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Category: Hydrocarbons

Introduction to Pakistan’s Upstream Sector

[dropcap font=”” size=”1″ background=”” color=”” circle=”0″ transparent=”0″]T[/dropcap]he first exploration well in the region that is now Pakistan was drilled in Mianwali, Punjab in 1887. The upstream E&P sector continued to discover fields until the promulgation of Mines and Oilfields and Mineral Development Act, 1948 came into effect. Following this, Pakistan Oilfields (POL) and Pakistan Petroleum Limited (PPL) were incorporated as local companies in 1950 which provided a much-needed stimulus to undertake more E&P activities. Discovery of Sui soon materialized in 1952 which consequently attracted the foreign players in Pakistan’s E&P segment which led to further discoveries in Uch, Kandhkot and Mari during the 1950s. In 1961, Oil and Gas Development Company Limited (OGDCL) was established as the national E&P company of Pakistan and led to the discovery of Qadirpur gas field in 1989. Today, Pakistan remains dependent on few of the large big fields with five of them providing over half of total recoverable reserves.

At present, in 2018, there are thirty-three active E&P companies in the country with foreign firms on equal footing. These operators carry out independent exploration activities as well as through joint ventures with Mari and OGDCL. OGDCL remains the dominant player in the segment with a 61% share in oil production and 23% in gas production.

The E&P upstream sector is subject to regulation by governments globally and Pakistan is no different. However, instead of the regulator, OGRA, regulating the upstream sector, it is the Director General Petroleum Concession’s (DGPC) office that works particularly with reference to the award of exploration and productions licenses and fields, the imposition of drilling specifications, controls over development and decommissioning of fields and, policies and sectoral development.

The Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948, was the first basic policy that governed the sector. Other complementary regulations, such as the Pakistan Petroleum (Exploration and Production) Rules, have also been introduced at various points in time. The ministry has also introduced various policies to promote private interest in the sector, with the first of those issued in 1991 and the most recent being the Petroleum Policy 2012. The latest revised policy of 2012 seeks to attract increased investment in the E&P sector in order to tap indigenous hydrocarbon resources by providing competitive incentives to local and foreign companies in the form of higher wellhead gas prices, along with a transparent and non-discriminatory licensing.

For the comfort of investors, exploration and production licenses and execution of Petroleum Concession Agreements and issuance of sovereign guarantees are carried out in the name of the President who is a symbol of Federation. The regime is a sophisticated regime giving investors’ confidence that their agreements are backed by none other than the Federation. For Production Sharing Agreements (PSA), the Government Holdings Private Limited (GHPL) holds title to all territorial waters and all the E&P companies come as sub-contractors to GHPL.

While the regulatory backdrop is improving for the upstream E&P sector, there are areas that could be further improved. For instance, the amount of documentation required at each stage for E&P activity is believed to be much higher than other countries and could be further simplified. An argument to move towards compliance-based regulation is often cited which simplifies the documentation processes and allows international companies to focus on their core activities rather than focusing and complying for the various paper work requirements asked at various stages of E&P activities by the DGPC’s office. Moreover, the strict regulatory control of the government over the sector has resulted in interference (since DGPC’s office is reportable to Secretary Petroleum) which has been the subject of criticism. In the future, simplification in procedures needs to be undertaken in order to attract more foreign investment in the sector.

Pakistan Essential Oil and Gas Reforms

In the last five years, the Government of Pakistan has initiated a major reform program in the hydrocarbon sector. This program is a component of broader reforms being carried out across Pakistan’s economy. In general, the focus of the reforms has been to:

  1. provide more incentives to existing petroleum concession agreements to utilize higher well head gas prices under the Petroleum Policy 2012,
  2. give a more prominent role to the private sector in commercial activities by introducing third party access regime in the transmission and distribution segment;
  3. gradually phase out government’s daily management of commercial enterprises so that it can focus on policy formulation;
  4. introduce newer fuels such as LNG in the fuel mix and create competition wherever feasible for the benefit of the economy as well as consumers; and
  5. more generally, integrate the economy into the global context by deregulating petroleum prices and rationalizing tariffs to reduce subsidy quanta to manageable levels.

Nonetheless, there remains a need for further reforms to achieve long term energy security as well as create an efficient oil and gas sector. The long-term vision for the natural gas sector is one where producers should compete among themselves for large consumer base (including distributors); the gas distribution companies (SSGCL and SNGPL) would offer a transportation service (and not be merchants) based on an efficient regulatory regime; introduction of cross-border pipelines to augment gas supplies and enhance competition, including projects such as Turkmenistan, Afghanistan, Pakistan and India (TAPI) pipeline or Iran Pakistan (IP) gas pipeline; and an independent regulator that promotes and pushes for competitive market conduct (for example, through third-party access to networks) and freely trading off LNG by private parties. The ultimate purpose of the reforms would be to ensure that the benefits of competition, price discovery through market forces and efficiency gains are passed on to consumers in terms of lower price, quality of service, safety, and supply reliability. Regulatory hindrances are removed so that upstream sector is facilitate through more of a compliance-based framework rather than current heavy regime of paper flows back and forth between DGPC’s office and E&P companies. Policy environment is created that would foster financially viable and economically efficient systems for the transportation, dispensation, storage, and marketing of natural gas. In the petroleum downstream sector, the long-term objective is that a competitive price and quality structure evolves where refineries compete among themselves and with product importers under a deregulated price regime; the terminals and main depots operate as regulated common carriers; tankers are phased out and pipelines are introduced as carriers of crude and petroleum products from one location to another and the government effectively enforces compliance with standards and regulations to ensure a level playing field and acts upon anti-competitive behavior, which would involve strengthening of all sector stakeholders such as OGRA, CCP and SECP.