Client Information Article for Josh and Mak International: Oil and Gas Sector

As an esteemed oil and gas law firm, Josh and Mak International is dedicated to offering comprehensive legal support in the energy sector, particularly within the dynamic and evolving landscape of Pakistan’s oil and gas industry. This article aims to provide a detailed overview of investment opportunities, regulatory frameworks, and the legal environment in Pakistan’s upstream oil and gas sector, drawing insights from the latest sectoral analysis.

Investment Opportunities in Pakistan’s Oil and Gas Sector

Since its independence in 1947, Pakistan’s oil and gas sector has seen significant growth. Initially, the country had negligible oil production and no gas production. Today, indigenous gas discoveries play a crucial role in the national energy mix, meeting over 79% of the country’s energy needs through a vast network of transmission and distribution systems. Local sources now meet about 15% of Pakistan’s oil demand, underscoring the sector’s vital contribution to national development.

Policy Focus and Legal Framework

Successive Pakistani governments have prioritised the oil and gas sector, adopting policies to promote foreign investment in upstream petroleum activities. The driving force behind these policies is to reduce dependence on volatile imported oil markets. The landmark Foreign Investment Protection Law of 1976 ensures full safeguard of foreign investments, encouraging exploration and production activities.

The legal framework governing Pakistan’s upstream oil and gas sector includes several key laws and regulations:

  • Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948
  • Territorial Waters and Maritime Zones Act, 1976
  • Income Tax Ordinance, 2001
  • Pakistan Environmental Protection Ordinance, 1997
  • Mines Act, 1923
  • Various safety, exploration, and production regulations specific to onshore and offshore activities

Onshore and Offshore Prospects

Onshore: The onshore sector has a rich history of exploration, with significant discoveries such as the Sui Gas Field in Balochistan, which contains over 10 trillion cubic feet (TCF) of natural gas. The Potwar region has also been historically significant with discoveries like the Khaur oil field. Recent policies have further incentivised exploration activities, ensuring continued interest and investment in onshore drilling and production.

Offshore: Pakistan’s offshore sector, particularly the Indus and Mekran Basins, holds promising prospects. Despite past exploratory challenges, modern seismic surveys and technological advancements have renewed interest in offshore exploration. Companies like Eni and BP Exploration have been active in these regions, conducting extensive 2D and 3D seismic surveys and committing to exploratory drilling.

Zoning and Concession Award Process

Pakistan is divided into various zones based on geological risk and prospectivity:

  • Zone I: High risk – high cost areas
  • Zone II: Medium risk – medium cost areas
  • Zone III: Low risk – low cost areas
  • Offshore Zones: Shallow, Deep, and Ultra Deep

E&P rights are awarded through competitive bidding or direct negotiation with strategic partner companies. The process involves bidding invitations, evaluation of bids based on work units offered, and the execution of Petroleum Concession Agreements (PCA) or Production Sharing Agreements (PSA).

Fiscal and Regulatory Incentives

Royalty and Taxes:

  • Royalty is fixed at 12.5% of the value of petroleum produced.
  • Corporate income tax is capped at 40%, with royalty payments deductible as expenses.

Windfall Levy: A windfall levy applies to crude oil, condensate, and gas sales exceeding base prices, ensuring the government shares in the profits from significant price increases.

Import Duties: Import duties and sales tax on exploration and production equipment are minimal, promoting the import of advanced technologies.

Production Sharing: Sliding scale production sharing arrangements replace direct government participation, facilitating rapid investment recovery and higher returns for contractors.

Data Access and Management

Pakistan has established the Pakistan Petroleum Exploration & Production Data Repository (PPEPDR), a state-of-the-art national data repository providing online access to geological and geophysical data. This initiative enhances transparency and facilitates informed decision-making for E&P companies.

Pakistan’s oil and gas sector presents lucrative opportunities for investment, supported by a favourable legal framework and progressive government policies. Josh and Mak International remains at the forefront, offering expert legal counsel to navigate this complex and promising landscape. Whether you are a local entity or a foreign investor, our firm is committed to ensuring your investments are protected and optimally managed.

For further information and legal assistance, contact Josh and Mak International at aemen@joshandmak.com your trusted partner in the oil and gas sector.

