Govt mulls royalty holiday for E&P firms

Incentive being planned to encourage offshore drilling for oil, gas reserves

ISLAMABAD:

As Pakistan finds it hard to make pricey liquefied natural gas (LNG) imports, the government is mulling over offering a four-year royalty holiday on offshore drilling to exploration and production (E&P) companies, with high hopes that the incentive will give a significant push to gas production.

At present, oil and gas exploration companies pay 12.5% royalty to provinces following successful search for hydrocarbon deposits.

The royalty break is being considered after one year of failed attempts by Pakistan to secure spot LNG supplies. However, it is receiving LNG from Qatar under a long-term contract.

The government has also planned to renew the revoked licences of oil and gas exploration in a bid to encourage companies to expedite activities in the potential energy-rich fields.

Sources told The Express Tribune that the Petroleum Division was working on amending the petroleum policy to offer price incentives and a four-year royalty holiday to woo exploration companies to participate in the bidding for offshore blocks.

It is likely to offer a price of $10 per million British thermal units (mmbtu) against the existing $7 per unit for the gas discovered in offshore fields.

In the international market, LNG has become quite costly as traders were demanding a price of up to $39 per mmbtu – a record high for the super-chilled fuel – due to its shortage in the wake of Russia-Ukraine war.

All LNG supplies were being diverted to Europe, which saw Russia curtail the gas flow to their pipelines. Energy experts point out that European countries have built gas storages, which are enough to meet demand for the current season. However, they may encounter severe gas shortages next year if their reserves deplete.

This situation is likely to impact Pakistan as well, prompting the government to consider announcing incentives for the offshore drillers. Thirty-five offshore sites are available for auction in a major move towards ramping up hydrocarbon production and meet growing consumer demand.

Earlier, US energy giant ExxonMobil and Italian firm Eni formed a joint venture with Oil and Gas Development Company (OGDC) and Pakistan Petroleum Limited (PPL) for offshore oil and gas exploration in Karachi.

They began drilling in sea in the hope of tapping an estimated 7 trillion cubic feet of hydrocarbon reserves. However, they failed to find anything because of high water volume in that dry well.

Despite the unsuccessful attempt, the domestic companies managed to collect some vital data, which would help them make significant headway in offshore oil and gas exploration in future.

Pakistani companies have also won an offshore block in the United Arab Emirates (UAE), which will enhance their exploration capacity. These firms include Mari Petroleum, OGDC and PPL.

Experts emphasise that there is no delta, like the Indus Delta in Pakistan, where oil and gas deposits have not been discovered. Therefore, Pakistan has the potential to find offshore reserves.

Citing an example, officials recalled that OGDC had formed a joint venture with a Canadian company in the 1980s that discovered 7 million cubic feet per day (mmcfd) of gas in an offshore field in Karachi. However, the gas volume was too low that could not be commercialised. Still, the discovery proved the potential of offshore wells in Pakistani waters in the Arabian Sea.

Regarding the participation of foreign firms in the auction of offshore sites, industry people say ExxonMobil was not willing to become part of a joint venture in Pakistan, but the then government made efforts, particularly former petroleum minister Shahid Khaqan Abbasi, to convince the energy giant to invest in the country.

Published in The Express Tribune, November 8^th, 2022.

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