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Petroleum policy - 1991.

Presently, a little more than one-fourth of oil consumption in the country is met thaough domestic production. In gas the picture in much brighter. In the national energy consumption pattern, gas with a share of 35 per cent is catching up with oil (45%). The intention in declaring this policy is to let the explorers, producers, refiners and traders world wide known the rules and procedures which would henceforth govern the hydrocarbon sector.

Though the first well in the territory now constituting Pakistan was drilled as far back as 1866 and the first discovery was made (at Khaur near Rawalpindi) almost eighty years ago, the production of oil at the time of independence was no more than 1500 barrels a day from four fields all in the Potwar region. The oil was refined in Attock Oil's refinery at Rawalpindi which also owned the wells. The remaining requirement of petroleum products which in 1947 stood at a meagre 7500 barrels was imported.

To promote and regulate exploration, The Petroleum Production Rules were promulgated in 1949. In the same year Pakistan Oilfields Ltd. (POL) was established as a subsidiary of Attock Oil in which 30 per cent shares were held by the government. In 1950 yet another company Pakistan Petroleum Ltd. (PPL) was incorporated inheriting the assets and activities of Burmah Oil Company. PPL discovered the country's first, and still the biggest, gas field at Sui in 1952. For the purification and distribution of gas, Sui Gas Transmission Company (SGTC) was incorporated in 1954 and Sui Northern Gas Company Limited (SNGPL) in 1963.

To reduce the import of products two refineries were established in Karachi, one going into production in 1962 and the second in 1966. In 1974, one of the two refineries (National) and the locally owned marketing companies were nationalised leading to formation of Pakistan State Oil (PSO) which in 1977 also purchased Esso. PSO is now the largest commercial organisation of the country claiming three-fourths share in the distribution of petroleum products. The rest is shared between PBS and Caltex. The State Petroleum Refining and Petrochemical Corporation was also set up in 1974 to develop refining and petrochemical industries in the public sector. Yet another organization in the public sector, Pak-Arab Refinery Limited (PARCO) with 40 per cent equity holding by ADNOC of Abu Dhabi, was formed in 1974 which, since 1982, is operating a pipeline for transporting petroleum products from Karachi to Multan. To extend support to the exploration and refining effort, a research organisation called the Hydrocarbon Development Institute of Pakistan (HDIP) was established in 1975.

The spectacular Sui discovery attracted five foreign companies-Stanvac, Hunt, Shell, Sun and Tidewater - to invest in exploration. They drilled 45 wells but made only one worthwhile discovery of gas at Mari-Sindh (by Stanvac) which, though large in size, was low in quality and suited to fertilizer production to which it is now almost wholly dedicated. To give impetus to exploration, the government established in 1961 its own Oil & Gas Development Corporation with Russian assistance. OGDC made its first oil discovery at Toot in Potwar in 1968. Eight years later it struck gas/condensate at Dhodak which is only now being developed

The discovery of oil at Khaskheli in 1981 in Lower Sindh by Union Texas constitutes a watershed in petroleum exploration in the country. It negated the commonly held belief that oil in Pakistan was confined to Potwar region. Khaskheli was the 10th oilfield found in Pakistan in 70 years. In the following 10 years 30 more fields were found. OGDC found gas/condensate at Dakhni in 1983. In the following year Occidental (OXY) discovered the largest oilfield of Pakistan at Dhurnal rejuvenating the interest of explorers in Potwar region.

In 1988 exploration was planned with a liberal bias. Forty-three blocks were offered to international companies for competitive bidding. Twenty-four bids were received for 12 blocks. Nine have since been awarded. In all, 14 exploration licences are now held by 22 companies. The country now produces some 65,00 barrels of oil and 1.5 billion cubic feet of gas per day saving Rs. 40 billion ($ 1600 million) a year in foreign exchange. Another 170,000 barrels of crude oil and products are imported costing (in 1990-91) Rs. 1.80 billion ($ 72 million).

The exploration efforts have been dogged by bad luck and a government policy which did not provide either adequate incentives or infrastructure for sustained investment. The silver-lining in this gloomy picture is provided in the earlier years by the discovery of Sui and in the last decade by the oilfields, small though, in Lower Sindh. The liberal and forthnight attitude of the present government both in handling the affairs of OGDC and in dealings with foreign prospectors and producers has resulted in the award of 23 concessions since November, 1990. Compare it with only four concessions given in the 20-month rule of Pakistan People's Party to mark the difference in effort and investment which is now going into this sector.

