Gas prices linked with crude oil import
By Khalid Amin

ISLAMABAD—Under the new Petroleum Policy, price of gas has been linked to the price of a basket of crude oils being imported by the country and more incentives have been provided to investors (compared to Policy 2001) for all zones.
This will encourage exploration and exploration activities and also develop gas infrastructure, says a press release issued by the ministry of Petroleum and Natural Resources here on Monday. A Gas Price Gradient concept has been introduced to keep the prices low through a competitive bidding process and at the same time, provide incentives for investment. Under the Policy, producers are also permitted to sell gas to third parties to provide them a level of comfort regarding the market Producers would be required to pay a windfall levy in casethird party sate prices are higher than the prices fixed by the Government under Policy 2007.
“If under this policy, half a trillion cubic feet (TCF) gas is injected into the system by 2009-10, the weighted average price would increase by about 3,5 percent,” it added.
The new price of gas at a $ 60 bbI crude oil reference price, would be around $ 3.0 - 3.3/MMBTU. If this quantity is not produced locally, the government would need to import alternative fuels suchas LNG and fuel oil. At the $ 60 per bbl crude on reference price, LNG price would be around $ 7/MMBTU and fuel oil price about $ 1O/MMBTU.
These high prices of alternative fuels would have a negativeimpact on the country’s economic growth.
The government has, therefore, based on a well considered process and in consultation with all stakeholders including exploration and production complies and consumers, has decided toprovided additional incentives for exploring for oil and gas in thecountry.
Recognizing the importance of the local community, under thepolicy, the government has also decided to increase the social welfare rates for development of remote areas. Besides production bonus will also be spent on the developmentof such areas.
The government’s intention is to involve the community as animportant stakeholder and to thus enlist its support in this effort.
Considering that the cost of exploration has escalated significantly in the international market, it has been decided that incentives under the Policy 2007 may also be provided to existingE&P companies who are not yet in the production phase.
However, the government is mindful that the prices should notincrease beyond a reasonble level and such as, conversion to the terms of Policy 2007 would be allowed at a GPG of 0.2 after $45/bbl crude oil price reference.
The Government is confident that, as a result of Policy 2007,Pakistan would be placed high in the ranking of peer countries, including India, China, Bangladesh, Thailand and Vietnam, in termsof its attractiveness as a destination for E&P investment.The new Petroleum policy is aimed at accelerating exploration and production activities in the country with a view to achieving self-sufficiency in energy by increasing oil and gas production, promoting investment in the energy sector, and enhancing security of energy supply.
A system of pre-qualification has been introduced to encouragequality companies with technical expertise, proven track record, and financial capability, to become onshore and offshore operators.
In order to develop a strong base domestically in theexploration and production sector, the local companies are also encouraged to participate in these activities. For this purpose, a simple and transparent mechanism has beenprovided in the Petroleum Policy 2007. In the Policy, the government has also introduced a bid evaluation system designed to ensure transparency.
Bids would comprise (i) work programme (in terms of work units) that the bidder intends to follow for the quick development of the block, with a 80% weighage and (ii) Gas Price Gradient (GPG), when the reference crude price is above USD 45/bbl, with a 20% weighage.
This bid evaluation system will expedite exploration activity and minimize prices.
Presently, 42 companies are working in Pakistan with 118 exploration licenses and 127 leases. The daily production of gas is around 4 BCF and 70,000 barrel of oil.
Gas is being supplied to more than 4.5 million consumers in the country. It is expected that with the incentives given in Policy 2007, production would increase through new and secondary discoveries.