Enhancing Exploration Activity through Further Incentives and Building Investor Confidence

Mazhar Farooq Secretary General PPEPCA

Pakistan Petroleum Exploration & Production Companies Association

Hydrocarbon Potential
Basins Overview

Sedimentary Basins

Hydrocarbon Potential
 Do we have a 3rd party authentic estimate of the possible hydrocarbon potential of the unexplored areas including the fold belt?  Figures that have been quoted give estimates of about 282 Tcf gas and 27 Billion barrels oil. Have these been revised downwards?  How much of the Tight gas which has been indicated as 35 Tcf at the 2008 seminar can be recovered?  What is the possible potential of Shale gas and CBM in Pakistan?  What could be the possible offshore oil & gas reserve potential ?  Is it possible to determine the possible size of future individual reserves, both in the explored and unexplored regions?  Solution: To market an authentic reserves estimate for potential investors the Government should commission a reputable international consultant to carryout a fast track marketable independent assessment of the possible reserves and potential reserve size estimates.

Oil & Gas Discovered - By Basin

Basin Potwar - Kohat Sulaiman- Kirthar Middle Indus Lower Indus West Balochistan Offshore Total

Gas, Tcf (N - 950) 3.2 18.0 18.0 6.0 0.0 0.0 45.2

Oil mmbbl 414 52 0.0 366 0.0 0.0 832

Note: Potwar and Lower Indus basins are now mature and declining.

Energy Year Book

Discoveries & Reserve size

Trends of Mature Basins

Field Sizes by Year of Discovery
100

Reserve Bcf Less than 50 50-100 100-200 200-300

No. of Discoveries 77 13 9 6 2 2 3 12

Avg. Discovery Size, Bcf 16 81 125 260 334 435 543 3.62

M 10 M 1 b o e 0.1
0.01 1980 1990 2000

300-400
Declining field size trends indicate future discoveries of less than 10 MMboe (57 Bcf) in mature basins Go for deeper horizons and infill drilling? How to make smaller fields commercially attractive?

400-500 500-1000 Over 1000

Source: Energy Year Book 2009

Major Issues of E&P Companies

SECURITY STABILITY OF CONTRACT PROVISIONS CLEAR POLICIES ON REGULATION COMPETITIVE GAS PRICING
The Fraser Global Survey 2010 also highlights some of the major irritants to investment in Pakistan.

Fraser Survey - Comparison of Factors

Pakistan Specific

100%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0% Fiscal Terms Taxation Regime Local Natural Gas Price Cost of Regulatory Compliance Regulatory Uncertainty Environmental Regulations Local Processing Requirements Trade Regulations

Encourages Investment Not Deterrent to Investment Mild Deterrent to Investment

Source: Global Petroleum Survey Fraser Institute

Labor Regulations Local Public Infrastructure Business Infrastructure

Strong Deterrent to Investment

Geological Database

Labor Availability

Aboriginal Land Claims

Would Not Invest

Political Stability

Security

Pakistan

India Comparison
Not Deterrent to Investment Mild Deterrent to Investment Strong Deterrent to Investment Would Not Invest

Encourages Investment

100%

80%

60%

40%

20%

Political Stability (Pakistan)

Political Stability (India)

Local Natural Gas Price (India)

Figure-8: Pakistan - India Comparison Investment Climate Survey

PPEPCA Paper 2010

Security (India)

Local Natural Gas Price (Pakistan)

Security (Pakistan)

0%

SECURITY

International perception - Pakistan is a high risk country in the world due to the threat of terrorism/militancy. It is becoming exceedingly difficult to get E&P companies, international contractors and service companies to work in Pakistan. How does the Government plan to mitigate the perceptions and threats?

Security

Way Forward

Clear definition of the obligations of the Government and State - how this is implemented? Companies should be made aware at the pre-bid stage of the security, tribal local problems and no-go areas that they can encounter. Issue security guidelines to E&P companies and their contractors to reduce risk to lowest acceptable levels Define obligations of law enforcing agencies in the areas of operation Lay-down policies and Standard Operating Procedures at Federal, Provincial & District levels. All should be on the same page. Fast track issuance of NOC and security clearances for expats Improved co-ordination and co-operation between the various concerned Ministries. Security Policy should not contravene UN Charter and other such principles to which Govt. of Pakistan is also a signatory

Security - Solutions

Government to counter wrong perceptions and hype created against actual ground realities. Finalize and implement a viable Security Policy & Guidelines in consultation with all stake-holders Politically manage expectations of local population in concession areas Government to bear cost of security personnel of law enforcement agencies etc. Granting status of Key Point Installation to Production Facilities. What should this deliver on the ground?

Stability of Contract Provisions

Globally the flow of investment capital is determined largely by the rate of return available to investors and the policy, regulatory frame work and security considerations. On the basis of the commitment made, contracts with guarantees are executed. In Pakistan also, contracts executed have stability provisions, which when flouted causes a serious dent on the credibility of the country and shakes the investors confidence. Signed PCAs have the following provisions:
All the rules, laws, regulations in effect on the Effective Date, including the Workers Welfare Fund Ordinance 1971 and the Companies Profits (Workers Participation) Act 1968 shall apply to the Agreement, throughout the term, whether or not subsequently amended or revised. The Rules, Income Tax ordinance 1979, Regulations of Mines and Oilfields and Mineral Development (Government Control) Act 1948 and other laws that are in force on the Effective Date shall remain applicable for the purposes hereof, whether or not the same are subsequently amended or revised.

Stability of Contract Provisions

What have we witnessed during the last five years? Taxation cases have been opened up after year 2005 relating to higher tax rate & depletion allowance incl. concerning contracts signed 20 years ago. Other provisions such as levy of fees on gas price notifications have been violated. Cases are now pending adjudication at tribunal and High court level. This in addition to adding to the cost of doing business is also scaring investors and eroding their confidence in the system. While the Petroleum Ministry is aware of the pitfalls it has for future investment, other Ministries and departments including provincial governments are not really aware of the results.
As someone said investors are like pigeons, scare them and they will fly away en block, but have to be wooed back one by one

Clear Policies on Regulation

Investors would not like to negotiate with more than one authority such negotiation is time consuming and tends to never close-out. Investors are comfortable with a one-window operation. Government should have very clear cut policies on the role and responsibilities of the federal and provincial governments lack of clarity will have a negative impact on future investment. Need to have a strong and independent federal regulator with role like OGRA, NEPRA etc. The interpretation of the constitution and the division of fiscal benefits etc. should be sorted out between the provinces and the federation without making E&P companies a party.

Elements of Successful Petroleum Regulation

Successful Petroleum Regulation

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