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PETROLEUM   

    EXPLORATION & 

 PRODUCTION 

 POLICY 2009  

GOVERNMENT OF PAKISTAN 

Ministry of Petroleum & Natural Resources 

(MARCH 2009) 

Contents 

1                Introduction- 1 - 

1.1            Background    - 1 - 

1.2            Previous Policies        - 1 - 

1.3            Policy Objectives       - 2 - 

1.4            Requirements of Policy          - 2 - 

1.5            Outline of Pakistan’s 2009 E&P Policy          - 3 - 

1.6            Promoting Involvement of Pakistani Companies in the Country’s Upstream 

Petroleum Industry                                                                                            - 3 - 

Section I – Licensing Process                                                                              - 4 -

2                Map of Licensing Zones       - 4 -

1. Companies entitled to acquire petroleum right       - 5 -

3.1            New Local Entrants                                                                                 -5-  

3.2            Requirement for an Applicant             - 5 - 

3.3            Direct Negotiation with Strategic Partners      - 6 - 

1. Licensing System      - 7 -

4.1            Types of Exploration and Production Rights   - 7 - 

4.2            Procedure for the Granting of E&P Rights      - 8 - 

4.3            Bid Evaluation Procedure       -10- 

4.4            Post Award Process    - 10 - 

Section II – Exploration and Production Regimes - 11 -

5 Onshore Petroleum Concession Agreement (PCA) - 11 -

5.1            Royalty, Income Tax and Windfall Levy        - 11 - 

5.2            Block System - 15 - 

5.3            Rentals           - 15 - 

5.4            Non Fulfilment of Work Obligations - 16 - 

6. Offshore Production Sharing Agreement (PSA)     - 17 -

6.1              Royalties, Corporate Tax and Windfall Levy - 17 - 

6.2              Depreciation - 18 - 

6.3              Direct Government Participation       - 18 - 

6.4              Production Sharing    - 18 - 

6.5              Cost Limit     - 19 - 

6.6              Profit Oil and Profit Gas Splits          - 19 - 

6.7              Production Bonuses   - 20 - 

6.8              Import Duties and Taxes        - 20 - 

6.9              Marine Research and Coastal Area Development Fee            - 20 - 

6.10           Local Employment, Training and Social Welfare Contributions         - 21 - 

6.11           Exploration Period     - 21 - 

6.12           Extended Well Testing          - 21 - 

6.13           Retention Period        - 22 - 

6.14           Total Lease Term      - 22 - 

6.15           Five Year Lease Term Renewal         - 22 - 

6.16           Policy for Grant of Lease after Expiry of Lease Term            - 23 - 

6.17           Block System            - 23 - 

6.18           Rentals          - 23 - 

6.19           Non Fulfilment of Work Obligations - 23 - 

Section III - Regulatory Process & Obligations                                                  - 24 -

7. Regulatory Process   - 24 -

7.1              Miscellaneous            - 24 - 

7.2              Application Fees        - 24 - 

7.3              Non-compliance        - 24 - 

7.4              Confidentiality of Data and Records - 25 - 

7.5              Performance Guarantees        - 25 - 

7.6              Profit Sharing                                                                                         -26- 

8                Foreign Exchange     - 26 -

9                Assignment or Transfer of Interest - 27 -

10             Domestic Supply Obligation & Gas Allocation       - 27 -

10.1         Domestic Supply Obligation   - 27 - 

10.2         Remittance of Proceeds Abroad          - 27 - 

10.3         Delivery Point and Field Gate for Natural Gas            - 28 - 

10.4         Sale of Natural Gas within Pakistan    - 28 - 

10.5         Pipeline Construction and Operation - 29 - 

Section IV – Pricing and Incentives for Petroleum Exploration & Production     - 31 -

11             Oil and Gas Pricing - 31 -

11.1         Crude Oil, Condensate and Liquefied Petroleum Gas (LPG) Pricing   - 31 - 

11.2         Gas Pricing     - 31 - 

11.3         Associated Gas Pricing           - 32 - 

11.4         Royalty Calculation in case of Sale of Gas to Third Parties     - 32 - 

11.5         Extended Well Testing Gas Pricing    - 32 - 

11.6         Ring Fencing - 33 - 

Section V: -   Implementation and Removal of Difficulties:-                               - 34 -

12             Implementation of the Policy, removal of difficulties, addressing of anomalies, framework for institutional development and strengthening of the 

