We help clients in the oil and gas sector navigate the complexities of the Tight Gas (Exploration and Production) Policy 2024, ensuring compliance, optimising benefits, and mitigating risks. Questions? Contact us at Aemen@joshandmak.com 
What is tight Gas?
Tight gas is a type of natural gas that is trapped within rock formations that have very low permeability and porosity. Unlike conventional natural gas reservoirs, where gas flows freely through porous rocks, tight gas is located in rock formations such as sandstone, limestone, or shale that require advanced extraction techniques to release the gas. Here are some key characteristics and aspects of tight gas:
  1. Low Permeability: The rock formations holding tight gas have extremely low permeability, typically less than 1 milliDarcy (mD). This means the gas cannot flow easily through the rock, making extraction more challenging.
  2. Extraction Techniques: To extract tight gas, advanced technologies are required. These include hydraulic fracturing (fracking), horizontal drilling, and high-performance perforation techniques. These methods help to create pathways in the rock formations, allowing the gas to flow to the wellbore.
  3. Hydraulic Fracturing: This is a common technique used in tight gas extraction. It involves injecting high-pressure fluid into the rock formations to create fractures. These fractures provide pathways for the gas to flow more freely.
  4. Horizontal Drilling: Unlike conventional vertical drilling, horizontal drilling allows for greater contact with the gas-bearing formations. By drilling horizontally through the rock layers, more of the gas can be accessed and extracted.
  5. Economic Considerations: The extraction of tight gas is generally more expensive and technically challenging compared to conventional natural gas. The higher costs are due to the need for advanced drilling and fracturing technologies. However, with technological advancements and supportive policies, tight gas extraction can become economically viable.
  6. Significant Reserves: Despite the challenges, tight gas represents a significant portion of natural gas reserves worldwide. Countries with substantial tight gas reserves, like the United States, Canada, and China, have invested heavily in technology and infrastructure to exploit these resources.
  7. Environmental Concerns: The extraction of tight gas, particularly through hydraulic fracturing, has raised environmental concerns. These include the potential for groundwater contamination, induced seismic activity, and the large volumes of water required for fracking operations. Proper regulatory frameworks and environmental safeguards are essential to mitigate these risks.

In summary, tight gas is a valuable but challenging natural gas resource trapped in low-permeability rock formations. Advanced extraction technologies and supportive policies are crucial for its development, balancing economic benefits with environmental and regulatory considerations.

The Tight Gas (Exploration and Production) Policy 2024 represents a significant step by the Government of Pakistan to stimulate investment in the tight gas sector. However, a practical critique of this policy reveals both commendable aspects and areas that may require further refinement to achieve its objectives effectively.

Positive Aspects

  1. Incentivisation through Premium Pricing: The policy’s provision of a 40% premium on the zonal price set by the Petroleum (Exploration and Production) Policy 2012 is a substantial incentive. This premium recognises the higher costs and technical challenges associated with tight gas extraction, making the investment more attractive to E&P companies.
  2. Rigorous Certification Process: The dual-step third-party certification ensures that only genuine tight gas reserves benefit from the policy’s incentives. This reduces the risk of misclassification and enhances investor confidence in the regulatory framework.
  3. Early Production Provision: Allowing early commercial production (ECP) before formal lease agreements are finalised helps operators to commence production swiftly, improving cash flow and facilitating quicker returns on investment.
  4. Extended Lease Terms: The policy’s provision for an initial lease term of up to 30 years, with a possible 10-year extension, aligns with the long-term nature of tight gas projects. This offers stability and security for investors, encouraging sustained investment.
  5. Customs Duty Exemptions: Exempting customs duties on equipment and machinery used in tight gas exploration and production is a strategic move to reduce operational costs and promote the use of advanced technologies.

Areas for Improvement

  1. Complex Certification Requirements: While the rigorous certification process is commendable, it may also be seen as overly complex and time-consuming. Smaller E&P companies may find the costs and administrative burden of compliance challenging, potentially limiting the policy’s attractiveness to only larger players with substantial resources.
  2. Ambiguity in Applicability: The policy states that tight gas discoveries that received benefits under the 2011 policy are excluded from the new incentives. This provision could lead to ambiguity and disputes, especially for projects that transitioned between policies. Clearer guidelines on transition provisions could mitigate such issues.
  3. Potential for Delays in Regulatory Approvals: Although the policy sets timelines for regulatory approvals, the actual adherence to these timelines is critical. Historical challenges in bureaucratic efficiency in Pakistan could lead to delays, undermining investor confidence and potentially slowing down project implementation.
  4. Limited Local Expertise: The policy heavily relies on advanced technologies and third-party certifications, often requiring expertise from international consultants. Developing local expertise and capabilities in tight gas technologies is essential to reduce dependency on foreign entities and lower costs in the long term.
  5. Risk of Overdependence on Premium Pricing: While the 40% premium on zonal prices is an attractive incentive, it also poses a risk of creating overdependence on high pricing to justify investments. If global energy prices fluctuate or if the premium is adjusted in future policies, the financial viability of ongoing projects could be jeopardised.
  6. Environmental Concerns: The policy does not sufficiently address environmental impacts associated with tight gas extraction, such as hydraulic fracturing. Comprehensive environmental regulations and monitoring mechanisms should be integrated into the policy to ensure sustainable development practices.
  7. Equitable Benefit Distribution: The policy’s incentives largely focus on E&P companies, but there is a need for mechanisms to ensure that local communities and stakeholders also benefit equitably from tight gas projects. This could include provisions for local employment, community development funds, and environmental safeguards.
  8. Coordination with Provincial Governments: Given that natural resources are a provincial subject in Pakistan, effective coordination between federal and provincial governments is crucial. The policy should outline clear roles and responsibilities for provincial authorities to ensure seamless implementation and avoid jurisdictional conflicts.

