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 “Tight Gas (Exploration & Production) Policy, 2011,” issued by the Ministry of Petroleum and Natural Resources of Pakistan. These guidelines are designed to establish the policies, procedures, tax, and pricing regime for the exploration and production of tight gas in Pakistan, aiming to address the country’s energy needs and reduce reliance on imported fuels.
Scope and Applicability
The Tight Gas Policy, 2011, applies to all tight gas discoveries that qualify and are accepted as “tight gas” under existing and future exploration licenses, Petroleum Concessions Agreements (PCAs), and Development & Production (D&P) leases that are not in production prior to the notification of this Policy. The Policy aims to accelerate the development and production of tight gas to meet the growing energy demand in Pakistan.
Key Provisions of the Policy
1. Introduction
The Tight Gas Policy, 2011, is introduced in response to the increasing global focus on unconventional energy sources, including tight gas. With the decline in production of conventional fossil fuels and the widening gap between energy demand and supply, the exploitation of tight gas reserves is seen as a crucial step in ensuring energy security for Pakistan.
2. Objectives
The principal objectives of the Tight Gas Policy, 2011, include:
- Fast-tracking the development and production of gas from existing tight gas reservoirs that are not being produced due to non-commerciality.
- Opening new frontiers for the exploration of tight gas to increase production levels and reduce the energy deficit.
- Raising additional revenues for the Federal and Provincial Governments.
- Improving the balance of payments by reducing the need for importing alternative fuels such as LNG and fuel oil.
- Reducing reliance on sovereign debts by saving foreign currency.
- Keeping local gas prices affordable for consumers by producing cheaper gas compared to imports.
- Generating employment opportunities for nationals.
- Boosting the local manufacturing industry for the supply of equipment for tight gas production through international collaboration and technology transfer.
- Increasing the dependability and security of energy supply and its sustained availability.
3. Applicability and Effect
The Tight Gas Policy, 2011, comes into effect from the date of its announcement as published in the official Gazette. The incentives of this Policy apply to tight gas discoveries that qualify and are accepted as “tight gas” under existing and future exploration licenses, PCAs, and D&P leases not in production before the notification of this Policy. In case of conflict between the general terms of the PCA and this Policy, the provisions of this Policy take precedence for tight gas.
4. Definition of Tight Gas
Tight Gas is defined as natural gas that:
- Cannot flow naturally at commercial rates with conventional methods despite having hydrocarbon reserves, as demonstrated to the satisfaction of the Federal and Provincial Governments.
- Requires advanced technologies for exploitation/production, such as high-performance perforation, hydraulic fracturing, horizontal wells, multilateral wells, infill drilling, or any new technology acceptable to the Regulator.
- Has an estimated effective permeability of less than 1.0 milliDarcy (mD).
5. Measurement of Permeability and Certification
To claim incentives under the Policy, the Working Interest Owners encountering Tight Gas Reservoirs (TGR) must follow these procedures:
- Provide all relevant data and supporting material to a recognized third party for accurate measurement of permeability and independent certification of the Tight Gas Reservoir and Tight Gas Reserves.
- The third party shall determine effective permeability using methods such as core data/analysis, well test data/analysis, Nuclear Magnetic Resonance (NMR), Pressure Transient Analysis (PTA), or other methods required by the Regulator.
- The third party certification must confirm that the gas qualifies as Tight Gas, assess the Tight Gas Reservoir and Reserves, and certify that the gas cannot be produced naturally through conventional methods at commercial rates.
6. List of Consultants/Laboratories
Certification of Tight Gas/nature of reservoirs, gas reserves, and allocation of Tight Gas may be obtained from recognized parties, including:
- DeGolyer and MacNaughton Petroleum Consultant
- Gaffney Cline and Associates Ltd.
- Ryder & Scott
- Other internationally recognized consultants as approved by the Federal and Provincial Governments.
7. Declaration of Commerciality
The declaration of commerciality involves:
- Notification of the Federal and Provincial Governments upon discovery of a tight gas reservoir sequence.
- Submission of an appraisal program for approval if the reservoir merits appraisal.
