Petroleum Policy 2011: Sliding-scale formula of windfall gain-sharing to be introduced

New policy to give more incentives to exploration companies.

ISLAMABAD: The government is planning on introducing a sliding-scale formula of windfall gain-sharing in the Petroleum Policy 2011, The Express Tribune learned on Tuesday.

Prepared by Member (Gas) of the Oil and Gas Regulatory Authority (Ogra) Mansoor Muzaffar, the draft of the new petroleum policy recommends the elimination of zones and introduction of a fixed discount of 72.5 per cent of the applicable price with the price floor of $30 per barrel.

Under the current Petroleum Policy 2009, the wellhead gas price is determined under three zones. The wellhead prices of the first, second and third zones are $5.3, $4.7 and $4.2 per Million British Thermal Unit (MMBTU), respectively.

Sources said that now the overall security situation in Pakistan was not good and, therefore, Ogra had recommended the elimination of zones. The wellhead gas price has been estimated at $7.05 per MMBTU for onshore areas if the price of crude oil stands at $115 per barrel. Exploration companies have called for removing the cap of $100 per barrel to determine the wellhead price. The sources said that the exploration companies believed that if there was no cap, the government would not need to introduce another petroleum policy in the future.

However, the sources said, the government was expected to increase the base price from the existing $30 per barrel to $50 per barrel. They added that it would increase the cap from the exiting $100 per barrel to $120 per barrel to determine the wellhead price and windfall levy gains.

It will result in the wellhead price ranging from $6 to $8 per MMBTU, they said.

Under the sliding-scale formula of windfall levy gains, the government will get 30 per cent share in windfall gains if the crude oil price remains between $70 and $100 per barrel. It will be 50 per cent in case the crude oil price remains between $100 and $125 per barrel. The government will get 70 per cent windfall gains if the crude oil price hikes above $125 per barrel.

Under the current mechanism, however, 100 per cent windfall gains go to the government. In the proposed mechanism, some incentives have been offered to the exploration companies.

The windfall production share (WPS) formula may also be introduced in case a petroleum company makes the discovery of more than 350 Million Barrels of Oil Equivalent (MMBOE), the sources said.

Also, state-owned exploration companies, including Oil and Gas Development Company Limited (OGDC), Pakistan Petroleum Limited (PPL) and Government Holdings Private Limited (GHPL), have now demanded that they be exempted from submitting performance guarantees on the pretext that they are state-owned entities.

It has also been recommended that the price of gas produced from shale formation should be linked with 78 per cent of the reference crude price with the price floor of $40 per barrel. This formula will result in the price of shale gas at $13.5 per MMBTU.

Published in The Express Tribune, August 17^th, 2011.