Annexure 7 - Wellhead gas price illustration as per pricing provsion of Policy 2009           -51- 

Annexure 8 - Wellhead gas price illustration as per pricing provsion of Policy 2001           -53 

Annexure 9 - Formulae for Conversion of Offshore Shallow, Deep and Ultra Deep         -54- 

Appendix-A- For Zone O Shallow                                                                       -56- 

Appendix-B-For Zone O Deep & Ultra Deep                                                        -57- 

1        Introduction       

1.1        Background 

The importance of the domestic petroleum industry to the economy of Pakistan cannot be over-emphasized as an issue of national security, national self reliance and as a major source of government revenue. 

Pakistan’s average daily production of crude oil and gas in 2007-08 was 70,205 barrels and 

4,176 million cubic feet, respectively. Pakistan’s current crude oil production meets only 18% of the total demand for domestic consumption. The balance requirement is imported involving large expenditures of foreign exchange.  

Domestic gas production and supply presently fails to meet the demand of domestic users, the industrial sector and power generation. Furthermore, gas supply may soon become insufficient due to increasing demand and depletion of present reserves. This, in turn, will force Pakistan to soon begin importing large volumes of gas at international prices to feed the domestic market. 

The Government of Pakistan (GOP) is committed to accelerate an exploration and development programme in order to reverse the decline in crude oil production, to increase the domestic gas production and supply and to reduce the burden of imported energy which  otherwise will have adverse effect  on the balance of payments & trade. In the current  global  energy price environment, E&P Policy has to be dynamic to meet the new challenges faced in meeting energy needs of the country at least cost option and  to minimize the adverse  effects on the economy of high import bill of energy.  

1.2     Previous Policies 

In 1991, GOP introduced the first petroleum Policy document. This was then followed by new Petroleum Policies of 1993, 1994, 1997, 2001 and 2007. Whenever previous policies were superseded by a subsequent Policy document, the existing rights granted under licences/Petroleum Concession Agreements (PCAs) / Production Sharing Agreements (PSAs) were not affected. 

The 1997 Policy, while preserving the provisions of the 1994 Policy with respect to onshore areas, introduced a new offshore package of terms based on production sharing arrangements. Under the 1997 Policy, existing licence holders in offshore areas were given an option to convert their concession agreements into Production Sharing Agreements (PSAs). 

The 1997 Policy was replaced in 2001 by Petroleum Policy 2001, coupled with Petroleum (Exploration and Production) Rules 2001, a model offshore Production Sharing Agreement and a model onshore Petroleum Concession Agreement. In 2003, a revised model offshore production sharing agreement was introduced complemented by the Offshore Petroleum (Exploration and Production) Rules 2003.  

Policy 2007 had to be amended by this Petroleum Policy 2009 as the new market conditions warranted urgent changes required for investment promotion in view of increasing international energy prices. It also reflects the resolve of Government of Pakistan to accelerate exploitation of indigenous natural resources by attracting foreign investment with technology as well as promoting local companies to participate in E&P activities on a level playing field. 

The purpose of this Petroleum Exploration and Production Policy 2009 (Policy) is to establish the policies, procedures, tax and pricing regime in respect of petroleum exploration and production (E&P) sector. 

1.3       Policy Objectives 

The principal objectives of this Policy are: 

1. To accelerate E&P activities in Pakistanwith a view to achieve maximum self sufficiency in energy by increasing oil and gas production. 
2. To promote direct foreign investment in Pakistanby increasing the competitiveness of its terms of investment in the upstream sector.  
3. To promote the involvement of Pakistani oil and gas companies in the country’s upstream investment opportunities.  
4. To train the Pakistani professionals in E& P sector to international standards and create favourable conditions for their retaining within the country. 
5. To promote increased E&P activity in the onshore frontier areas by providing globally competitive incentives.
6. To enable a more proactive managementof resources through establishment of a strengthened Directorate General of Petroleum Concessions (DGPC) and providing the necessary control and procedures to enhance the  effective management of Pakistan’s petroleum reserves. 
7. To undertake exploitation of oil and gas resources in a socially, economically and environmentally sustainable and responsible manner. 