- Conducting third-party certification to define the nature of the reservoir and reserve potential.
- Submission of a Development Plan for approval following the Commercial Discovery.
8. Management of Mixed Production
If tight gas and conventional gas are produced from the same well or different zones of the D&P lease, allocation shall be based on flow rates determined by a third party. Commingled production is not allowed unless produced through dual completions or other internationally acceptable methods approved by the Regulator.
9. Delivery Point
For pricing and delivery obligations, the field gate is the outlet flange of the gas processing facilities. If tight gas is processed and delivered from existing facilities, the delivery point for tight gas remains the same as for conventional gas delivery.
10. Gas Pricing
To exploit Tight Gas Reserves, a 40% premium over the respective zonal price of Petroleum Policy 2009 is given. An additional 10% premium is provided for volumes brought into production within two years of the Policy’s announcement.
11. Lease Term and Renewal
The initial term of the development and production “Tight Gas lease” is up to 30 years, renewable for a period not exceeding 10 years subject to justification.
12. Royalty
Royalty is payable as per the Petroleum (Exploration & Production) Policy, 2009.
13. Tax Loss Carry Forward
Operating loss can be carried forward for up to 15 years.
14. Abandonment Costs
As per the Finance Act 2010.
15. Windfall Levy
No windfall levy applies to tight gas production.
16. Other Fiscal Levies
If both conventional and tight gases are produced from the same D&P lease, lease rental, production bonus, training fee, and community welfare are levied once and not duplicated.
17. Production Suspension
Production suspension for a cumulative period
of one year is allowed, subject to technical and economic justifications. The Federal Government and the Provincial Government concerned may grant further extensions on a case-by-case basis if the provided justifications are satisfactory.
18. Remittance of Proceeds Abroad
Provisions of the Petroleum (Exploration & Production) Policy 2009 apply regarding the remittance of proceeds abroad.
19. Review of Tight Gas Policy
The Tight Gas Policy will be reviewed after two years from its implementation to assess its effectiveness and make necessary adjustments based on the evolving industry and market conditions.
20. Implementation of Tight Gas Policy
An institutional mechanism will be established to oversee the implementation of the Tight Gas (Exploration & Production) Policy 2011. This includes forming an Authority consisting of the Directorate General of Petroleum Concessions (DGPC) and representatives from each province. A sub-committee comprising representatives from the concerned province and DGPC will address tight gas implementation issues within that province. The implementation committee will oversee general matters related to the policy.
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. The certification process and the need for third-party validation ensure that companies comply with industry standards and regulatory requirements.
Incentives for Development
The Policy provides significant financial incentives to make investments in tight gas production economically viable. This includes additional premiums on gas pricing and duty-free importation of necessary equipment, fostering an environment conducive to investment and technological advancement.
Environmental Impact
The guidelines emphasize utilizing advanced technologies that can minimize the environmental impact associated with gas extraction. However, specific provisions for environmental assessments and community engagement could further enhance the sustainability of tight gas projects.
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, thus fostering a fair and competitive market environment.
Enhanced Energy Security
By incentivizing the development of tight gas, the guidelines aim to enhance Pakistan’s energy security and reduce reliance on imported fuels. This aligns with the national objective of achieving a more self-sufficient energy supply and mitigating the economic impact of energy imports.
Technological and Economic Constraints
While the Policy acknowledges the need for advanced technologies, the cost and logistical challenges associated with these technologies could be significant, especially for smaller companies. The guidelines encourage technological innovation but could provide more detailed support for overcoming these economic and technological barriers.
Critical Analysis of the Tight Gas (Exploration & Production) Policy, 2011
While the Tight Gas (Exploration & Production) Policy, 2011, provides a necessary framework for incentivizing the exploration and production of tight 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 tight gas, which includes gas that “cannot flow naturally at commercial rates with conventional methods,” is somewhat vague. The criteria for determining what constitutes “commercial rates” and “conventional methods” are not explicitly outlined, leading to potential disputes and inconsistent application of the policy.