Presently, a little more than one-fourth of oil consumption in the country is met though domestic production. In gas the picture in much brighter. In the national energy consumption pattern, gas with a share of 35 per cent is catching up with oil (45%). The intention in declaring this policy is to let the explorers, producers, refiners and trades world wide know the rules and procedures which would henceforth govern the hydrocarbon sector. The basic principles underlying the policy are to: i) Produce and procure oil and gas

enough to sustain the planned economic

rate of growth. ii) Step-up exploration and development

of indigenous oil and gas resources. iii) Mobilise domestic and external financial

and technical resources from

private and public sectors, especially

the former, for the development of

petroleum exploration, refining, import,

export storage, distribution and

marketing. iv) Replace oil even by bulk import of

gas but so to fix the quantity imported

as not to dampen the indigenous

exploration efforts. v) Strengthen the research, technical

and administrative capabilities of the

government agencies responsible for

making policies and their effective

implementation. vi) Progressively free the petroleum industry

and trade from government

controls. vii) Create a competitive environment for

giving the best deal to the consumer

in price and quality. vii) Promote measures for protection of

the environment especially by reduction

of lead in motor spirit and use of

CNG in vehicles.

The measures specific to various segments of the oil and gas sector for achieving these policy objectives are spelled out below:

Exploration and Development

a) All applications for exploration licences

will be decided within three months.

The applications disputed or contested

may take up to six months to decide but

no more. b) Expeditious and equitable disposal of

applications will be ensured through a

standing committee in the Ministry of

Petroleum and Natural Resources on

which all the concerned Federal and

Provincial organisations will be

repsesented. c) The standing practice of the government

(or OGDC on its behalf) sharing in

every concession agreement 5 per cent

of the exploration cost and acquiring 50

per cent share in development and

production after discovery would be

replaced by negotiations or competitive

bidding, if there be more than one

applicant, to determine these shares or

to adopt any other suitable formula like

production - sharing. d) Local companies would be induced to

invest with the foreign companies and

OGDC in exploration. e) The foreign exchange requirements of

exploration companies who are paid for

their share of oil/gas in local currency

will be fully met by the government. f) The present system under which no

duty is levied on machinery and equipment

imported by companies at the exploration

stage, 5-1/4% at the

development stage (two to five years)

and normal rates thereafter would be

replaced by a uniform rate of 5-1/4% at

all stages. The import of the following

equipment however would be allowed

without duty:

- Drilling rigs.

- Logging trucks.

- Seismic equipment.

- Well cementation equipment.

- Snubbing units.

- Platforms and related equipment

for off-shore exploration.

The equipment imported for enhanced

oil recovery from depleted fields will be

subjected to the same tariff concession.

Locally manufactured machinery and

equipment used by the exploration companies

will be entitled to all such benefits

as are admissible on its export. g) The price on non-associated gas is currently

determined at 66 per cent of the

border price of fuel oil less negotiated

discount. To attract companies to explore

for gas in new and distant areas,

it would now be fixed at 75 per cent of

fuel oil price less such discounts as

may be negotiated at the time of signing

the concession agreement and not on

commercial discovery as is the present

practice. h) The price of LPG will be, in stages,

linked to its international price with appropriate

discount to encourage its local

production. i) The associated gas currently priced at

a fixed rate of Rs. 5 per Mcft will be

priced at 66 per cent of the fuel oil price

less discounts based on a declared formula

provided there is no flaring beyond

the quantity authorised for

reservoir study. j) The current practice of relating the oil

price to the price of comparable Middle

East crude less a discount negotiated

at the time of signing the concession

agreement keeping in view the prospects

of the areas and size of investment

will continue. k) The current practice of accepting a

commercial discovery on the basis of

the first exploration well followed by two

appraisal wells to determine the extent

of the reservoir will be changed, and the

declaration of commerciality could be

accepted even on the basis of one well. l) The gas producing companies will be

assured a market outlet within a reasonable

time (up to four years) of commercial

discovery. If indication of an

out let is not given by the government

within 6 months of the declaration of

commercial discovery the producer

would be free to use it for power generation,

fertilizer production or any other

industrial or commercial purpose. m) To encourage drilling off-shore, the associated

and non-associated gas from

such fields will be priced at par with fuel

oil. n) The companies would be required to

undertake optimal development of oil

and gas fields for maximum recovery. o) Incentive orientated regulations will be

prescribed for exploration and recovery

from deeper horizons. p) A comprehensive data base will be

developed for the use of exploration

companies. The confidentiality clause

will be amended to bring it in line with

the international practice. q) The model concession agreement will

be reviewed at suitable intervals in consultation

with the explorers/producers. r) The pre-shipment inspection of machinery

will be discontinued. s) Security of personnel and equipment in

the fields will be assured through a special

force. t) OGDC will be placed wholly on commercial

footing and treated at par with

private companies. u) For off-shore production the rate of income

tax, bonuses and government's

share would be lower by 5 per cent than

on-shore production.

