At Josh and Mak International, we provide comprehensive legal guidance on regulatory frameworks within the energy sector. This article offers a detailed overview of the “Low BTU Gas Pricing Policy, 2012,” issued by the Ministry of Petroleum and Natural Resources of Pakistan. These guidelines aim to establish a reasonable framework of policies, procedures, and pricing to accelerate the exploration and production of low BTU gas in Pakistan, thereby improving energy security and reducing reliance on imported fuels.
Scope and Applicability
The Low BTU Gas Pricing Policy, 2012, applies to all low BTU gas discoveries that qualify and are accepted under the existing rights granted in terms of Exploration Licences, Petroleum Concession Agreements (PCAs), Development and Production (D&P) leases, but are not in production prior to the notification of this Policy. The Policy also applies to future exploration licences, PCAs, and D&P leases granted under subsequent Petroleum (Exploration and Production) Policies.
Key Provisions of the Policy
1. Introduction
Pakistan faces a significant challenge in meeting its growing energy requirements due to an expanding population and economic growth. Energy demand is projected to grow from 64.91 Million Tons of Oil Equivalent (MTOE) in 2010 to 147 MTOE by 2022, reflecting a phenomenal increase of 126%. Gas, being the largest component of energy supply (48%), is projected to decline from the existing 4.2 BCFD to 1.6 BCFD in 2022, reflecting a deficit of 7 BCFD. Serious efforts are therefore needed to explore, discover, and produce additional oil and gas reservoirs for long-term sustainable energy security in Pakistan.
2. Policy Objectives
The Low BTU Gas Pricing Policy, 2012, is aimed at achieving the following principal objectives:
- Fast-track development and production of gas from the existing discovered low BTU gas reservoirs that have remained dormant due to poor economics.
- Provide opportunities for investors in the exploration and production of low BTU gas, which would help increase the power generation capacity of the country and reduce the energy deficit.
- Generate additional revenues for the government in the form of royalties and taxes.
- Improve the balance of payments position by reducing the need for import of other fuels such as LNG and fuel oil, which require massive foreign exchange outflows.
- Produce additional power at affordable tariffs for consumers by using indigenous gas resources.
- Boost local manufacturing of equipment for the production of low BTU gas.
- Increase the security of energy supplies.
3. Applicability and Effect
The Low BTU Gas Pricing Policy, 2012, comes into effect from the date of its notification in the official Gazette of Pakistan. The incentives of this Policy apply to low BTU gas discoveries that qualify and are accepted as “Low BTU Gas” under the existing rights granted in terms of Exploration Licences, PCAs, and D&P leases but are not in production prior to the notification of this Policy, as well as future exploration licences, PCAs, and D&P leases granted under subsequent Petroleum (Exploration and Production) Policies.
4. Definition of Low BTU Gas
Low BTU Gas is defined as gas produced from the well-heads in raw form which does not contain methane as its primary constituent and has a gross heating value of less than 450 BTU/SCFT. The threshold of 450 BTU/SCFT is selected based on the definition of natural gas contained in various laws and rules.
5. Certification of Chemical Composition
To be eligible for the incentives provided in this Policy, producers of low BTU gas must obtain a certificate of the chemical composition of the gas from at least three independent laboratories: HDIP, Core Lab, Weatherford Lab, or any other party with world-class standing approved by the Federal and Provincial Governments. Each producer must install an online gas chromatograph before the injection of raw gas into any processing facility or buyer’s facility.
6. Gas Pricing
Gas prices are calculated based on BTU content. Low BTU gas with 450 BTU/SCF is assigned a price of US$ 6 per MMBTU, which increases by US$ 0.01/MMBTU for each BTU/SCF reduction below 450 BTU/SCF up to 175 BTU/SCF, making the maximum price at 175 BTU/SCF US$ 8.75/MMBTU. Low BTU gas ranging from 450 to 600 BTU/SCF also entails a price of US$ 6 per MMBTU for making it pipeline quality gas.
7. Royalty and Retention Period
Royalty is payable as per the Petroleum (Exploration & Production) Policy, 2012. E&P companies are entitled to a minimum of five years retention period to determine various development options and market gas from the date of approval of the development plan. This retention period can be extended for another five years to implement the development plan, subject to providing technical justification and milestones.
8. Third-Party Sales and Government’s Right of First Refusal
The Government has the first right to purchase 90% of low BTU gas converted to pipeline quality gas by the producer. The producer is allowed to sell 10% of the remaining gas at their discretion. If the government does not exercise its right within two months, the producer is free to sell the gas to a third party. For sales to parties other than the government, a windfall levy of 25% is applied on the difference between the policy price and the third-party sale price.
9. Incentives for Development and Utilization
Leaseholders are allowed to import equipment and machinery required for the development and utilization of low BTU gas free of duties and taxes. This also applies to equipment required for the re-injection of low BTU gas into the reservoir or recycling it into existing facilities. The first production bonus applicable to the grant of a D&P lease of a low BTU gas field is waived.
10. Review of Policy
The Low BTU Gas Pricing Policy, 2012, may be reviewed by the Government every five years in light of additional information, technological advancements, and changes in circumstances, including business dynamics. Existing producers of low BTU gas at the time of review may benefit from any policy revisions, provided no changes are detrimental to their existing economic rights.