1.4       Requirements of Policy 

In order to achieve these objectives, it is necessary for this Policy to: 

1. Provide stimuli for increasing exploration and production investment by modifying current contracting terms and incentives while taking into consideration the market conditions. 
2. Adopt licensing terms, conditions and processes to attract newcomers including oil and gas majors and independents, National Oil Companies (NOCs), and Pakistani private companies. 
3. Provide a balance between prices and incentives through the rationalization of the pricing formula so as to suitably compensate exploration and production risk. 
4. Implement pro-active Policy management.  
5. Successfully align the Policy with GOP’s objective to achieve maximum self sufficiency in domestic energy resources for the larger public good. 
6. Provide a transparent and non-discriminatory licensing and contracting system managed by DGPC. 

1.5       Outline of Pakistan’s 2009 E&P Policy  

The Petroleum Exploration & Production Policy 2009 maintains a system based upon the two different types of agreements to obtain E&P rights in Pakistan: 

• For onshore operations, a system based upon a Petroleum Concession Agreement (PCA)
• For offshore operations, a system based upon a Production Sharing Agreement(PSA) This document is structured in six Sections: 
• Section I: Licensing Process;  
• Section II: Exploration and Production Regimes;  
• Section III: Regulatory Process and Obligations; 
• Sections IV: Pricing and Incentives for Petroleum Exploration & Production; 
• Section V: Implementation and Removal of Difficulties; 
• Section VI: Conversion to 2009 Policy. 

This Policy has incorporated the significant achievements of the Pakistani petroleum industry with established good international oilfield practices. 

This Policy will be enhanced by DGPC’s continued active support of:  

1. The implementation of best practices for assessing petroleum projects and efficient regulatory process. 
2. Vigorously promoting exploration and production investment opportunities within Pakistan to both the domestic and the international petroleum industry. 
3. Vigorously promote the access to and sale of public domain upstream geological and engineering data sets both in Pakistan and abroad. 

1.6        Promoting Involvement of Pakistani Companies in the Country’s Upstream Petroleum Industry

GOP is also committed to promoting the active participation of Pakistani companies in oil and gas activities in order to stimulate growth of domestic industry and capture the maximum economic benefit for the country and its workforce.  

Furthermore, GOP views the increased involvement of Pakistani companies in partnerships with foreign companies, combined with the involvement of the local stakeholders, to be one of the keys to unlocking the potential of the petroleum reserves in the frontier areas for the benefit of the country. 

Section I – Licensing Process 

2        Map of Licensing Zones 

For the purposes of petroleum licensing, Pakistan will continue to be divided into three onshore and one offshore Zones, on the basis of risk and investment requirements.  

3.      Companies entitled to acquire petroleum right:- 

1. Every company interested to acquire petroleum right will be required to furnish the details as to the nature of and the principal place of business of the company, the authorized, subscribed and paid-up capital of the company, the names and nationality of the directors thereof and the names and holdings of the principal shareholders. In addition, every company shall also furnish evidence as to his financial and technical qualifications and as to his ability to conduct the activities under the relevant petroleum right in accordance with the good oilfield practices.  
2. All local and foreign companies presently operating in Pakistan will be eligible to acquire petroleum right  
3. Foreign companies not operating in Pakistan but having operated concessions in other geographical areas of the world will also be eligible to acquire petroleum right subject to demonstration of technical and financial capability. 
4. All companies having joined a consortia of companies in a concession and have gained at least three years of experience as a non-operator will be eligible to become operator subject to demonstration of technical and financial capability.

  3.1           New Local Entrants 

Smaller local Pakistani companies will be allowed to join consortia with other E&P companies as non operator in order to gain the necessary industry experience to allow them to expand their capacity to take on operating roles in future. In the event, local Pakistani company does not have requisite  past operating experience, such company shall be required to either produce an agreement with an internationally renowned E&P/ services company acceptable to DGPC  or a high calibre technical and management team with proven track record of overseeing and managing operations in the international petroleum industry.  

3.2 Requirements for an Applicant 

      3.2.1        Legal Capacity and Residence Requirements 

The applicant company must: 

1. Be  eligible to apply for a petroleum right in accordance with the applicable Rules and to execute any subsequent agreement, and that such status is likely to remain valid for a period longer than the life of any subsequent agreement plus one year; 
2. Declare that there is no pending litigation, legal process or other circumstance that might cause it to breach its obligations; and 
3. Provide a sworn statement that it is not incapable of contracting with GOP and/or Government Holdings (Private) Limited (GHPL). 
4. Within a period not exceeding ninety days after award of petroleum right to a qualified company, it must either become incorporated in Pakistan or obtain permission to operate as a registered branch office of a foreign company to operate in 

           Pakistan.           