- The Policy requires demonstrating that the gas cannot be produced naturally at commercial rates, but the specific parameters for this determination are not detailed, which could result in varied interpretations and potential legal challenges.
2. Certification Process
- The requirement for certification by a third-party consultant is critical for ensuring transparency and accuracy. However, the Policy does not specify the qualifications or selection process for these consultants, leading to potential inconsistencies and conflicts of interest.
- The cost of certification and the logistical challenges associated with obtaining it from multiple laboratories could be burdensome for smaller companies, potentially discouraging investment in tight gas projects.
3. Gas Pricing Mechanism
- The pricing mechanism, which offers a 40% premium over the respective zonal price of the Petroleum Policy 2009, may not reflect the true economic challenges and costs associated with tight gas extraction. The rationale for the specific percentage premium is not clearly explained.
- The additional 10% premium for volumes brought into production within two years is intended to incentivize quick development. However, this timeframe may be unrealistic for many projects given the complexities and technical challenges involved in tight gas extraction.
4. Government’s Right of First Refusal
- The provision granting the government the first right to purchase tight gas could lead to delays and uncertainty for producers. The Policy does not specify the criteria or process for the government to exercise this right, potentially leading to bureaucratic inefficiencies.
- The timeframe for the government to exercise this right is not clearly defined, which could result in prolonged decision-making processes that hinder timely project development.
5. Technological and Economic Constraints
- While the Policy acknowledges the need for advanced technologies, it does not provide detailed guidance or support for overcoming the economic and logistical challenges associated with these technologies. Smaller companies, in particular, may struggle with the high costs and technical complexities of tight gas extraction.
- The Policy could benefit from more explicit incentives or support mechanisms for technological innovation and adoption, such as grants, subsidies, or partnerships with technology providers.
6. Environmental and Social Considerations
- The Policy focuses primarily on economic incentives and technological requirements 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 lack of mandated environmental protection measures could lead to negative environmental consequences, particularly in sensitive or high-impact areas.
7. Regulatory Oversight and Enforcement
- While the Policy establishes a framework for tight 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 and the sub-committees is not clearly defined, and their capacity to resolve issues and enforce the Policy is unclear. More robust and transparent oversight mechanisms are needed to ensure accountability.
8. Review and Update Mechanism
- The Policy provides for a review every two 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, potentially limiting its long-term effectiveness.
Comparison between the Tight Gas (Exploration & Production) Policy, 2011, and the Tight Gas (Exploration & Production) Policy, 2024
Introduction
At Josh and Mak International, we provide comprehensive legal guidance on regulatory frameworks within the energy sector. This article offers a detailed comparison between the Tight Gas (Exploration & Production) Policy, 2011, and the newly introduced Tight Gas (Exploration & Production) Policy, 2024. Both policies aim to incentivize the exploration and production of tight gas in Pakistan, addressing the country’s energy needs and reducing reliance on imported fuels. However, the 2024 Policy introduces several updates and changes to address the challenges and improve the framework established by the 2011 Policy.
Key Comparisons and Changes
1. Introduction and Objectives
2011 Policy: The 2011 Policy was introduced in response to the increasing global focus on unconventional energy sources, including tight gas. It aimed to address the widening gap between energy demand and supply and the decline in conventional fossil fuel production. The policy’s objectives included fast-tracking the development of tight gas reservoirs, improving the balance of payments, and creating employment opportunities.
2024 Policy: The 2024 Policy builds on the objectives of the 2011 Policy but places a stronger emphasis on technological advancements and the need for a dynamic and adaptable policy framework. It aims to provide a more attractive investment environment for both local and foreign E&P companies, recognizing the capital-intensive and technically challenging nature of tight gas projects. The objectives now include a greater focus on sustainable energy security and reducing reliance on imported fuels.
2. Applicability and Effect
2011 Policy: The incentives applied to tight gas discoveries that qualified and were accepted under existing and future exploration licenses, PCAs, and D&P leases. The policy was effective from the date of its notification in the official Gazette.
