$5b investment in E&P at risk

Proposed new framework for gas allocation to third parties deters investors

ISLAMABAD:

The Petroleum Division has prepared a framework for gas allocation to third parties but it carries such terms that may pose a serious threat to the planned $5 billion investment by oil and gas exploration companies.

Exploration firms had held a meeting with Prime Minister Shehbaz Sharif where they pledged an investment of $5 billion, depending on amendments to the petroleum policy for gas allocation to third parties.

The caretaker government, in its tenure before the current administration took over, approved amendments to the policy by enhancing the share of gas allocation to third parties from 10% to 35%.

However, the Petroleum Division has prepared a framework, which will be tabled in a meeting of the Executive Committee of the National Economic Council (Ecnec) for approval, with such terms which could jeopardise billions of dollars in potential investment in the exploration and production (E&P) sector.

According to industry sources, over seven months have passed since the inter-provincial Council of Common Interests (CCI) approved amendments to the Petroleum (Exploration and Production) Policy 2012. Despite the nod, the Petroleum Division has prepared a different framework, diverting away from the spirit of the CCI decision.

It is pertinent to note that local and international E&P firms, at a meeting held in the first week of July and chaired by PM Sharif, announced plans to pump $5 billion into Pakistan’s oil and gas exploration sector over the next three years. An investor delegation told the meeting that around 240 potential sites would be explored to search for hydrocarbon deposits.

The CCI approved on January 26 a summary submitted by the Petroleum Division for amendments to the Petroleum (Exploration and Production) Policy 2012.

The amendments allow E&P companies to sell up to 35% of gas to third parties without government approval, provided the sales were made through a competitive process and the prices were not lower than the wellhead gas prices under the 2012 policy. This provision applies to all the existing licences and leases granted under the Petroleum (E&P) Rules from 1986 to 2013 for the unallocated gas discoveries made after the CCI approval.

The CCI stipulated that the province where a wellhead was situated should be given preference according to Article 158 of the Constitution. The Petroleum Division was tasked with preparing a framework for gas sales to third parties and presenting it to Ecnec for consideration.

However, sources told The Express Tribune that the proposed framework was allegedly contrary to the spirit of the CCI decision. According to the framework, E&P companies can offer up to 35% of gas to third parties, but it should be done in a phased manner over a period of several years.

During financial year 2024-25, these companies will be able to offer up to 15%, which will increase up to 20% in FY26, 25% in FY27, FY28 and FY29, 30% in FY30 and 35% in FY31.

This amendment does not apply to the Extended Well Test (EWT), appraisal, development wells and up-dip or down-dip potential well production.

According to the framework, a benchmark for each company will be formulated, above which the 35% incentive will apply.

The Petroleum Division said in the framework that producers must inform the division of their intention to sell a percentage of gas to third parties for review against the set benchmarks before initiating sales.

According to the framework, gas must be transported through a pipeline network, governed by the Oil and Gas Regulatory Authority’s (Ogra) Third Party Access Rules 2018 and the Pakistan Gas Network Code. Also, third-party buyers must secure capacity allocation and access arrangements and ensure safety and compliance with Ogra’s gas quality benchmarks.

It said that gas must be sold through a competitive bidding process while adhering to Article 158 and Public Procurement Regulatory Authority (PPRA) rules, where applicable. For gas transportation, Sui network will be used within franchise areas through commercial negotiations, in line with the Pakistan Gas Network Code and Third Party Access Rules.

According to the framework, third-party sales are contingent on maintaining supplies to Sui Northern Gas Pipelines Limited (SNGPL) and Sui Southern Gas Company (SSGC) at 2,000 million cubic feet per day (mmcfd), benchmarked against supplies of the last five years. In addition, producers must comply with the merit order for third-party gas sales.

Industry sources expressed concern over the proposed framework, stating that the phased approach would undermine prospects of immediate 35% sales to third parties, as approved by the CCI.

The introduction of unreachable targets and unrealistic benchmarks, they said, could discourage companies from taking benefit of the policy amendments, fostering bureaucratic obstacles.

By mandating the use of pipeline network, the framework gives leverage to Sui companies, which potentially allows them to inhibit third-party sales. The proposed amendments were in contradiction to the CCI decision, which said that gas sales should occur without approval of the government or any of its entity, they added.

Similarly, delays and the proposed restrictive framework could damage investor confidence, impact ease of doing business and deter future investments.