K-P demands sales tax exemption for exploration firms

Insists it will attract investment and ease energy shortages

ISLAMABAD: Khyber-Pakhtunkhwa (K-P) has demanded that oil and gas companies should be exempted from sales tax on the exploration of tight gas, a step it believes will attract much-needed foreign investment and expertise as well as ease energy shortages, officials say.

Responding to a plan of the federal government to amend the existing tight gas policy, K-P proposed that the prevailing sales tax on exploration, production and service companies may be removed to woo foreign and domestic investors.



The province also suggested that an order for exempting machinery imports from duty payment may be notified again to allow the exploration and production companies to bring down their cost of production.

The Ministry of Petroleum and Natural Resources insisted that the issue pertained to the Federal Board of Revenue (FBR) and a summary would be sent to the FBR for its input.

The governments of Sindh and Punjab have also endorsed proposed amendments to the policy designed for extraction of tight gas, a natural gas from reservoir rocks with low permeability that requires massive hydraulic fracturing.

The Punjab energy department said it was a challenging task to tap the tight gas reserves and the government should give an incentive to the exploration and production companies in their search for such deposits. Keeping in view comments of the Finance Division, the petroleum ministry has recommended a 20% premium over the tight gas price set in the 2012 petroleum policy for different onshore zones.

The division had argued that though the effective increase in prices for tight gas reserves appeared to be on the higher side, in order to encourage exploration and considering the high risk and capital investment involved and a longer recovery cycle, the division endorsed the proposal.

The Finance Division and the Planning Commission have backed the proposed revision in the tight gas policy.

Earlier, a 40% premium was offered on respective zonal prices in the 2009 petroleum policy, but with announcement of the 2012 policy, the price incentive for tight gas exploration was withdrawn.

The Pakistan Petroleum Exploration and Production Companies Association has been pressing the petroleum ministry since long for an appropriate revision in the tight gas policy that could provide price incentive compared to the conventional petroleum policy.

The average price incentive for three geological zones was $1.8 per million British thermal units (mmbtu), 40% above the average price set in the 2009 policy.

The Ministry of Petroleum had also insisted that the same price incentive be kept in place, which was estimated at around 30% of average price of the 2012 petroleum policy. However, now the ministry has revised it downwards and recommended a 20% premium.



The extraction of hydrocarbon from the tight gas reserves economically poses a challenge, especially to Pakistan’s oil and gas industry, because of complexity of such projects.

This requires state-of-the-art technology for seismic data acquisition and processing, horizontal drilling, multiple hydraulic fracturing and reservoir stimulation. There are also risks to capital investments with a longer recovery cycle due to low permeability and relatively lower production rates.

Published in The Express Tribune, October 26^th, 2016.

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