The government intends to replace the existing five-year petroleum policy in vogue within 15 months of its announcement, made in November 2007. The new policy offering attractive benefits to the investor and approved by the ECC of the Cabinet is to be announced shortly.

Oil and gas experts, however, fear that the proposed Petroleum Exploration and Production (E&P) Policy 2009 may turn out to be a recipe for economic disaster.

So far, the nation has witnessed six petroleum policies since 1991 including those of 1993, 1994, 1997, 2001 and 2007, all claimed to be investor-friendly, with the objective of increasing investment in the oil and gas sector. Currently, there are as many as 42 companies, mostly international or their joint ventures with local investors, engaged in E&P activities, with 119 exploration licences and 127 leases. Yet, the desired results have not been achieved. Under the garb of attracting foreign investment, numerous fiscal and financial incentives have been extended at the cost of other economic sectors.

On one hand, such measures have resulted in outflow of substantial foreign exchange in the form of profits, dividends and royalties, and, on the other, have failed to increase indigenous share in energy supplies, which remained almost stagnant during the past decade or so. The policies however were framed and implemented in a manner so as to allow handpicked investors to make millions of dollars overnight, with nominal additional investments.

There are two features of the new policy which are highly negative. First, all new discoveries will qualify for higher oil and gas prices. To improve natural gas pricing formula, an increase in wellhead cost of the gas is suggested so as to boost gas production that remained stagnant in spite of new discoveries over the last many years. Large volumes of confirmed gas reserves, amounting to three trillion cubic feet (TFC), have been discovered since 1997, including seven new natural gas fields.

Total gas reserves discovered were of 53 TCF, of which 23 TCF has already been produced, and the remaining recoverable reserves are of 30 TCF. Still, total production of gas during 2007-08 was of the level of 3.97 BCF (billion cubic feet), resulting in massive gas loadshedding this winter. Next year gas demand is projected at 5.08 BCF, whereas production during 2010 is likely to remain at the level of the current year.

The E&P companies have been delaying commencement of gas production from new discoveries, always looking for upward revisions of gas price. Natural gas is normally sold from the wellhead in standard volume measurements of thousands of cubic feet (MCF). Petroleum Policy 2001 allowed $2.55 per MCF (thousand cubic feet) and Policy 2007 at a price of $3.47

Policy 2009 is expected to increase the average price by one dollar per unit. This will add to tariff for natural gas and CNG consumers, causing multiplier adverse effect on national economy.

Second, the mechanism for pre-qualification of E&P companies is being done away with. The pre-qualification process for award of E&P license/concession has been modified, allowing the highest bidder to get license, without ascertaining his technical and financial credentials. Also, foreign investors will be allowed ownership and management of oil and gas fields simply on obtaining minority shares. Thus the government will be constrained to purchase its own resource of gas from such international companies at exorbitant price, and that too in foreign exchange. Production sharing formula with the public sector is also being reviewed in favour of investors..

Development plan as envisaged in the policy, covers drilling of 100 new oil and gas exploration wells by end June 2009, which is considered unrealistic by any standard. In all, 659 exploration wells were drilled since the emergence of Pakistan, which resulted in development of production wells-- 54 of oil and 165 of gas and condensate. It is impossible to drill 100 exploration wells within four months, considering the limited number of available drilling rigs, high cost of drilling and other constraints.

According to declared policy, the domestic and commercial sectors are the top priority sectors for gas supply. In practice, however, the power sector, otherwise ranked third, enjoys the status of first preference. Additional allocations of major gas supply have thus been recently diverted to the power sector, which already takes about 34 per cent share of total gas supply.. The government has committed, in 2005, gas supply to three IPP projects namely, Orient Power, Muridke Power and Western Electric Power, of cumulative capacity of 575 MW, which were scheduled to generate electricity by June 2008. All the three projects however have been delayed and not as yet on stream.

Besides PEPCO and KESC, gas supply has been committed to other four under-construction power projects of total capacity of 1,025 MW, scheduled for commissioning in 2010. Allocation of gas to the IPP projects is still being done. Another factor impacting gas supply to domestic and commercial sectors is of allowing installation of the IPPs on independent or dedicated gas fields including Mari, Zamzama, Qadirpur, Kandhra and Uch II. Six power projects in the private sector, having cumulative capacity of over 1,170 MW have been planned availing gas supplies from these gas fields. All this was done by the government taking decisions on political considerations rather than economic, amending the petroleum policy as and when it suited.

The previous flawed and inconsistent petroleum policies did not deliver in the past neither would the new policy. But the strategic national assets of oil and gas sector will be sold dirt cheap.