3.2.2  Submission of Misleading Information or an Adverse   Material Change in Status 

1. DGPC reserves the right to disqualify any company should there be an adverse material change in the status of a company after filling of an application.  
2. DGPC reserves the right to refuse authorisation to participate should erroneous or misleading information be supplied by the applicant. 

3.3         Direct Negotiation with Strategic Partners 

GOP may assign  the status of “Strategic Partner” to national oil companies representing foreign governments. GOP will promote direct negotiations with selected strategic partners in order to: 

1. Explore and develop specific acreage selected by DGPC for strategic partnerships. 
2. Develop acreage of significant petroleum potential identified by DGPC in regard to which GOP considers that a strategic partnership would improve the exploitation of any petroleum resources. 
3. The party to whom block is awarded would remain the Operator and majority share holder of such block(s). The block awarded to the strategic partner can only be farmed out to Public Sector Companies of the same country acceptable to the GOP or Pakistani Public Sector E&P companies including GHPL. 

Strategic partners will be required to undergo the same  procedure as other companies outlined above; however, they will be given privileged award of petroleum rights without following competitive bidding for certain blocks selected by DGPC on mutually acceptable terms and conditions. 

4.          Licensing System 

4.1.        Types of Exploration and Production Rights 

Four different types of E&P rights will be available, as outlined in the table below: 

¹  For details of the retention period for gas market arrangements, please see 5.1.7 below

²  For details of the retention period for gas market arrangements, please see 6.13 below

4.2.        Procedure for the Granting of E&P Rights 

Onshore and Offshore E&P rights will be awarded via three distinct procedures: 

1. The granting of Petroleum Exploration Licences for entering into PCA or PSA in relation to onshore and offshore blocks offered through competitive bidding as per procedure laid down herein below. 
2. The granting of Petroleum Exploration Licences for entering into PCA or PSA in relation to onshore and offshore blocks without competitive bidding to Strategic Partner Companies on Government to Government basis. 
3. The granting of non-exclusive Reconnaissance Permits for undertaking studies and multiclient surveys after direct negotiation. 

An application for any offshore permit or licence will be filed to DGPC. However, GHPL will hold the rights to such permit or licence and will contract the applicant company to perform the required work via a contractor agreement (PSA). 

In order to further streamline the procedure for expeditious disposal of applications for the grant of exploration licences for both onshore and offshore; DGPC will continue the competitive bidding process as given below. In addition, the existing procedure for clearances by Provincial Governments and security agencies through a predefined "White and Green Area Map" will continue. No area clearance would be required for concession blocks falling inside white/green areas. 

4.2.1             Invitation to Bid  

1. DGPC will issue an Invitation to Bid  as per the format at Annexure 6, in national newspapers, the MPNR website. Invitation to Bid may cover the nominated blocks and such additional blocks as DGPC may deem appropriate. 
2. An Invitation to Bid will remain valid for at least 60 days and all companies providing the requisite information would be eligible to contest Invitation to Bid. 
3. It is a pre-requisite that the standard Model Petroleum Concessions Agreement and Model Production Sharing Agreement are followed by all companies participating in Invitation to Bid. All the economic terms and conditions will remain fixed as defined in this Policy, unless mutually agreed by the parties and approved by GOP. All participating companies will be required to furnish an undertaking to the effect that in the event, they are considered for the award of petroleum right by DGPC, they will not seek any change or modification or amendment or revision to terms and conditions applicable to Invitation to Bid including that of Model Petroleum Concessions Agreement and Model Production Sharing Agreement.  
4. Upon a written request of an interested company, DGPC will make every effort to provide bid documents within 15 days of the request, which will include but not be limited to copies of: (a) the Policy; (b) the applicable Rules; (c) Model Petroleum Concessions Agreement and Model Production Sharing Agreement, whichever is applicable; and (d) information which is available or can be purchased. 
5. Bids will be invited based on criteria of the highest work programme determined on the basis of Work Units above as set-out in Annexure 5 and the minimum threshold indicated in PCA. 
6. Any company can submit a bid for any block included in Invitation to Bid in accordance with the Policy/Rules. The first applicant company in Zone O & I may be given the opportunity to match the best work programme and financial obligation. This however, cannot be claimed as a matter of right.  
7. All Bids will be opened publicly in the presence of authorized representatives of the bidders should they chose to be present. If only one bid is received, the bidding company can be considered for award in accordance with the Rules provided the company offers a reasonable Work Programme commensurate with the prospectivity of the area.  
8. Award of petroleum rights to Pakistani state owned companies will also be subject to the same process mentioned herein above. 
9. DGPC will ensure that the conditions and requirements concerning the exercise or termination of the Invitation to Bid are established and made available to interested companies along with the bid documents. Furthermore, any changes made to the conditions and requirements in the course of the bid procedure are to be notified to all interested companies immediately by means of bulletins posted to the website and through registered mail to the companies buying bid documents. 