 

At Josh and Mak International, we provide comprehensive legal services tailored to the intricate needs of the oil and gas sector in Pakistan. Leveraging our deep understanding of the regulatory framework, including key legislation such as the Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948, the Territorial Waters and Maritime Zones Act, 1976, and the Pakistan Petroleum (Exploration and Production) Rules, we offer expert guidance on compliance, licensing, and operational matters. Our team adeptly navigates the complexities of the Income Tax Ordinance, 2001, and the Pakistan Environmental Protection Ordinance, 1997, ensuring that our clients meet all fiscal and environmental obligations. We also assist in drafting and negotiating Petroleum Concession Agreements and Production Sharing Agreements, advising on competitive bidding processes, strategic partnerships, and reconnaissance permits. With our robust legal support, clients can confidently explore and invest in Pakistan’s upstream oil and gas sector, secure in the knowledge that their operations adhere to the highest legal and regulatory standards. If you have any questions please contact us at aemen@joshandmak.com 

Pakistan’s upstream oil and gas sector operates under a comprehensive legal framework designed to regulate exploration and production activities, ensure safety, and protect the environment. Key legislation includes:

  • Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948 (including the Amendment of 1976): Governs the management and control of mines and oilfields.
  • Territorial Waters and Maritime Zones Act, 1976: Defines the legal regime of Pakistan’s maritime zones.
  • Income Tax Ordinance, 2001 (Fifth Schedule): Details the tax obligations specific to the petroleum sector.
  • Pakistan Environmental Protection Ordinance, 1997: Mandates environmental protection measures during exploration and production.
  • Mines Act, 1923: Establishes safety protocols and labour conditions in mines.
  • Oil and Gas (Safety in Drilling and Development) Regulations, 1974: Ensures safe drilling and development practices.
  • Pakistan Petroleum (Exploration and Production) Rules, 1986, 2001, 2003, 2009: Provide guidelines for exploration and production activities both onshore and offshore.

Investment Opportunities in Pakistan’s Oil and Gas Sector

The upstream oil and gas sector in Pakistan presents significant investment opportunities, particularly through structured concession award processes. The Ministry of Petroleum and Natural Resources (MPNR) manages these processes, which include zoning, invitation to bid, and agreement execution.

Zoning

The country is divided into zones based on geological risk and prospectivity:

  • Onshore Zones:
    • ZONE-I: High risk and high cost areas.
    • ZONE-II: Medium risk and medium to high cost areas.
    • ZONE-III: Low risk and low to medium cost areas.
  • Offshore Zones:
    • Shallow
    • Deep
    • Ultra Deep

Separate incentives are provided for onshore and offshore areas to attract investments tailored to the specific risks and costs of each zone.

Concession Award Process

1. Competitive Bidding: Petroleum Exploration Licences (PEL) are granted for entering into Production Concession Agreements (PCA) or Production Sharing Agreements (PSA) through competitive bidding processes.

2. Strategic Partnerships: Licences are also granted without competitive bidding to strategic partner companies based on government-to-government agreements.

3. Reconnaissance Permits: Non-exclusive permits for undertaking studies and surveys are granted through direct negotiation.

Invitation to Bid

The Director General of Petroleum Concessions (DGPC) issues invitations to bid through national newspapers and the MPNR website. These invitations remain valid for at least 60 days. Bids are evaluated based on the number of work units offered, with provisions for re-bidding in the case of ties.

Execution of Agreement

Following a successful bid, the DGPC endeavours to sign a PCA or PSA based strictly on the model provided with the bid documents.

Upstream Sector Procedural and Regulatory Measures

Gas Market Dynamics

Under the Petroleum Exploration & Production Policy 2009, Exploration and Production (E&P) companies can negotiate gas sales directly with transmission and distribution companies, and other third parties, excluding residential and commercial consumers. The government may also purchase gas through nominated buyers, with payment made at the field gate price.

Foreign Exchange Remittance

Foreign E&P companies selling gas domestically are allowed to remit a “guaranteed percentage” of their revenues in foreign currency, which varies by zone: 75% for Zone O and Zone I, 70% for Zone II, and 65% for Zone III. The remaining income must cover local expenses and government dues.

Pipeline Infrastructure

E&P companies are responsible for constructing and maintaining pipelines from the field to the main transmission system. These costs are borne by the companies, and no transportation tariff is paid by the government for this infrastructure.

Regulatory and Financial Measures

Royalties and Corporate Income Tax

Royalties are set at 12.5% of the petroleum value at the field gate. Corporate income tax is capped at 40% of profits, with royalties deductible as expenses.

Prospectivity Zonation and Mandatory Participation

The onshore area is divided into three zones based on risk and investment potential. Joint ventures with foreign companies must include local E&P companies, including Government Holdings Private Limited (GHPL).

Production Bonuses

Production bonuses are payable at various stages of cumulative production, ensuring that contributions align with the output.