The Tight Gas (Exploration and Production) Policy 2024 is a well-intentioned framework designed to unlock Pakistan’s significant tight gas potential. While it offers substantial incentives and a structured approach to certification and production, the policy’s success will hinge on addressing the practical challenges identified. Streamlining certification processes, enhancing regulatory efficiency, developing local expertise, and ensuring environmental and community safeguards are vital steps towards achieving the policy’s objectives effectively and sustainably. By addressing these areas, the Government of Pakistan can create a more conducive environment for investment and ensure the long-term viability of its tight gas resources.

In continuation of our comprehensive examination of the new Tight Gas (Exploration and Production) Policy 2024, it is pertinent to provide an in-depth analysis of the significant sections that affect stakeholders, particularly exploration and production (E&P) companies. This policy, as encapsulated in the statutory notification S.R.O. 191(I)/2024 issued by the Government of Pakistan’s Ministry of Energy (Petroleum Division), sets a robust framework designed to foster investment and development in the tight gas sector. The following discussion delves into the practical and regulatory nuances of key policy provisions.

Applicability & Effect of the Policy

The policy applies immediately upon its publication in the official Gazette, offering incentives for new and existing tight gas discoveries under various exploration licences and agreements. Notably, discoveries that previously received benefits under the 2011 policy are excluded from the new incentives, ensuring no overlap in financial advantages. This clear demarcation is aimed at preventing double-dipping while promoting new investments.

Definition of Tight Gas

Tight gas, under this policy, is stringently defined by its inability to flow naturally at commercial rates without advanced extraction technologies. The required permeability must be less than 1.0 milli Darcy, establishing a precise criterion for qualification. This definition sets the foundation for ensuring only genuine tight gas reserves benefit from the policy’s incentives.

Measurement of Permeability

E&P companies must adhere to a rigorous process involving independent third-party consultants to measure permeability accurately. The policy outlines specific methodologies, including core data analysis and well test data, to ensure reliable certification. This approach guarantees that only qualified tight gas reserves are developed, fostering confidence among investors and stakeholders.

 Certification of Tight Gas and Tight Gas Reservoir through Third Party

The certification process is twofold: initial certification upon discovery and final certification post-appraisal. This methodical approach ensures thorough validation at each stage of exploration and development, reducing risks of misclassification and ensuring the integrity of the incentive framework. Additionally, the stringent penalties for data misreporting underscore the policy’s emphasis on accuracy and transparency.

 Determination of Tight Gas and Declaration of Commerciality

The policy stipulates a detailed mechanism for the determination and declaration of commerciality of tight gas reservoirs. Operators must notify the Regulator immediately upon discovering a potential tight gas reservoir, followed by submitting appraisal programs and final certifications within specified timelines. This structured process ensures timely and efficient development while providing clear guidelines for operators.

 Early Production

Early Commercial Production (ECP) is permitted under the policy, allowing operators to commence production before formal lease agreements are finalised. This provision ensures swift monetisation of tight gas reserves, aiding cash flow and investment recovery for operators. The gas produced during ECP will be subject to the same pricing and fiscal obligations as regular production, ensuring no financial discrepancies.

Gas Pricing

A critical component of the policy is the 40% premium on the zonal price of Petroleum (Exploration and Production) Policy 2012 for tight gas. This substantial premium is designed to offset the higher costs associated with tight gas extraction, making investment in this sector more attractive. The policy also allows for provisional pricing post initial certification, further facilitating early investment returns.

 Lease Term & Renewal

The policy offers an initial lease term of up to 30 years, extendable by an additional 10 years, recognising the long-term nature of tight gas projects. This extended duration provides stability and security for investors, encouraging sustained investment in the development of tight gas resources.

 Royalty and Fiscal Provisions

Royalty is fixed at 12.5% of the value of petroleum at the field gate, aligning with standard industry practices. Additionally, provisions for tax loss carry forward and specific abandonment cost regulations ensure a balanced fiscal environment conducive to long-term investment.

Incentives for Service Sector

To further bolster the sector, the policy provides customs duty exemptions for equipment and machinery essential for tight gas exploration and production. This measure aims to reduce operational costs and encourage the deployment of advanced technologies, crucial for the efficient exploitation of tight gas reserves.

Representation and Dispute Resolution

In the event of grievances regarding the Regulator’s decisions, operators can appeal to the Petroleum Division within 30 days. This provision ensures a transparent and fair dispute resolution process, fostering a conducive environment for investment and operational activities.

The Tight Gas (Exploration and Production) Policy 2024 is a comprehensive and meticulously structured framework designed to invigorate the tight gas sector in Pakistan. By addressing technical, commercial, and regulatory challenges, the policy aims to attract significant local and foreign investments, ultimately enhancing indigenous hydrocarbon production and reducing dependence on imported fuels. This forward-looking policy not only seeks to exploit Pakistan’s vast unconventional gas reserves but also aims to create employment opportunities, promote technological transfer, and ensure energy security for the nation.

By The Josh and Mak Team

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