10.Bids are to be submitted in a sealed envelope. 

11.All bids are to be made in accordance with the applicable Rules. 

12.All bidders are required to notify DGPC should there be an adverse material change in their status after the bidding. GOP will retain the right to refuse the granting of any rights when there is adverse material change in the information provided. 

13.DGPC will make every effort to conclude and sign a Petroleum Concession Agreement or Production Sharing Agreement as the case may be based strictly on the model provided with the bid documents within 15 days after the closing date of Invitation to Bid subject to completion of all documents to be submitted by the applicant companies. 

14.The Government reserves the right to exercise the powers to accept or reject any application and cancel or annul the bidding process. 

15.DGPC reserves the right to call bidding rounds as and when required. 

4.2.2          Direct Negotiation of Non-Exclusive Rights 

A potential investor may apply, in accordance with the Rules, for a non-exclusive Reconnaissance Permit via direct negotiation with DGPC in any area currently open and considered by DGPC to be suitable for this purpose. 

4.3        Bid Evaluation Procedure 

1. Each bid must contain the necessary information regarding Work Units for Phase I of the initial term of the licence that the bidder offers as a firm commitment. The bid with the highest firm Work Units for Phase I of the initial term will be declared the winner. 
2. If more than one bidder offer the same number of Work Units and there is a draw, then the successful bidder will be decided on the basis of following process: 
   1. Within 15 days of bid opening date, the bidders offering the equal number of the highest Work Units will be asked to re-bid the Work Units and the bidder offering the higher Work Units in the re-bidding will be declared the winner, provided however, bidders cannot offer Work Units lower than the one previously offered.
   2. The above process will be repeated until there is a clear winner.

4.4         Post Award Process 

Following a successful bid, either a PCA for onshore acreage or a PSA for offshore acreage, will be concluded between Government/ GHPL and the successful bidder as per the Model PCA/PSA made available to the applicants at the time of the announcement of the invitation for bids. No modification to the terms of the model agreement nor to the terms of the bid will be allowed during the finalisation of execution copies of the PCA or PSA. 

Section II – Exploration and Production Regimes 

5      Onshore Petroleum Concession Agreement 

(PCA)

The economic package for onshore licensing Zones I, II and III is detailed below and will be included in a model PCA to be released in line with this Policy (see map of licensing Zones in Section I above). 

      •   Zone I        West Balochistan, Pashin and Potowar Basins 

          Zone II       Kirthar, East Balochistan, Punjab platform and Suleman Basins 

          Zone III       Lower Indus basin 

The onshore PCA will apply to all new licences in onshore areas. 

The onshore fiscal package contained in this Policy as applied to future awards will be reviewed from time to time in the light of additional information and may be adjusted to maintain international competitiveness. 

5.1         Royalty, Income Tax and Windfall Levy  

1. Royalty will be payable at the rate of 12.5% of the value of petroleum at the field gate. 
2. The royalty will be paid in cash or kind at the option of GOP on liquid and gaseous hydrocarbons (such as LPG, NGL, Solvent oil, gasoline and others) as well as all substances including sulphur, produced in association with such hydrocarbon. The lease rent paid during the year shall not be deductible from the royalty payment. 
3. Tax on income will be payable at the rate of 40% of profit or gains in accordance with the Fifth Schedule of the Income Tax Ordinance, 2001.  Royalties will be treated as an expense for the purpose of determination of income tax liability. 
4. Windfall Levy (WLO) will be applicable on crude oil and condensate using the following formula: 

WLO = 0.5 x (M-R) x (P-B) Where: 

WLO -  Windfall Levy on crude oil and condensate; 

M      - Net production (petroleum produced & saved); 

R       - Royalty; 

P       - Market Price of crude oil and condensate as set out in paragraph 11 below; 

B      -  Base Price, which will be as under: 

1. The base price for crude oil and condensate will be USD 30 per bbl. 
2. This base price for crude and condensate will escalate each calendar year by USD 0.25 per barrel starting from the date of first commercial production in contract area. 