Work Unit Concept

The work unit concept provides flexibility in fulfilling work obligations under concession agreements, replacing firm obligations with a more adaptable approach based on technical judgement.

Windfall Levy

A windfall levy on crude oil and condensate is calculated based on net production, royalty, market price, and base price. This levy ensures that extraordinary profits are shared with the government.

Import Duties and Taxes

Import duties and sales tax on non-locally manufactured equipment are set at 5%, while locally manufactured items incur a 10% duty, with specific exemptions for technical service providers.

Training and Social Welfare Contributions

E&P companies must contribute to training and social welfare projects, with minimum annual expenditures specified for both exploration and production phases.

Offshore Package

Lease Terms and Relinquishments

The total lease term for offshore areas is up to 25 years, with a possible five-year renewal. Companies must relinquish portions of their licence areas at specified intervals.

Depreciation and Cost Recovery

Depreciation rates for exploration and development wells are set at 25% on a straight-line basis, with immediate expensing for dry holes. A sliding scale production sharing arrangement is used instead of direct government participation, allowing contractors to recover up to 85% of costs from gross revenues.

Profit Oil and Gas Splits

Profit splits between the government and contractors are based on a sliding scale tied to cumulative production, facilitating rapid investment recovery and higher net present value.

Production Bonuses and Marine Research Fees

Production bonuses are tiered based on cumulative production milestones. Additionally, a marine research and coastal area development fee is applicable during exploration and production phases.

Exploration and Retention Periods

The exploration period consists of an initial term of five years, with two possible renewals, totaling nine years. For gas discoveries, a maximum retention period of up to 10 years is allowed to evaluate commercial viability and market arrangements.

Pakistan’s regulatory framework and structured investment opportunities make its upstream oil and gas sector a compelling destination for exploration and production activities. With detailed procedural guidelines and incentives tailored to various zones, the sector promises significant returns on investment while ensuring compliance with safety and environmental standards. For further information and updates, clients are encouraged to contact us at aemen@joshandmak.com

Legal Framework of Pakistan’s Oil and Gas Sector

The legal framework governing Pakistan’s oil and gas sector is comprehensive, encompassing various laws, regulations, and policies that ensure the orderly and safe exploration, development, and production of petroleum resources. This framework is designed to attract investment, protect the environment, and ensure that the benefits of petroleum extraction are shared with the government and the people of Pakistan. Below is an in-depth analysis of the key legal instruments and their implications for stakeholders in the sector.

Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948

The Regulation of Mines and Oilfields and Mineral Development (Government Control) Act of 1948, as amended in 1976, is a foundational law that vests the government with the authority to regulate mines and oilfields. This Act empowers the government to issue licences for exploration and production, ensuring that activities are conducted in a manner that maximises resource utilisation while safeguarding public interests.

Territorial Waters and Maritime Zones Act, 1976

The Territorial Waters and Maritime Zones Act, 1976, delineates Pakistan’s jurisdiction over its maritime zones, including the territorial sea, contiguous zone, exclusive economic zone (EEZ), and the continental shelf. This Act provides the legal basis for offshore exploration and production activities, ensuring that they are conducted within the legal boundaries and sovereignty of Pakistan.

Income Tax Ordinance, 2001 (Fifth Schedule)

The Income Tax Ordinance, 2001, particularly the Fifth Schedule, outlines the tax regime applicable to the petroleum sector. It details the tax obligations of companies engaged in exploration and production, including provisions for corporate income tax, depreciation, and the treatment of royalties as deductible expenses. This Ordinance aims to provide a predictable and investor-friendly tax environment.

Pakistan Environmental Protection Ordinance, 1997

The Pakistan Environmental Protection Ordinance, 1997, mandates the protection of the environment during petroleum exploration and production activities. It requires companies to conduct Environmental Impact Assessments (EIAs) and implement mitigation measures to minimise environmental damage. Compliance with this Ordinance is crucial for obtaining and maintaining operational licences.

Mines Act, 1923

The Mines Act, 1923, establishes safety standards and labour conditions in mining operations, including those in the petroleum sector. It sets forth regulations regarding worker safety, health, and welfare, ensuring that exploration and production activities do not compromise the well-being of workers.

Oil and Gas (Safety in Drilling and Development) Regulations, 1974

The Oil and Gas (Safety in Drilling and Development) Regulations, 1974, provide detailed guidelines for safe drilling and development operations. These regulations are essential for preventing accidents and ensuring the safety of personnel and equipment involved in drilling activities.