Oil Refining

Oil refining has stagnated around 140,000 barrel/day because of the nationalisation policy of 1972 and government control on price and marketing of products. Expansion and modernisation of the refining sector is imperative to meet the current demand of 250,000 barrels/day growing at 7 to 8% annually. Inadequate and inefficient refining hampers exploration and production as well as marketing. In order to attract private investment in the development of refining centers (on the coast, in the middle and north of the country) the following policy changes will be made. * No permission would be required for

setting up new refineries or expanding

existing ones. * New marketing companies linked with

investment in production and refining

would be allowed at the zonal and national

levels subject to a firm irrevocable

commitment to develop infrastructure

(pipelines, storages, distribution) particularly

in remote areas. * Debt equity ratio for refineries would

be 80:20 instead of 70:30. * The pricing formula for refineries will

be based on import parity prices. Inland

freight for products will be added

for upcountry refineries based on imported

crude oil. Local crude will be

supplied at international parity price at

the refinery gate. The upcountry refineries,

in turn, will be authorised to

charge import parity price for their products

as permissible to the coastal

refineries. * The existing refineries will be allowed

up to five years to increase capacity

and modernise processes to switch

over to international prices. * Refineries may import crude, after lifting

the local crude allocated, from

sources of their choice at

prices not higher than those negotiated

in government-to-government

deals. * Foreign exchange for the import of

crude will be provided by the government. * Concessionary import tariff will be

prescribed for refining equipment not

manufactured locally. * Refineries will be free to sell their products

to any marketing company. * Foreign investors in refining whether

on their own or in association with the

local investors would enjoy the benefits

of the Private Investment (Promotion

and Protection) Act, 1976.


i) Lube products will be freed from price

control. ii) No permission will be required for

establishing lube, grease, and wax

plants subject to registration for quality

check. iii) The investors will be free to procure

raw materials from local or foreign

sources. iv) The used lubricating oils will be sold

only to registered reclamation plants

operating on the prescribed guidelines.

v) As a consequence to the deregulation

of investment and prices, quality standards

will be enforced through checks

and each plant will be required to

establish adequate testing facilities.

Marketing and Distribution

A free marketing environment will be created with due regard to quality and reasonable prices for the consumers. The measures intended toward this end are:

a) The prices of products will be fixed ex-depot

at various places in the country

instead of ex-retail outlet to encourage

development of regional storage, reduce

"dumping" and to ensure a return

to the marketing companies and petrol

pump dealers related to their investment. b) Development of retail outlets will be left

to the marketing companies subject to

environment and safety rules. c) The commission of the marketing

company and dealer will be excluded

from the notified prices and instead given

to the former as a percentage of the

selling price. The dealer's commission

will be left to be determined by the

marketing company. d) The private sector will be given incentives

to invest in infrastructure like pipelines

(including common carriers), storages,

and distribution/handling facilities. e) Marketing companies may import POL

products after lifting the local products. f) Stringent laws will be enacted to check

adulteration and to enforce quality. g) The use of imported fuel oil in power

generation and in other industry will be

replaced by gas imported through pipeline

in a quantity and at a price (lower

than fuel oil) which does not discourage

the exploration and development of gas

in the country. h) Private sector may obtain gas from the

trunk mains for distribution in specified

areas or for specified purposes like

power generation and fertilizer manufacture. i) Import of LPG will be allowed for use as

household fuel.

Research and Development

To enforce this policy the monitoring, research and development capabilities of Directorate General of Petroleum Concessions, Hydrocarbon Development Institute of Pakistan, Geological Survey of Pakistan, Oil and Gas Training Institute, universities and other institutions will be strengthened by utilizing the technical assistance provided by the oil-producing companies under concession agreements. A cess, say, one per cent, on domestic production of oil and gas may also be earmarked for this purpose in addition to the normal budgetary allocation.

Use of CNG in Transport

The use of CNG in vehicles replacing petrol and diesel will be commercialised.

New and Renewable

Resources in Energy

The integration of new and renewable sources into the energy sector in any country whether industrialized or developing is a slow process. About 85 per cent of the energy needs of the rural areas in the country are met by "non-commercial" sources. The remaining 15 per cent is met by kerosene oil, diesel oil and electricity. The use of biomass in Pakistan has advanced to a point where severe damage is being done to the forest resources. Radical measures are needed for adopting renewable technology to reduce dependence on imported oil and yet improve the living conditions of rural population without degrading the environment. The measures planned are:

i) Install renewable energy systems which

are easy to operate and maintain. ii) Integrate renewable energy technology

systems with rural development

programmes. iii) Subsidise the renewable energy technology

systems to the same extent as

conventional fuels. iv) Encourage investment in the systems

under a leasing programme.

v) Allow import of equipment free of duty

till manufactured locally.

Energy Conservation

The import of all equipment, not manufactured locally and needed for conservation of energy will be free of duty.


A standing panel of experts will be constituted to advise the government on important policy and operational issues relating to the exploration and development of oil and gas resources.


A standing task force will be established to deal with fire and other hazards at the oil/ gas fields and installations. The companies in consultation with the Ministry of Petroleum and Natural Resources will contribute toward the: * Development of roads, water supply,

health and educational facilities in the

areas of their operation. * Eradication of illiteracy in the country. * Rehabilitation of the mentally retarded

and handicapped children. * Promotion of sports. * Fight against narcotics.

The existing laws and rules will be amended to reflect the policy changes. The Government of Pakistan expects prompt and large investment in the petroleum sector, especially in exploration, in response to these measures.
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Publication:Economic Review
Article Type:Cover Story
Date:Feb 1, 1992
Previous Article:Oil production and exploration.
Next Article:An overview of exploration and production of oil and gas in Pakistan.

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