CCI approves incentives for oil, gas exploration

E&P companies encouraged to find hydrocarbon reserves in high-risk areas

ISLAMABAD: The Council of Common Interests (CCI) has approved an incentive package for exploration and production (E&P) companies in a bid to encourage them to work in high-risk areas of Balochistan and tribal region, which was merged into Khyber-Pakhtunkhwa (K-P), and give a boost to oil and gas production in the country.

Estimates suggest the high-risk areas have gas reserves of over 21 trillion cubic feet (tcf). Under the incentive package endorsed by the CCI on Monday, a new frontier zone would be created, which would comprise the unexplored areas of Kharan, Pishin and those recently merged into K-P.

At present, there are three zones called Zone-1, Zone-2 and Zone-3 for onshore hydrocarbon exploration on the basis of risk and investment requirements. West Balochistan, Pishin and Potohar Basins fall in Zone-1; Kirthar, East Balochistan, Punjab and Suleman Basin come in Zone-2 whereas Lower Indus Basin is in Zone-3.

The CCI approved the creation of the new zone named Zone-1 (F) on the demand of Pakistan Petroleum Exploration and Production Companies Association (PPEPCA) - a body of E&P companies - for exploring over 21tcf of gas deposits. Thus far, only three wells have been drilled. PPEPCA had been of the view that E&P companies needed higher prices and additional incentives as an exceptionally high investment was required to be made in the frontier areas. Therefore, it said, a new zone may be defined for the purpose.

The gas price for Zone-1 (F) has been set at $4.5 per million British thermal units, which is equal to the price for the offshore shallow Zone-0, if crude oil is at $40 per barrel. Maps of the licensing zones will be revised accordingly.

Holding companies

Paragraph 4.1.3(6) of the 2012 petroleum policy provides that Government Holding Private Limited (GHPL) and the respective provincial holding company will be given the option to have 5% working interest on a full participation basis ie 2.5% each for GHPL and the provincial holding company, where the block will be located.

The Sindh government, in a summary sent to the CCI, had suggested amending the clause to allow carried working interest of 5% - 2.5% each for GHPL and the provincial holding company - during the exploration phase and the expenditure incurred would be reimbursed by GHPL and the holding company in installments from the proceeds of commercial production over a five-year period starting from the date of declaration of commerciality.

However, the PPEPCA strongly opposed the proposal, terming it detrimental to the interest of investors.

The Petroleum Division said the provincial holding companies were newly formed companies which did not have any working interest in any producing asset.

The CCI agreed on restricting the carried interest of 2.5% for the holding companies and the provision for GHPL may continue to be applied as contained in the existing policy.

Accordingly, the gas price will be increased only by 2.5% by pushing up the zonal indexation by 2.5% for each of the zones instead of the earlier proposal of 5% increase.

The CCI also approved an increase in the base crude price from $40 per barrel to $41 per barrel.

Award of blocks

According to the petroleum policy, the party which is awarded a block will remain the majority shareholder in the block.

The block awarded to the strategic partner can only be farmed out to public-sector companies of the same country acceptable to the government of Pakistan or Pakistan’s public-sector exploration companies including GHPL.

The Petroleum Division informed the CCI that a proposal had been received to amend the policy to facilitate foreign oil companies, which were interested in working in Pakistan in partnership with reputable private-sector companies having government shareholding.

The CCI agreed on including associated companies of Pakistan’s public-sector E&P companies, GHPL and the holding company of the province where the exploration block was located or reputable private-sector companies with government shareholding for farming out by the strategic partners.

Licence extension

Section 4.1.5 of the petroleum policy deals with the exploration period, which allows cumulative extension of not more than two years. However, there are circumstances, which warrant extension of more than two years, therefore, the regulator has to exempt the rule by exercising powers under Section 5 of the Regulation of Mines and Oilfields and Mineral Development (Government Control) Act 1948.

The Petroleum Division proposed that the restriction should be removed and the regulator may be allowed to grant extension on a case-to-case basis on reasons justifying such extensions. Hence, a provision may be added that if the cumulative extension period exceeds two years, it would be formally approved by the Economic Coordination Committee. The CCI approved the proposal.

Lease extension/renewal

Para 4.1.9 of the petroleum policy provides that a lease may be renewed for one term of five years subject to the condition that the exploration area has been producing on a regular basis on the date of request for renewal.

The Petroleum Division proposed that the CCI should approve an amendment to the paragraph in order to allow extension and renewal of the lease in case commercial production was not continuing on the expiry of the lease period and upon the submission of a committed work programme, which was likely to result in commercial production. The CCI also endorsed the proposal. 

Published in The Express Tribune, December 25^th, 2019.

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