Pakistan Petroleum (Exploration and Production) Rules

The Pakistan Petroleum (Exploration and Production) Rules, issued in various years (1986, 2001, 2003, 2009), govern the granting of exploration and production rights. These rules outline the procedures for applying for licences, the obligations of licence holders, and the terms and conditions of exploration and production agreements. The rules aim to ensure that exploration and production activities are conducted efficiently and transparently.

  • 1986 Rules: These initial rules provided the framework for the early stages of petroleum exploration and production in Pakistan.
  • 2001 Rules: These rules updated the regulatory framework to align with evolving industry standards and practices.
  • 2003 Rules: Focused on offshore exploration, these rules provided specific guidelines for offshore blocks.
  • 2009 Rules: Introduced further refinements to enhance investment attractiveness and operational efficiency.

Regulatory and Procedural Aspects

Zoning

Pakistan’s onshore and offshore areas are divided into zones based on geological risk and prospectivity. This zoning system helps manage exploration and production activities more effectively:

  • Onshore Zones:
    • ZONE-I: High risk, high cost.
    • ZONE-II: Medium risk, medium to high cost.
    • ZONE-III: Low risk, low to medium cost.
  • Offshore Zones:
    • Shallow
    • Deep
    • Ultra Deep

Concession Award Process

The concession award process is designed to be transparent and competitive, with distinct procedures for awarding exploration and production rights:

  1. Competitive Bidding: Licences are granted through a competitive bidding process where companies submit bids based on work units, which represent the commitment to exploration activities.
  2. Strategic Partnerships: Licences may also be granted to strategic partner companies through government-to-government agreements, bypassing the competitive bidding process.
  3. Reconnaissance Permits: These permits allow companies to conduct preliminary studies and surveys, facilitating informed decision-making before committing to full-scale exploration.

Invitation to Bid and Agreement Execution

The Director General of Petroleum Concessions (DGPC) issues invitations to bid, detailing the available blocks and bidding procedures. Successful bidders enter into Petroleum Concession Agreements (PCA) or Production Sharing Agreements (PSA) with the government, based on standardised models provided in the bid documents. These agreements outline the rights and responsibilities of the parties, ensuring clarity and legal certainty.

Financial and Operational Incentives

Royalties and Taxation

Royalty payments are set at 12.5% of the value of petroleum produced and saved at the field gate. Corporate income tax is capped at 40% of profits, with royalties deductible as expenses. This fiscal regime is designed to balance government revenue needs with the financial viability of exploration and production projects.

Production Bonuses and Work Units

Production bonuses are payable at various stages of cumulative production, ensuring that contributions are commensurate with output. The work unit concept provides flexibility in meeting work obligations, allowing companies to adjust their exploration activities based on technical and economic considerations.

Windfall Levy

The windfall levy ensures that extraordinary profits from high oil and gas prices are shared with the government. The levy is calculated based on a formula that takes into account net production, royalty, market price, and a base price.

Import Duties and Training Contributions

Import duties on non-locally manufactured equipment are set at 5%, with higher rates for locally manufactured items. Companies must also contribute to training programmes and social welfare projects, supporting the development of local skills and communities.

Offshore Exploration and Production

Lease Terms and Relinquishments

Offshore leases have a total term of up to 25 years, with a possible five-year renewal. Companies are required to relinquish portions of their licence areas at specified intervals, ensuring that exploration and production activities are focused on the most prospective areas.

Depreciation and Cost Recovery

Depreciation rates for exploration and development wells are set at 25% on a straight-line basis, with immediate expensing for dry holes. A sliding scale production sharing arrangement allows contractors to recover up to 85% of costs from gross revenues, facilitating rapid investment recovery and higher net present value.

Conclusion

Pakistan’s legal framework for the oil and gas sector is designed to attract investment, ensure safe and environmentally responsible operations, and maximise the benefits of petroleum resources for the government and the people. The framework provides clarity and stability, making Pakistan an attractive destination for exploration and production activities. For further information and updates, clients are encouraged to contact aemen@joshandmak.com

By The Josh and Mak Team

Josh and Mak International is a distinguished law firm with a rich legacy that sets us apart in the legal profession. With years of experience and expertise, we have earned a reputation as a trusted and reputable name in the field. Our firm is built on the pillars of professionalism, integrity, and an unwavering commitment to providing excellent legal services. We have a profound understanding of the law and its complexities, enabling us to deliver tailored legal solutions to meet the unique needs of each client. As a virtual law firm, we offer affordable, high-quality legal advice delivered with the same dedication and work ethic as traditional firms. Choose Josh and Mak International as your legal partner and gain an unfair strategic advantage over your competitors.

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