Notwithstanding above, in the event Market Price of Crude Oil/Condensate exceeds US$ 100/barrel, the 100% benefit of Windfall Levy will pass on to the Government. The ceiling would be reviewed as and when pricing dynamics significantly change in the international market.   

1. For sale of natural gas to parties other than GOP, Windfall Levy (WLG) will be applicable on the difference between the applicable GOP Zone price and the 3^rdparty sale price using the following formula: 

WLG = 0 .5 x (PG-BR) x V Where: 

WLG - Windfall Levy on share of natural gas; 

PG  -  Third Party Sale Price of natural gas;  

                       BR -     Base Price; 

                       V   -     Volume of gas sold to third party excluding royalty. 

The Base Price will be the applicable Zone price for sale to GOP as outlined in paragraph 11 below. Where the 3^rdparty sale price of gas is less or equal to the base price, the windfall shall be zero. The windfall levy shall not apply on sales of natural gas made to GOP.

5.1.1             Import Duties, Taxes and Fees 

Incentives in respect of Import Duties/Taxes and Fees for the E&P companies and the “service companies” are as per applicable SRO on the effective date of execution of the Exploration Licences/PCAs. . 

5.1.2          Production Bonuses 

Production bonuses will be payable on a contract area basis as follows: 

1. Local Operator companies will pay their share of production bonuses in the Pakistan Rupees equivalent of United States Dollar converted at the prevailing exchange rate on the day of transaction. 
2. GHPL will not pay the production bonuses as long as GOP is the majority shareholder of this company. 
3. It is intended that production bonuses will be expended on social welfare projects in and around the respective contract areas according to guidelines to be issued by the government from time to time. 

5.1.3 Incentives for Exploration and Production Companies incorporated in Pakistan 

There is a need to develop a strong indigenous base in Exploration and Production sector and to minimize foreign exchange outlays. Therefore, the following incentives will continue to be offered to qualified E&P Companies incorporated in Pakistan, which pay dividends and receive payments for petroleum sold in Pakistani currency.  

1. Such E&P companies will be encouraged to operate exploration blocks with 100% ownership.  
2. In case of joint ventures with foreign E&P companies, local E&P companies including GHPL shall have working interest of 15% in Zone-I, 20% in Zone-II and 25% in Zone-III on full participation basis (hereinafter referred to as “required minimum Pakistani working interest”). The local E&P companies shall contribute their share of exploration expenditure in Pakistani currency upto required minimum Pakistani working interest. GHPL will remain non-operator in such joint ventures. In the event any local E&P company, other than GHPL, subsequently intends to reduce its working interest in a joint venture whereby the collective working interest(s) of local E&P companies (including that of GHPL) becomes lower than the above threshold specified for required minimum Pakistani Working Interest, GHPL shall have the first right to make up the balance required minimum Pakistani working interest on point forward basis without reimbursement or payment of any past cost.  
3. Consortia of companies not meeting the minimum required Pakistani working interest can still be granted an exploration licence provided such companies advertise in the press within 15 days of the grant, inviting Pakistani incorporated companies and GHPL to participate in the joint venture on the full participation basis under standard Joint Operating Agreement. The Pakistani incorporated companies and GHPL shall have the option to participate in the joint venture within 30 days.  
4. The foreign E&P companies shall be deemed to have fulfilled their obligation with respect to the minimum Pakistani participation if Pakistani incorporated companies and/or GHPL do not take any interest fully or partially. 
5. Local E&P companies will, on a case to case basis, be entitled during the exploration phase to receive foreign exchange against payment in Pakistani currency to meet their day to day obligations under permits, licences and PCAs/PSAs. After commercial discovery, local E&P companies would be paid up to 30% of their sale proceeds in foreign currency to meet their day to day operational requirements. For project financing after commercial discovery, local E&P companies will be required to make their own foreign exchange arrangements except for companies in which GOP holds majority shareholding.  

