ISLAMABAD, July 18: The new ‘Petroleum Exploration & Production Policy 2007’, which is expected to be approved by the Economic Coordination Committee (ECC) of the cabinet on Thursday, offers 100 per cent international crude price to the domestic production of crude oil, natural gas, condensate and liquefied petroleum gas.

The existing policy of 2001 provides a maximum of 67.5 to 77.5 per cent of the international crude price depending on three different zones. Even these prices are capped at a maximum of $36 per barrel of international crude price.

For all practical purposes, the new reference crude price would be assumed at $45 per barrel and the producer gas prices would then be calculated using a three linear formula for Zone III, commonly known as lower Indus basin.

The formula ensures that gas production price never falls below $2.70 per MMBTU even in case of crude pricing falling below $30 per barrel but goes beyond $3.06 if crude prices are above $45 and so on.

As a result, the average well-head price known in the layman terms as production price will increase from an average of $2.85 per MMBTU (million British Thermal Unit) to more than $3 and less than $4 per MMBTU when the 2007 policy comes into effect. Generally, a simple 18 page petroleum policy of 2001 has been converted into a detailed 59 page document in 2007 that will remain in force for five years.

A copy of the 2007 policy obtained from the ministry of petroleum says that the producer policy price for crude oil delivered at the nearest refinery gate shall be based on the reference crude price equal to cost & freight (C&F) price of a comparable crude or a based of Arabian and Persian Gulf crude oils plus or minus a quality differential between the comparable crude and domestic crude.

Similarly for all gas pricing, a reference crude price (RCP) equal to C&F price of a basket of Arabian/Persian Gulf crude oils imported in Pakistan during the first six months period of the seven months period immediately preceding the relevant price notification period as published in an internationally recognised publication will be used.

The C&F price will be arrived at on the basis of FOB (freight on board) price of imported crude into Pakistan plus applicable freight. The producer policy for condensate will be the FOB price of internationally quoted comparable condensate delivered at the nearest refinery gas plus or minus a quality yield differential. No other adjustment of discount will apply.

The well-head price in Zone-II (Kirthar, East Balochistan) Punjab Platform and Suleman Basins) would ensure at least $3.31 in case of crude prices are at $45 per barrel. Frontier areas would get special pricing incentives and get comparative higher rates to encourage exploration in Zone-I (West Balochistan, Pishin and Potohar), Zone 0 Shallow water and Zone 0 deep and ultra deep waters.

A senior petroleum ministry official explained that Director General of Petroleum Concessions has been given greater discretionary powers in case of qualification of exploration and production companies, bidding and award and cancellation of petroleum concession agreements but according to a well-defined criterion.

The new policy also envisages giving special ‘Strategic Partner’ status to national oil companies representing foreign governments and in fact the government will promote direct negotiations with selected strategic partners to develop specific acreage, exploit special areas. Such partners would also be given privileged award of petroleum rights without following competitive bidding for certain blocks.

The new policy also allows E&P companies to export their share of crude oil and condensate as well as their gas based on export licences subject to the considerations of internal requirements and national emergencies.For the purpose of the grant of such export licences for gas, the export volumes will be determined in accordance with “L15” concept provided a fair market value for such gas is realised at the export point.

Under this concept the gas reserves that exceed the net proven gas reserves in Pakistan including the firm import commitments vis-à-vis the projected gas demand for next 15 years can be considered for export. Once dedicated for export, no such export volume would be revoked.

Also the gas companies would be free to sell their gas to gas transmission and distribution companies and other third parties except residential and commercial consumers. The E&P companies would be required to sell their gas to an outlet within 25-km radius of the production outlet and would not be paid any pipeline tariff.

The royalty will continue to be 12.5 per cent while tax on income will be payable at 40 per cent of profit or gains. Windfall levy will also be applicable on crude oil, condensate and LPG.

In case of joint ventures, the local exploration and production companies including Government Holdings will have working interest of 15 per cent in Zone 1, 20 per cent in Zone 2, and 25 per cent in Zone 3 on full participation basis but without becoming an operator.

Some incentives have also been offered to the E&P companies to make joint ventures, taking more areas for their activities and relinquishment of given areas besides extension of licence periods.

The licence holders would be required to pay a rental of Rs3,500 per sq. km a year for initial five-year term and then Rs800 per sq.km. In case of renewal of the licence, the rental would be Rs5,000 per sq. km per year and then Rs2750 per sq. km.

The E&P companies will need to submit guarantees that at irrevocable and unconditional including bank guarantee equal to 50 per cent of minimum financial obligation from a bank of international repute, or a parent bank guarantee, a production lien, first and preferred asset lien and escrow account.

The foreign companies to move their earnings and profits in foreign exchange up to a 70-75 per cent guaranteed amount while local companies would be provided up to 30 per cent of their earnings in foreign exchange.