Legal Advice on the Petroleum Policies, Bidding Procedures, and the Model Petroleum Concession Agreements in Pakistan

Introduction

The Government of Pakistan has a long history of issuing policies concerning various sectors, including the petroleum sector. These policies are essentially statements of government objectives and do not have the binding force of laws, rules, or regulations. However, they reflect the government’s agenda and are crucial for petroleum exploration and production companies to consider when strategizing their operations in Pakistan. Understanding these policies, along with the bidding procedures and applicable model agreements, is essential for companies interested in acquiring upstream interests in Pakistan.

Chronological History of Petroleum Policies, Bidding Procedures, and Model Agreements

 Pre-1991 Model Petroleum Concession Agreement

In 1969, Pakistan issued its first Model Oil Concession Agreement. Subsequent Model Petroleum Concession Agreements were released in 1982 and 1987. These models were primarily recommended forms, and negotiations for Petroleum Concession Agreements (PCAs) often took years.

The first competitive bid round was held in 1988, offering 43 exploration blocks. This resulted in 24 bids for 12 blocks and the signing of nine PCAs. A revised Model Petroleum Concession Agreement was issued alongside this bid round, although it remained a recommended form and negotiations still took up to two years.

4.2 1991 Petroleum Policy and Model Petroleum Concession Agreement

The 1991 Petroleum Policy, Pakistan’s first formal policy, was introduced during the first International Petroleum Seminar in Islamabad. The theme was “New Directions and Strategies for Accelerating Petroleum Exploration and Production in Pakistan.” A revised Model Petroleum Concession Agreement was also issued in 1991, followed by a bidding round. The policy was revised in September 1992.

4.3 1993 Petroleum Exploration and Production Policy and Model Petroleum Concession Agreement

In September 1993, a new Petroleum Policy was issued, along with a further revised Model Petroleum Concession Agreement. This policy aimed to streamline and improve the exploration and production processes.

1994 Petroleum Policy and Model Petroleum Concession Agreement

The landmark 1994 Petroleum Policy introduced significant economic incentives for both local and foreign companies. It divided Pakistan into three zones based on geological prospectivity, linking economic incentives to these zones:

• Zone 1: High risk/high cost
• Zone 2: Medium risk/high cost
• Zone 3: Medium risk/low to high cost

The policy included various economic terms such as government interest, producer pricing, production bonuses, and social welfare requirements, tailored to each zone. The Model Petroleum Concession Agreement of July 1994, developed in collaboration between the government and the petroleum industry, facilitated rapid agreement signing.

1997 Petroleum Policy and Model Petroleum Concession Agreement

Issued in October 1997, this policy improved incentives for offshore exploration and introduced a new prospectivity zone “0” for offshore areas. It retained the three onshore zones from the 1994 policy and established specific economic packages for each.

Salient Features of the 1997 Model Petroleum Concession Agreement

The 1997 Model PCA was largely similar to the 1994 version, addressing all relevant issues for petroleum exploration and production. It included a Model Joint Operating Agreement and Accounting Procedure, which were integral parts of the PCA and could not be altered.

 Salient Features of the 1997 Petroleum Policy

The 1997 Policy:

• Superseded the 1991, 1993, and 1994 policies, without affecting accrued rights.
• Governed all petroleum company imports through SRO 400 (I) 97.
• Streamlined security clearances and decision-making for exploration licenses.
• Encouraged natural gas imports.
• Protected foreign investment under various acts.
• Provided deeper drilling incentives for hydrocarbons found below the deepest known producing horizon in existing lease areas.

EOR and Deeper Drilling Incentives under the 1997 Policy

The policy offered incentives for deeper drilling projects but lacked specific incentives for Enhanced Oil Recovery (EOR) projects.

Compression Gas Pricing Incentives in Pakistan

While the 1997 Policy did not offer specific incentives for compression gas pricing, the government provided price incentives for incremental gas production from older fields using compression techniques. This was crucial to motivate investment in enhancing production from these fields.

Comprehensive Legal Comparison of Petroleum Policies in Pakistan: 2007, 2009, and 2012 (Amended in 2024)

The petroleum policies of Pakistan have evolved significantly over the years to address the dynamic challenges and opportunities within the energy sector. This comparative analysis focuses on the Petroleum Policy 2007, the Petroleum Policy 2009, and the Petroleum Policy 2012 (amended in 2024), highlighting the critical changes and their implications for stakeholders in the upstream petroleum industry.

