With approval by the Economic Coordination Committee of the Cabinet of a Memorandum of Agreement on Dec 13, average natural gas prices are to go up by about 10pc during the current financial year.

The Pakistan Petroleum Limited (PPL) will also have the right to continue operating the country’s oldest and largest gas field for another 10 years.This came about following the Balochistan government’s — led by then chief minister Dr Abdul Malik — strong protest over a unilateral arrangement by the federal government to allow PPL to continue gas production from the field on existing terms in 2014.

After detailed negotiations, a Memorandum of Agreement (MoA) was signed on May 20, 2016 between the Ministry of Petroleum and Natural Resources and Balochistan’s provincial government.

Given the fact that the formula is being revised retroactively, the impact of the 2015-16 change is to be absorbed in 2016-17 having a cumulative impact of about a 9.7pc across the board increase

The MoA allowed the PPL to continue to operate the Sui field, with the decades old mining lease being converted into a Development and Production Lease (DPL) effective June 1, 2015 — extended under and pursuant to the 2012 Policy and 2013 Rules.

The MoA required the PPL to submit a Field Development Plan to the Director General of Petroleum Concessions (DGPC) of the federal government in consultation with the Balochistan government. The DPL is to be executed jointly by the federal and provincial governments.

Also, the wellhead price of the Sui DPL shall be fixed at 55pc of the 2012 Policy price while the PPL shall pay 10pc of the wellhead value as a lease extension bonus to the Balochistan government.

All financial obligations of the 2012 Policy including employment, training, social welfare and production bonus will be applicable on the PPL.

A special package has also been included for scholarships for the

people of Dera Bugti and the rest of Balochistan. All such social responsibility related activities shall be carried out in consultation with the provincial government.

The PPL shall also invest Rs20bn in exploration activities in Balochistan during the lease period.

To introduce enabling provisions in the 2013 Rules in order to grant a Development Production Lease to PPL, suitable amendments in said rules will be made in consultation with the Law and Justice Division.

The PPL will enter into a new Gas Pricing Agreement (GPA) with the federal government to incorporate the revised wellhead gas pricing formula with retrospective effect from June 1, 2015.

The new GPA for Sui shall also allow, subject to policy eligibility, application of incentives given to existing leases under Tight, Marginal and Low BTU, Shale Gas policies, Petroleum Policy 2012 and any other policy benefits to be allowed from time to time.

The estimated financial impact of the new arrangement on consumer pricing has been estimated at Rs14.4bn for fiscal year 2015-16 (about a 4.7pc across the board increase) whereas estimated financial impact for fiscal year 2016-17 on consumer pricing would be around Rs10.9bn (about a 4.2pc across the board increase).

Given the fact that the formula is being revised retroactively, the impact of the 2015-16 change is to be absorbed in 2016-17 having a cumulative impact of Rs25.4bn (about 9.7pc across the board increase).

The Balochistan government was originally demanding 100pc price indexation with the 2012 petroleum policy but the petroleum ministry did not agree.

The centre finally agreed, on the insistence of the provincial government, to the indexation of the Sui wellhead gas price at 55pc from the existing 50pc of the 2012 policy price, with a lease extension bonus at 10pc of the wellhead value.

Under the Pakistan Petroleum (Production) Rules 1949, the government had granted a Mining Lease (ML) over the field to the PPL for 30 years — from June 1, 1955 — which was subsequently extended for another 30 years from June 1, 1985 to May 31, 2015.

The old rules were silent about the way forward if production from the field continues after expiry of 60 year lease. Presently, the PPL is producing 437m cubic feet per day (MMCFD) and the remaining reserves have been estimated at 1.6tr cubic feet (TCF).

The new arrangement became necessary sine the old mining lease expired on May 31, 2015, making a legally tenable solution critical to avoid any complication and ensure continuity of gas production from the field.

Interestingly, the petroleum ministry had extended the old arrangement on the same terms and conditions for one year as an interim arrangement through an S.R.O on May 30, 2015, under Section 5 of the Regulation of Mines and Oil-Fields and Mineral Development (Government Control) Act, 1948 (‘1948 Act’).

The Balochistan government, however, protested the extension saying it was mandatory upon the federal government after the 18th Amendment to take the provincial government on board before signing a mining lease agreement for any area situated in the province.

It said the extension granted to the PPL without consent of the provincial government was a negation of the spirit of the 18th Amendment.

Balochistan demanded revocation of the extension granted and signing of a new agreement with its consultation. The petroleum ministry, however, did not agree saying there was a legal requirement for putting an arrangement in place on expiry of the previous lease for continuity of gas production and hence an interim arrangement with the PPL was allowed to continue for one year.

The petroleum ministry further viewed that prior to the 18th Amendment coming into force, the legislative authority and executive authority in respect to matters dealing with mineral oil and natural gas vested exclusively in the Majlis-e-Shoora (Parliament) and the federal government respectively.

After the promulgation of the 18th Amendment, the constitutional and legal position in the matter remains the same as none of the relevant provisions of the Constitution (conferring legislative and executive authority) and the related entries in the Federal Legislative List — set out in the Fourth Schedule to the Constitution — have been altered or amended.

It was further stated that the provisions of Article 172(3) have been introduced and made subject to the existing commitments and obligations and the provincial governments had not been conferred authority to regulate existing Petroleum Concession Agreements, Joint Operating Agreements, Exploration Licences and the Mining Leases.

However, a working group was constituted to amicably resolve the issue.

Repeated meetings finally reached a general consensus that the new arrangement shall be covered under the prevailing 2012 Petroleum Policy.

The ministry, however, wanted continuation of the wellhead gas price at 50pc of the 2012 Policy price to allow the PPL to commercially operate the field for at least ten years.

Published in Dawn, Business & Finance weekly, January 2nd, 2017