Legal and Operational Implications
Compliance
- Adherence to these guidelines is mandatory. Non-compliance can result in legal and financial consequences, including fines and operational disruptions.
Incentives for Development
- The Policy provides significant financial incentives to make investments in low BTU gas utilization economically viable. This includes additional premiums on gas pricing and duty-free importation of necessary equipment.
Environmental Impact
- The guidelines emphasize reducing flaring and venting of gas, thereby contributing to environmental sustainability and reducing the carbon footprint.
Transparency and Accountability
- Detailed certification and record-keeping requirements promote transparency and accountability within the industry. This ensures that all stakeholders operate on a level playing field and adhere to the same standards.
Enhanced Energy Security
- By utilizing low BTU gas, the guidelines aim to enhance Pakistan’s energy security and reduce reliance on imported fuels.
Critical Analysis of the Low BTU Gas Pricing Policy, 2012
While the Low BTU Gas Pricing Policy, 2012, aims to provide a comprehensive framework for incentivizing the exploration and production of low BTU gas, several areas require critical examination from a legal perspective. This analysis highlights potential deficiencies and areas for improvement in these guidelines.
Identified Deficiencies
1. Ambiguity in Definitions and Criteria
- The definition of low BTU gas as “gas produced from the well-heads in raw form which does not contain methane as its primary constituent and has a gross heating value of less than 450 BTU/SCFT” is clear. However, the criteria for what constitutes poor economic viability are not explicitly outlined, leading to potential disputes over qualification and certification.
- The Policy does not adequately address how variations in the composition of low BTU gas, such as the presence of impurities like carbon dioxide, nitrogen, and hydrogen sulfide, should be handled in terms of pricing and processing requirements.
2. Certification Process
- The requirement for certification by at least three independent laboratories is essential for transparency. However, the guidelines do not specify the selection process for these laboratories, which could lead to inconsistencies and potential conflicts of interest.
- The cost and logistical challenges of obtaining certification from multiple laboratories may be burdensome for smaller companies, potentially discouraging investment in low BTU gas projects.
3. Gas Pricing Mechanism
- The pricing mechanism, which assigns a price of US$ 6 per MMBTU for 450 BTU/SCF gas with incremental increases for lower BTU content, is somewhat arbitrary. The Policy does not provide a clear rationale for the specific pricing increments, which may lead to disputes and challenges from producers.
- The Policy does not account for fluctuations in global gas prices or changes in the domestic market, which could affect the economic viability of low BTU gas projects over time.
4. Government’s Right of First Refusal
- The provision granting the government the first right to purchase 90% of low BTU gas converted to pipeline quality gas within two months may be impractical. The Policy does not specify the criteria or process for the government to exercise this right, leading to potential delays and uncertainty for producers.
- The two-month period may be insufficient for the government to make an informed decision, potentially resulting in missed opportunities for both the government and producers.
5. Windfall Levy
- The imposition of a windfall levy of 25% on the difference between the policy price and third-party sale price is intended to capture excess profits. However, this threshold is arbitrary and may not reflect current market conditions.
- The levy could discourage investment in low BTU gas projects by significantly reducing the potential returns for producers, particularly in a volatile market environment.
6. Environmental and Social Considerations
- The Policy focuses primarily on economic incentives but does not adequately address environmental and social impacts. There are no specific provisions for environmental assessments, community engagement, or compliance with international environmental standards.
- The guidelines should mandate specific environmental protection measures, such as requirements for minimizing emissions and mitigating the impact of flaring and venting.
7. Implementation and Monitoring
- While the Policy establishes a framework for low BTU gas utilization, the mechanisms for regulatory oversight and enforcement are insufficient. The guidelines do not detail the procedures for monitoring compliance or the penalties for non-compliance, potentially undermining their effectiveness.
- The role of the Implementation Committee is not clearly defined, and its quarterly meeting schedule may not be sufficient to address emergent issues promptly.
8. Technological and Economic Constraints
- The Policy acknowledges techno-economic constraints in utilizing low BTU gas but does not provide detailed guidance on overcoming these challenges. This could result in producers continuing to flare gas due to perceived economic infeasibility.
- There is insufficient emphasis on technological innovation and the adoption of best practices to improve the feasibility and efficiency of low BTU gas projects.
9. Review and Update Mechanism
- The Policy provides for a review every five years, but there is no clear process for stakeholder engagement during the review. This could lead to changes that do not adequately reflect industry needs or concerns.
- The lack of interim reviews means that the Policy may not keep pace with technological advancements or changes in the economic environment.
Conclusion
While the Low BTU Gas Pricing Policy, 2012, provides a necessary framework for incentivizing the exploration and production of low BTU gas in Pakistan, addressing the identified deficiencies could enhance its effectiveness and practicality. Clarifying definitions, improving the certification process, enhancing transparency in gas pricing, and strengthening regulatory oversight and environmental considerations would contribute to a more robust and efficient regulatory environment. At Josh and Mak International, we are committed to helping our clients navigate these complexities and advocate for continuous improvements in the legal framework. For detailed advice and support, please contact our expert team.
