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 “Flare Gas Utilization Guidelines, 2016,” issued by the Ministry of Petroleum and Natural Resources of Pakistan. These guidelines aim to address the issue of flared gas at oil and gas production and processing facilities, providing a framework for its utilization to improve energy efficiency and environmental sustainability.

Scope and Applicability

The Flare Gas Utilization Guidelines, 2016, apply to all existing and future facilities under all phases of development, including Extended Well Testing (EWT) and commercial development phases. These guidelines encourage the leaseholders to invest in the necessary infrastructure to utilize flare gas, thereby reducing wastage and environmental impact.

Key Provisions of the Guidelines

1. Objectives

The primary objectives of the Flare Gas Utilization Guidelines are to:

  • Maximize the utilization of flare gas by installing suitable facilities for collection, metering, compression, processing, transportation, and sale.
  • Encourage leaseholders to invest additional capital and operational expenditure to commercially use flare gas.
  • Generate additional revenues for the government through royalties, duties, and taxes.
  • Ensure compliance with health, safety, and environmental (HSE) requirements in utilizing flare gas.

2. Applicability and Effect

The guidelines come into effect from the date of publication in the official Gazette of Pakistan. They apply to all flare gas reported by existing and future facilities under all phases of development. The flare gas must be certified by an independent third-party engineering consultant, categorizing it as flare gas and certifying that it cannot be produced through normal processing facilities.

3. Definition of Flare Gas

Flare gas is defined as any flammable hydrocarbon gas disposed of by venting, flaring, or safe burning, irrespective of pressure and heating values. The guidelines exclude blanket gas, purge and fuel gas, safety flaring, and acid gas flaring or incineration.

4. Incentives for Using Flare Gas

Gas Quality

  • For pipeline quality gas distribution companies (SSGCL or SNGPL), the gas must meet minimum pipeline quality standards approved by OGRA. For third-party sales, the quality can be agreed upon between the buyer and seller.

Delivery Point

  • The delivery point for gas supplies to customers shall be the field gate at the mutually agreed gas injection pressure.

Gas Pricing

  • The price for flare gas sold to customers shall be set in accordance with the Petroleum Exploration & Production Policy, 2012, with an additional premium of US$ 0.25 per MMBTU. The flare gas baseline volume at optimum production operations must be verified by an independent third-party consultant.

Import Duties and Taxes

  • Leaseholders are allowed to import equipment and machinery required for the development and utilization of flare gas free of duties and taxes, as recommended by the regulator. This incentive also applies to equipment required for re-injection of flare gas into the reservoir or recycling and reprocessing it into existing facilities.

Separate Regime for Gas Sale and Purchase Agreements (GSPA) and Metering

  • Flare gas will be dealt with under a separate regime of GSPAs, invoice verification systems, and metering protocols to be notified by the concerned regulator.

5. Gas Pricing for Third-Party Sales

If flare gas cannot be used by the leaseholder for injection into the reservoir, recycling into existing facilities, or the national pipeline system due to techno-economic constraints, the leaseholder is free to sell the gas to a third party at a negotiated price. For third-party sales, the wellhead gas price for royalty determination will be based on the agreed price between the leaseholder and the third party under a Model GSPA approved by OGRA.

6. Offering Flare Gas to the Government

If the leaseholder is unable to utilize flare gas commercially, they must notify and offer it free of cost to the government or its designee at the downstream flange of the gas/oil separation facilities. The government must exercise this right within 30 days of notification. If the government elects to off-take the gas, it will bear all investment costs for its utilization. If not, the leaseholder is allowed to flare the gas until further government orders, while continuing to make efforts to utilize it.

7. Flare Gas Utilization Plan

Flare gas utilization plans should be an integral part of the Field Development Plan. Existing leaseholders must submit these plans within 120 days of the guidelines’ publication. The plans should include volumes of flare gas, quality, facilities requirements, and economic viability. Prospective leaseholders must include such plans in their applications for lease grants.

8. Production/Processing Facilities, Metering, and Utilization System

Leaseholders are required to:

  • Establish the commercial viability of flare gas utilization.
  • Design future facilities to maximize flare gas recovery.
  • Arrange metering systems for fuel and flare gas at production facilities.
  • Submit monthly flare gas reports to the regulator.

9. Royalty, Excise Duty, and Taxes

To incentivize flare gas utilization, the guidelines offer several fiscal measures:

  • A royalty rate of 12.5% on flare gas.
  • Accelerated depreciation rates on capital expenditures for design, engineering services, equipment procurement, and facilities commissioning.

