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 “Marginal/Stranded Gas Fields – Gas Pricing Criteria and Guidelines, 2013,” issued by the Ministry of Petroleum and Natural Resources of Pakistan. These guidelines are designed to establish policies, procedures, and pricing mechanisms to accelerate the development and production of hydrocarbons from marginal gas fields, ensuring energy security and reducing the import burden on the country.
Scope and Applicability
The Marginal Field Guidelines, 2013, apply to all discoveries that qualify and are accepted as “Marginal Fields” under existing and future exploration licences, Petroleum Concession Agreements (PCAs), Development and Production (D&P) leases, and Mining leases, but are not in production prior to the notification of these Guidelines. These guidelines provide incentives to make the investment in developing these fields economically viable.
Key Provisions of the Guidelines
1. Objectives
The primary objectives of the Marginal Field Guidelines, 2013, are to:
- Fast-track the development and production of hydrocarbons from existing discovered marginal reservoirs that have remained dormant due to poor economics.
- Encourage field redevelopments and infield drilling to expand production from fields that are uneconomic at current contract prices.
- Provide opportunities for investors in the exploration, development, and production of marginal fields to help reduce the energy deficit.
- Generate additional revenues for the government through royalties and taxes.
- Improve the balance of payments by reducing the need for fuel imports.
- Produce additional hydrocarbons to make indigenous energy more affordable for consumers.
- Increase the security of energy supplies.
2. Definition of Marginal Field
A “Marginal Field” or “Marginal Discovery” is defined as a field that is uneconomical for development and production using current technologies based on the terms of existing Petroleum Concession Agreements. Marginal fields are categorized based on reservoir size, compartmentalized reservoirs, and depleting fields nearing the end of economic production life. The criteria include:
- Reservoir size thresholds for different zones (e.g., Zone I: 25 Bcf, Zone II: 20 Bcf, Zone III: 15 Bcf).
- Compartmentalized reservoirs where individual compartments are smaller than the specified size.
- Depleting fields that require secondary or tertiary recovery methods.
3. Certification by Independent Consultant
Producers of marginal fields must obtain certification from an independent consultant confirming that the gas qualifies as marginal gas under these guidelines. The certification must include:
- Confirmation that the gas qualifies as marginal gas.
- Assessment of the marginal gas reservoir and reserves.
- Certification that the gas cannot be produced at commercial rates using conventional methods.
4. Gas Pricing and Incentives
The guidelines provide for gas pricing based on the Petroleum Exploration & Production Policy 2012, with an additional premium of US$ 0.25 per MMBTU for the three zones. This “Base Price” applies to pipeline specification gas. The government has the first right to purchase this gas at the base price within 90 days of application. If the government does not exercise this right, the E&P company can sell the gas to third parties at negotiated rates.
5. Royalty and Taxation
Royalty is payable as per the applicable Petroleum (Exploration & Production) Policy. For third-party sales, a windfall levy above the base price of US$ 8/MMBTU will be applicable at 50% on the difference between the base price and the third-party sale price. The benefits of the windfall levy are equally divided between the federal and provincial governments.
6. Retention Period
E&P companies are entitled to a minimum retention period of five years to determine development options and market the gas. This period can be extended for another five years to implement the development plan. The retention period does not count towards the total lease period.
7. Import Duties and Levies
Import duties and other levies and taxes are applicable as per the existing Statutory Regulatory Orders (SROs).
8. Production Bonus and Delivery Point
The first production bonus applicable to a D&P lease of a marginal field is waived. For pricing and delivery obligations, the gas will be delivered at the outlet flange (Field Gate/Delivery Point) within a three-kilometre radius from the production facility.
9. Re-grant of Old Areas
The Directorate General of Petroleum Concessions (DGPC) may invite bids from E&P companies to re-grant old relinquished areas with possible marginal discoveries. Bids will be evaluated based on the signature bonus, which is allocated for social welfare in the field’s area.
10. Review of Guidelines
The guidelines will be reviewed every five years in light of additional information, technological advancements, and changes in business dynamics. Existing producers of marginal discoveries may avail benefits from any revisions to the guidelines, 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 guidelines provide significant financial incentives to make investment in marginal fields economically viable. This includes additional premiums on gas pricing and waivers of certain production bonuses.
Government and Third-Party Sales
- The guidelines outline clear procedures for gas pricing and sales, giving the government the first right of purchase while allowing E&P companies to negotiate third-party sales if the government does not exercise this right.
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 accelerating the development of marginal fields, the guidelines aim to enhance Pakistan’s energy security and reduce reliance on imported fuels.
Critical Analysis of the Marginal/Stranded Gas Fields – Gas Pricing Criteria and Guidelines, 2013
While the Marginal/Stranded Gas Fields – Gas Pricing Criteria and Guidelines, 2013, aim to provide a comprehensive framework for incentivizing the development of marginal gas fields, 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 Criteria The guidelines provide definitions for key terms, but some areas remain ambiguous or lack specificity. For example:
- The term “Marginal Field” is defined, but the criteria for what constitutes poor economic viability are not clearly outlined. This can lead to disputes over whether a field qualifies as marginal.
- The definition of “Low BTU gas” and its distinction from other marginal gases is not sufficiently detailed, potentially causing confusion in applying the incentives.
2. Certification Process The requirement for certification by an independent consultant is a critical component of the guidelines. However:
- The guidelines do not specify the qualifications or selection process for these independent consultants, which could lead to inconsistencies in certification.
- The cost and process for obtaining certification may be burdensome for smaller E&P companies, potentially limiting their ability to benefit from the incentives.
3. Gas Pricing Mechanism While the guidelines provide for a premium on gas pricing, the mechanism for determining the base price and the additional premium lacks transparency:
- The process for calculating the base price and the additional 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 marginal fields over time.
4. Government’s Right of First Refusal The provision granting the government the first right to purchase gas from marginal fields within 90 days has several issues:
- The guidelines do not specify the criteria or process for the government to exercise this right, which could lead to delays and uncertainty for E&P companies.
- The 90-day period may be insufficient for the government to make an informed decision, potentially resulting in missed opportunities for both the government and E&P companies.
5. Windfall Levy The imposition of a windfall levy on third-party sales above the base price is intended to capture excess profits, but:
- The calculation of the windfall levy is based on an arbitrary threshold (US$ 8/MMBTU), which may not reflect current market conditions.
- The 50% levy on the difference between the base price and the third-party sale price could discourage investment in marginal fields, as it significantly reduces the potential returns for E&P companies.
6. Retention Period The guidelines provide for a minimum retention period of five years, extendable by another five years, but:
- The lack of clarity on the criteria for extension and the approval process can lead to uncertainties for E&P companies.
- The retention period being separate from the total lease period could create legal complexities and disputes over lease terms.
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.
8. Regulatory Oversight and Enforcement While the guidelines establish a framework for marginal field development, 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 Directorate General of Petroleum Concessions (DGPC) in overseeing the implementation of the guidelines is not clearly defined.
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, which 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 Marginal/Stranded Gas Fields – Gas Pricing Criteria and Guidelines, 2013, provide a necessary framework for incentivizing the development of marginal gas fields 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.
