Financial transparency in extractive sector

It is imperative to mention here that financial reporting is not a novel idea for the industry

Jehanzaib Durrani May 14, 2019
The writer is a practising lawyer with expertise in international law

Pakistan’s oil and gas industry holds a distinct position. By numbers alone, recoverable oil reserves are estimated at 282.22 million barrels, and as of March 2019, the current oil production was 90,356 bpd, while the production of raw gas in April 2019 was reported 3.6 billion cubic feet per day. A total of 2,537 wells have been drilled in Pakistan’s history, out of which 1,094 are exploratory wells and 1,443 development/appraisal wells with 394 oil and gas discoveries.

In January, Pakistan, with the help of ExxonMobil and Eni Pakistan Limited, began offshore drilling at Kekra-1 well in the Indus-G block, located 280 km from the Karachi coast. The surveyors believe that the Indus-G block is estimated to have nine trillion cubic feet of gas deposits and large reserves of crude oil.

There is, no doubt, over the tremendous deposits of oil and gas in the ocean and on land. However, under the current regulatory regime, it is unequivocally certain that the benefit of natural resources would hardly ever reach the masses — the reason being that the extractive sector is marred by governance gaps and corruption of various kinds including kickbacks, embezzlement of funds and bribes.

Therefore, it is recommended that Pakistan should conceive a standard for monitoring compliance with revenue-transparency criteria to ensure that companies publish what they pay to the government and the government disclose what it receives from extractive companies.

The Oil and Gas Regulatory Authority (OGRA) is an autonomous body, mandated to regulate the extractive sector and to protect the public interest. Hence, the government should formulate rules and regulations under the OGRA Ordinance 2002, requiring oil and gas companies operating inside Pakistan to disclose in their annual financial report all payments made to the government in return for exploration and production licences.

The rules must specifically outline the categories of payments that will be required by companies to disclose publicly such as taxes, royalties, bonuses, infrastructure improvement payments, etc. Likewise, the government should also ensure comprehensive financial reporting and present a reliable picture of how much revenue the government earns from oil and gas companies.

Such rules would put meat on the legislative skeleton of the OGRA ordinance. Besides revealing hidden taxes that the government levies on the general public in contravention of the rules, it would unveil undue incentives given to oil refineries and oil marketing companies (OMCs) either in the form of ‘deemed duty’ or ‘price differential’ claims by the government.

Subsequently, the proposed legislation would also unravel the issue of ‘hidden ownership’ of the oil and gas companies. After the leaked ‘Panama Papers’, it is an open secret how corrupt public officials and politically-exposed persons use anonymous companies for tax evasion, money laundering and corruption.

It is imperative to mention here that financial reporting is not a novel idea for the industry. It has been adopted through domestic legislation by African and Latin American states and borne positive results. The World Bank Enterprise Surveys (WBES) and World Development Indicators (WDI) had shown a robust reduction of corruption in Peru, since the introduction of transparency laws in its extractive sector. Interestingly, revenue collection of Peru had also risen six-fold by publishing financial data on revenue collection.

The solution seems simple but sometimes the most obvious solutions are the hardest to accept. Therefore, a call for formulating transparency laws and the right of public access to documents in the extractive sector is imperative. All stakeholders should come to a common platform to discuss, design and debate the measures required eradicating corruption, the culture of bribery and illicit flows of funds from the extractive sector. Only then, can the extractive industry truly benefit the people of Pakistan.

Published in The Express Tribune, May 14th, 2019.

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