New Oil Policy Offers Major Incentives to Attract FDI in Energy Sector

Some of the new incentives include an increase in the well-head price cap to $100 per barrel from $45 per barrel. The discount of well test has been reduced to 10 per cent from 15 per cent. The Windfall Levy (WLO), too, has been capped at $100 a barrel. The new policy lays down that WLO will apply on crude oil and condensate. The incentives are much bigger compared to those provided in the Petroleum & Exploration Policy-2007, because that had not proved to be attractive. Foreign and domestic investment in the field, as a result, was short of projections.

The policy explains that the capping of $100 per barrel has been incorporated to safeguard the government’s interests against high international crude oil prices, which was the case in recent months.

In case the crude oil or condensate market prices move beyond $100 a barrel, the 100 per cent benefit of WLO will go to the government.

However, the ceiling of $100 per barrel will be reviewed in case the pricing dynamics mechanism indicate change in the international market.

The calculation for the base price of crude and condensate puts it at $30 per barrel. It will rise each calendar year by $ 0.25 per barrel, the startup being the date of first commercial production in the contracted area.

The policy has been unveiled, and has come into effect, at a time when the country is struggling against a serious energy crunch leading to up to 18 hours of electricity and natural gas outages that have particularly hit the industrial output. It has also created big headaches for commercial, domestic and other consumers. Industry, particularly textiles the largest employer of manpower and earner of 70 per cent of the country’s forex, is up in near revolt. In protest, a large number of textile and other industrial units have been observing strikes and shutdowns in various cities.

The new oil policy comes on the back of a record $12 billion oil import bill during fiscal 2008. Despite official hopes for the oil import bill to come down in the current 2009 fiscal because of declining oil prices in the international market, the quantitative demand in domestic market will keep a question mark on such a projection.

The natural gas price in Zone-III is calculated at $3.43 per mmbtu in case the crude oil price is $45 a barrel. The price of gas will be $ 4.43 per mmbtu if the crude oil price is $100 a barrel.

The policy calculates the gas price in Zone-II at $3.69 per mmbtu at crude oil price of $45 per barrel. It will be $4.71 per mmbtu at crude oil price of $100 a barrel.

In Zone-1 and Zone-0 Shallow, the gas price is worked out at $3.94 per mmbtu if the crude oil price is $45 a barrel. It will be $5.03 per mmbtu in case crude oil price is $100 a barrel.

In Zone-0 Deep and Ultra-Deep, gas price will be $4.20 per mmbtu at crude oil price of $45 a barrel, but will rise to $5.36 per mmbtu at crude oil price of $100 a barrel.

The Corporate Income Tax will be payable by the investors and operators of concessions at the rate of 40 per cent of profit or gains, as laid down in the Fifth Schedule of Pakistan Income Tax Ordinance-2001, in case the incentives are offered to the operator by the government.

The new policy will be beneficial for the domestic and foreign companies, already operating in Pakistan.They will be entitled to acquire petroleum rights. Foreign companies at the moment not operating in Pakistan, but which have operated concessions elsewhere in the world, will also be entitled to acquire petroleum rights in case they demonstrate their technical and financial capabilities to do the job.

The new policy also heavily cuts down the bureaucratic red tape, simplifies and improves procedures for the benefit of investors and potential operators. These, for instance, include simplification of bidding and pre-qualification processes. The time period for this purpose has been slashed from the existing 90 days to 10 days only.It translates into reducing the processing period from 90 days to 60 days.The bid evaluation procedure will now be simple. It eliminates the factor of biddable Gas Price Gradient (GPG) of a 20 per cent weightage along with work units weightage of 80 percent. The new policy provides that bids will be evaluated on the basis of best Work Programme only.The GPG mechanism, provided in the 2007 policy has been dropped.

The availability of forex to meet requirements of the domestic energy and petroleum companies has been eased. These companies will be allowed, during their exploration phase, to receive forex against payment in Pakistan currency to foot their day to day requirements under permits, licenses under, under petroleum concession agreements or production sharing agreements. After commercial discovery of oil or gas,local E&O companies will be paid up to 30 percent of their sale proceeds in foreign exchange to meet their day-to-day operational financial needs.

The policy also laid down the procedure for grant of petroleum rights after expiry of lease period. The Director-General Petroleum Concessions, Ministry of Petroleum & Natural Resources (MoP&NR), will invite bids during the call of bids, one year before the end of lease period from pre-qualified companies which wish to have petroleum rights over the lease area for an additional ten years.

Each bidder will provide a bid bond of 10 percent of the offered signature bonus at the time of the bidding. The existing lease holders, who are already producing from the field, have a better knowledge and experience of the lease area. Because of this, the policy proposes to give the first right to match the highest bid to the existing leaseholders to fully exploit the hydrocarbon potential of the lease area. G.A. Sabri, Spokesman of MoP&NR says “the new oil policy has frozen the well-head price of natural gas, both windfall and upstream, at $ 100 per mmbtu to attract investment in the energy sector.” The government also has established a Ministerial Committee to look into interim production discount.The Committee will ensure that oil and gas companies discharge their social responsibilities in the area of their concession.

Sabri says the interim production discount has been reduced from 15 to 10 per cent. The policy also lays down that the companies already working on expiry of lease will not be required to re-bid as they will be given priority for leasing. They can get lease on 25 percent additional payment.