10. Windfall Levy

For third-party sales, a windfall levy is applied using the formula: WL = 0.4 x (SP – BP) x GVS. The benefit is shared equally between the federal and provincial governments.

11. Implementation Committee

A committee chaired by the Secretary/Additional Secretary of the Ministry of Petroleum and Natural Resources oversees the implementation of the guidelines. The committee meets quarterly to address emergent issues and includes representatives from concerned provinces, the Ministry of Finance, the Ministry of Planning, Development and Reforms, PPEPCA, DGPC, and DG Gas.

12. Review of Guidelines

The guidelines may be reviewed every five years in light of technological advancements and changes in circumstances. Existing leaseholders utilizing flare gas at the time of review may avail benefits from any modifications, provided no changes detrimentally affect their existing 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 guidelines provide significant financial incentives to make investments in flare 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 are operating on a level playing field and adhering to the same standards.

Enhanced Energy Security

  • By utilizing flare gas, the guidelines aim to enhance Pakistan’s energy security and reduce reliance on imported fuels.

Critical Analysis of the Flare Gas Utilization Guidelines, 2016

While the Flare Gas Utilization Guidelines, 2016, aim to provide a comprehensive framework for reducing gas flaring and enhancing the utilization of flare gas, several areas require critical examination. This analysis highlights potential deficiencies and areas for improvement in these guidelines from a legal perspective.

Identified Deficiencies

1. Ambiguity in Definitions and Scope

  • The definition of flare gas is broad, encompassing any flammable hydrocarbon gas disposed of by venting, flaring, or burning. However, the exclusion of blanket gas, purge and fuel gas, safety flaring, and acid gas flaring or incineration is not clearly justified, leading to potential ambiguities in implementation.
  • The guidelines do not adequately define the criteria for determining when gas is considered uneconomical to process, which could lead to disputes over qualification and certification.

2. Certification Process

  • The requirement for certification by an independent third-party consultant is a critical component. However, the guidelines do not specify the qualifications or selection process for these consultants, potentially leading to inconsistencies in certification.
  • The cost of certification is to be borne by the leaseholders, which could be burdensome, particularly for smaller companies, and may discourage investment in flare gas utilization projects.

3. Gas Pricing Mechanism

  • The guidelines provide for a premium on gas pricing, but the mechanism for determining the base price and additional premium lacks transparency. The process for calculating the base price and the US$ 0.25 per MMBTU premium is not fully explained, leading to potential disputes and misunderstandings.
  • The guidelines do not account for fluctuations in global gas prices, which could affect the economic viability of flare gas utilization projects over time.

4. Government’s Right of First Refusal

  • The provision granting the government the first right to purchase gas from marginal fields within 30 days is problematic. The guidelines do not specify the criteria or process for the government to exercise this right, which could lead to delays and uncertainty for leaseholders.
  • The 30-day period may be insufficient for the government to make an informed decision, potentially resulting in missed opportunities for both the government and leaseholders.

5. Windfall Levy

  • The imposition of a windfall levy on third-party sales above the base price is intended to capture excess profits. However, the calculation of the windfall levy is based on an arbitrary threshold, which may not reflect current market conditions.
  • The 40% levy on the difference between the sale price and the base price could discourage investment in flare gas utilization projects, as it significantly reduces the potential returns for leaseholders.

6. Implementation and Monitoring

  • While the guidelines establish a framework for flare 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.

7. Environmental and Social Considerations

  • The guidelines focus on economic incentives but do not adequately address environmental and social impacts. There are no specific provisions for environmental assessments or community engagement, which are critical for sustainable development.
  • The guidelines do not mandate any specific environmental protection measures or compliance with international environmental standards, which could lead to negative environmental consequences.

8. Technological and Economic Constraints

  • The guidelines acknowledge techno-economic constraints in utilizing flare gas but do not provide detailed guidance on overcoming these challenges. This could result in leaseholders 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 flare gas utilization projects.

9. Review and Update Mechanism

  • The guidelines provide 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 guidelines may not keep pace with technological advancements or changes in the economic environment.

Conclusion

While the Flare Gas Utilization Guidelines, 2016, provide a necessary framework for reducing gas flaring and enhancing the utilization of flare gas in Pakistan, addressing the identified deficiencies could enhance their 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.

By The Josh and Mak Team

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