2024 Policy: The 2024 Policy retains the applicability to existing and future tight gas discoveries but adds clarity on the eligibility criteria. It specifies that tight gas discoveries not developed as of the policy’s effective date are eligible for the incentives. The policy includes provisions for a Model Supplemental Agreement to ensure consistency and clarity in its application.
3. Definition of Tight Gas
2011 Policy: Tight gas was defined as natural gas that could not flow naturally at commercial rates with conventional methods despite having hydrocarbon reserves, requiring advanced technologies such as hydraulic fracturing and horizontal drilling. The effective permeability threshold was set at less than 1.0 milliDarcy (mD).
2024 Policy: The 2024 Policy retains the definition but expands the list of acceptable advanced technologies to include high-performance perforation, slanted/deviated wells, multilateral wells, and any new technology acceptable to the Authority. The policy also emphasizes the use of state-of-the-art technologies and the significant investments required for tight gas production.
4. Certification and Measurement of Permeability
2011 Policy: The policy required third-party certification to confirm the nature of the tight gas reservoir and reserves, using methods such as core data analysis, well test data, and Nuclear Magnetic Resonance (NMR) methods.
2024 Policy: The 2024 Policy enhances the certification process by introducing a two-step third-party certification: initial certification after the discovery well completion and final certification after the appraisal program completion. It also emphasizes the need for accurate data collection and independent certification to ensure transparency and reliability.
5. Gas Pricing Mechanism
2011 Policy: The policy offered a 40% premium over the respective zonal price of the Petroleum Policy 2009 to incentivize the exploitation of tight gas reserves.
2024 Policy: The 2024 Policy maintains the 40% premium but ties it to the Petroleum (Exploration and Production) Policy 2012. It also introduces additional incentives for early production and provisions for selling gas to third parties within Pakistan at mutually negotiated prices, with the government retaining the first right of refusal.
6. Lease Term and Renewal
2011 Policy: The initial term of the development and production lease was up to 30 years, with the possibility of renewal for up to 10 years based on technical justifications.
2024 Policy: The 2024 Policy retains the initial lease term of up to 30 years and the renewal option but adds provisions for extending the lease area to adjoining free areas based on technical justifications. It also includes specific guidelines for the amendment of existing D&P leases to include tight gas rights.
7. Incentives and Fiscal Measures
2011 Policy: The policy provided for royalty payments, tax loss carry forward for up to 15 years, and exemption from windfall levies. It also included measures to avoid duplication of fiscal levies for mixed production from the same lease.
2024 Policy: The 2024 Policy enhances these incentives by including exemptions from customs duties for equipment and machinery used in tight gas projects. It introduces incentives for the service sector to promote technology transfer and the deployment of state-of-the-art equipment. The policy also emphasizes the importance of a fair and transparent fiscal regime to attract investment.
8. Environmental and Social Considerations
2011 Policy: The 2011 Policy primarily focused on economic and technological aspects, with limited emphasis on environmental and social impacts.
2024 Policy: The 2024 Policy acknowledges the environmental and social implications of tight gas exploration and production. It calls for adherence to international environmental standards and the implementation of best practices to minimize the environmental footprint. The policy also encourages community engagement and social responsibility initiatives to ensure sustainable development.
9. Review and Update Mechanism
2011 Policy: The policy included provisions for periodic review to adapt to changing market conditions and technological advancements.
2024 Policy: The 2024 Policy strengthens the review mechanism, with a scheduled review every five years. It also allows for interim reviews and updates to the list of approved third-party consultants and laboratories. The policy emphasizes stakeholder engagement during the review process to ensure that industry needs and concerns are adequately addressed.
Conclusion
The Tight Gas (Exploration & Production) Policy, 2024, builds on the foundation laid by the 2011 Policy, incorporating lessons learned and addressing the challenges faced by the industry. The updated policy provides a more comprehensive and attractive framework for incentivizing tight gas exploration and production, with enhanced clarity, transparency, and support for technological advancements. At Josh and Mak International, we are committed to assisting our clients in navigating these policies and maximizing the benefits of the regulatory framework. For detailed advice and support, please contact our expert team.
