THE government has launched a new oil and gas policy, aimed at increasing outside investment in its hydrocarbon industry. The policy offers substantially improved financial incentives and cutting red tape.

The international oil industry has welcomed the new regime and is showing renewed interest in what is a potentially productive region. In March, Tullow Oil of Ireland was the first to sign a licence agreement under the new arrangements (MEED 18:3:94).

The country has substantial hydrocarbon needs. Domestic oil production of 60,000 barrels a day (b/d) covers only a quarter of local demand, and importing the remainder costs $1,550 million a year. Gas demand is also fast outstripping supply.

Providing the necessary infrastructure for oil handling, storage and transport would require an additional $20,000 million investment, according to government estimates.

The government’s Petroleum Policy 1994 addresses both upstream and downstream investment incentives.

Reduced government participation. Government participation in the production phase is fixed at one of three levels, depending on the risk category of the licence area. Blocks in known hydrocarbon provinces such as the Indus basin, classified as low-risk, will have government participation of 25 per cent. Medium-risk areas, mostly in central Pakistan, will require 20 per cent government participation, and production agreements for Baluchistan, North West Frontier Province and offshore concessions will involve a 15 per cent government share.

Previously, the share taken by government was negotiated separately for each agreement and was usually around 30-45 per cent.

Market-level gas prices. The new policy links the price of associated and non-associated gas to the price of a basket of Gulf crude, again graded according to three risk zones. Gas produced in the low-risk zone is to be sold at 67.5 per cent of the crude basket price, increasing to 72.5 per cent for the medium-risk zone and 77.5 per cent for high-risk areas. The oil price continues to be linked to Gulf crude prices.

Guaranteed returns on downstream ventures. New refineries based on domestic crude will be ensured a minimum rate of return of 25 per cent on paid- up capital over eight years, if set up by the year 2000. The ceiling on rates of return for existing refineries will be lifted and made subject to negotiation to encourage expansion. Rates of return are now limited to 10-40 per cent.

No import duties or licence fees. The import of machinery and other equipment for exploration or downstream development will no longer be subject to import duty or licence fees. However, the oil or gas producer will have to pay the equivalent of 3 per cent of the imported equipment tally every year after the field is declared commercial.

Less red tape. A new process of competitive bidding will speed up the licensing process and make it more transparent.

The new policy also attempts to encourage local exploration and production expertise. It offers an additional 2.5 per cent share to local companies out of its own shareholding once a field has been declared commercial, as long as the company invests a minimum of 5 per cent during exploration. A liberal payments policy will ensure that the companies have access to foreign exchange.