Petroleum Policy 2007

The Petroleum Policy 2007 aimed to provide a conducive environment for exploration and production activities, focusing on attracting foreign investment and promoting local participation. The key objectives were to achieve self-sufficiency in energy, enhance the competitiveness of Pakistan’s terms of investment, and train Pakistani professionals to international standards .

Key Features:

1. Incentives for Exploration and Production: The policy offered various fiscal incentives to encourage exploration and production activities. This included tax holidays, reduced royalty rates, and exemption from certain duties and taxes.
2. Licensing and Regulatory Framework: A transparent licensing process was established, ensuring non-discriminatory access to petroleum rights. The Directorate General of Petroleum Concessions (DGPC) was strengthened to enhance its regulatory capabilities.
3. Local Participation: Emphasis was placed on increasing the involvement of Pakistani companies in the upstream sector, with specific provisions for local employment and training .

Petroleum Policy 2009

The Petroleum Policy 2009 introduced several modifications to address the evolving market conditions and to further incentivize investment in the petroleum sector. This policy aimed to accelerate exploration and production activities to meet the growing energy demands and reduce the import bill .

Key Changes:

1. Enhanced Fiscal Regime: The 2009 policy introduced a more competitive fiscal regime, including higher wellhead prices for gas, reduced corporate tax rates, and increased cost recovery limits. These changes aimed to make Pakistan’s upstream sector more attractive to investors.
2. Zonal Division: Pakistan was divided into different zones based on geological prospectivity, each offering tailored fiscal incentives. Zone-I, Zone-II, and Zone-III were designated for onshore areas, while Zone-O covered offshore areas with distinct fiscal terms .
3. Production Sharing Agreements (PSA): The policy introduced a sliding scale production sharing mechanism for offshore areas, providing a clear framework for profit oil and profit gas splits between the government and contractors .

Petroleum Policy 2012 (Amended in 2024)

The Petroleum Policy 2012, amended in 2024, reflects significant shifts in the global energy landscape and aims to enhance Pakistan’s energy security by maximizing the development of indigenous resources. This policy builds on the previous frameworks while introducing new measures to address contemporary challenges .

Significant Amendments:

1. Revised Fiscal Incentives: The 2024 amendments introduced further enhancements to fiscal incentives, including higher wellhead prices for new discoveries, extended tax holidays, and additional exemptions from import duties. These incentives aim to attract both foreign and local investors to undertake new exploration projects.
2. Strengthened Regulatory Framework: The Directorate General of Petroleum Concessions (DGPC) was reorganized to include both federal and provincial representatives, ensuring a more coordinated approach to managing petroleum resources. This reorganization aimed to streamline regulatory processes and enhance resource management .
3. Environmental and Social Responsibility: The amended policy places a greater emphasis on environmentally sustainable and socially responsible exploration and production activities. This includes mandatory environmental impact assessments and increased contributions to social welfare programs in areas affected by petroleum operations .
4. Increased Local Content Requirements: The policy enhances local content requirements, mandating higher levels of local employment, procurement of local goods and services, and training programs for Pakistani professionals. This aims to bolster the domestic petroleum industry’s capabilities and ensure broader economic benefits .

The evolution of Pakistan’s petroleum policies from 2007 to the amended 2012 policy in 2024 reflects a strategic shift towards creating a more attractive investment climate while addressing the critical need for energy security and sustainable development. The progressive enhancement of fiscal incentives has made Pakistan’s upstream sector more competitive on the global stage. The introduction of zonal divisions and production sharing agreements tailored to specific geological conditions ensures a more targeted approach to exploration and production activities.

However, the policies have also faced challenges, particularly in terms of implementation and regulatory consistency. The frequent amendments and shifts in policy frameworks can create uncertainties for investors, potentially affecting long-term investment decisions. Furthermore, while the emphasis on environmental and social responsibility is commendable, effective enforcement of these provisions remains a critical concern.

In conclusion, Pakistan’s petroleum policies have progressively evolved to meet the dynamic needs of the energy sector. The amendments introduced in 2024 demonstrate a forward-looking approach aimed at maximizing the potential of indigenous resources while ensuring sustainable and responsible development practices. For stakeholders, understanding the nuances of these policies and their practical implications is essential for navigating the complex landscape of Pakistan’s upstream petroleum industry.