amendment. Fortunately, same purchasing power parity (PPP) is having in Sindh, Balochistan and as well as the centre.
Sovereignty or ownership of resources does not mean physical possession or occupation of resources and their projects. Resource projects effectively belong to the companies, which develop it. Owners, provincial or federal have a claim on income, royalties, and taxes. Provinces were getting royalties even before the 18th amendment. In all federations including the neighboring India, federal governments have major domain in petroleum policies and their management. However, consideration should be given to make an independent E&P authority, in place of the directorate generals of oil and gas or perhaps adding a department in OGRA managing through independent or autonomous agencies is more akin to federalism. Such agencies could report to CCI as IRSA does. But, this is futuristic and may have to be resorted to when adversarial political governments may be creating difficult situations. At this moment, the energy crisis is so huge and damaging those efficiency considerations should receive priority in a federal framework.
CCI has cleared the policy but with keeping the zonal differentials intact. The new policy, as opposed to the previous ones, did not offer zonal incentives. Companies do not like zonal differentiations and believe in the survival of the fittest and it is in keeping with companies arguments that the policy draft withdrew the zonal differentiation. But, as approved by the CCI, the policy in its final form has zonal incentives intact.
Companies would have liked to see automatic conversion of exploration leases into production leases based on the requisite payments. Conventionally, this is the case and explorers have been given the production lease. There are arguments on both the sides. Rekodeq project has created a bad example whereby the provincial government has refused to award production lease to the company, which explored and discovered the Rekodeq copper resource. The matter is expected to go into international litigation, after the Supreme Court finally speaks its mind. An influx of 600 million US dollars is being stopped from occurring while there are talks in the corridor of reverting to IMF for solving the balance of payments problem.
Energization and revitalization of OGDC should also receive due attention, after an embarrassment of appointing clearly unsuitable and unqualified person to head this organization, although past records do not reveal appointment of fully qualified and industry experienced people. Many bureaucrats have got this plum job and contributed towards the failure of this organization.
OGDC employees and professionals may also be given some kind of incentive payments on new explorations and development. Development of local private companies both in E&P and its servicing sector is an area where more thinking and action is in order.
Let us congratulate all the stakeholders to have developed a policy that may greatly help towards easing the energy crisis. However, policy declaration and announcements are only half the battle. Equal emphasis and effort is to be applied in the implementation, faster awarding of contracts and leases and solving the problems of the exploration companies. A more business like and project management style implementation is to take over the traditional bureaucratic milieu. Time bound targets and annual work plans ought to be established.
The bidding process for new exploration is long overdue. An earlier scheduled round had been postponed perhaps due to 18th amendment issues. Let us start the bidding process and go full throttle on it. It augurs well that announcements in this respect have already been made. The challenge, as great as it is, can be met squarely, as there is a reliable potential and not a mere hope and expectation.