5.1.4          Local Employment, Training and Social Welfare 

Local employment, training and social welfare obligations will be applicable as per Annexure-3. 

5.1.5          Exploration Period 

See paragraph 4.1.above. 

Upon a written request of an Operator DGPC may, on a case to case basis, extend the term of the licence on the following grounds only:  

1. If seismic and drilling services are not readily available in the country for the timely discharge of minimum work obligation, a proof to this effect will be required before the Government considers accepting or denying a request for extension of an exploration licence. Such a request for extension will be required to be made after the holder of the exploration licence has exhausted all other options including but not limited to pooling resources to undertake coordinated activities with other petroleum right holders, if possible;  
2. If a holder of an exploration licence commits to undertake additional work which is  equivalent to at least  20% more than the minimum work obligation of subsequent phase or renewal;  
3. If a holder of an exploration licence makes additional accelerated area relinquishment equivalent to 20% of the original licence area; or 
4. If the party was unable to perform work because of circumstances beyond his control such as law and order situation or for unforeseeable reasons including but not limited to a flood or earthquake etc. 

Notwithstanding above, in no circumstances shall an extension or extensions cumulatively exceed 36 months during the currency of an exploration licence.  

5.1.6          Extended Well Testing 

1. Subject to approval from DGPC, an Operator may be permitted to undertake extended well testing (EWT) during the appraisal phase and before declaration of commerciality and approval of the development plan. Such approval will be granted provided that the Operator inter-alia complies with the requisite royalty, tax, rentals, and training/social welfare commitments as applicable under the lease.  
2. A request for approval of EWT (including associated temporary production facilities) will be made to DGPC providing information with regard to (a) technical justification for EWT; (b) proposed duration for EWT and (c) a plan with regard to disposal of gas during the proposed EWT period. The duration of EWT will be allowed keeping in view the reservoir uncertainty and the proposed investment outlay on EWT. DGPC will not grant approval to undertake flaring for EWT for a period longer than 30 days if the gas infrastructure is located within 25 kms radius of the discovery well, unless under exceptional circumstances.  
3. Where the specification and quality of the gas from an approved EWT is acceptable to the buyer, the gas price shall entail a 10% discount from the applicable gas price for that Zone.  
4. The facilities that are required to undertake EWT shall be constructed and operated in accordance with good international oilfield practices. 
5. In the case of a significant gas discovery in Zone I or Zone II, a retention period of up to 5 years will be considered for onshore licences, on a case to case basis, provided such discovery can be declared a commercial discovery when inter-alia adequate gas pipeline transportation facilities are installed and gas markets have been sufficiently developed for sale of natural gas on commercial basis.  
6. A discovery containing oil and gas or oil, gas and condensate is considered to be a gas discovery for the purposes of obtaining a retention period only when liquids production is not considered economic without marketing the gas stream.

5.1.7          Retention Period 

5.1.8          Total Lease Term 

Total term of an onshore development and production lease will be up to 25 years plus five years renewal subject to paragraph 5.1.9 below. 

5.1.9          Five Year Term Renewal  

So as to provide the Operator with a suitable return on late term investment in the lease, the production period of a lease may be renewed for one term of five years.  A revised field development plan will be required to be submitted for approval by DGPC. In order to obtain such a renewal the Operator must meet the following conditions:  

1. The submission of a request for a renewal  has been submitted not less than three years in advance of the expiry of initial term of the production period; and 
2. That the exploitation area has been producing on a regular basis on the date of the request. 
3. For grant of petroleum rights after the expiry of lease period, DGPC will invite bids using the call for bids one year before the end of the lease period from pre-qualified companies seeking to have a petroleum right over the lease area, in relation to any producing field for an additional ten years. The bids will be evaluated on the basis of Signature Bonus, which would be spent for social welfare of the area in which the field is located. A procedure for transfer of funds generated through signature bonus would be the same as being applicable for transfer of royalty. 
4. The existing lease holder can have the right to match the highest bid as allowed by the Government on case to case basis but this cannot be claimed as a matter of right. 
5. Each bidder(s) shall provide a bid bond of 10% of the offered signature bonus at the time of bidding. 
6. DGPC shall be under no obligation to grant any extension.  
7. The above Policy for grant of lease after expiry of lease term shall also apply to leases granted under Pakistan Petroleum (Exploration & Production) Rules of 1986 and 2001. 

5.1.10        Policy for Grant of Lease after Expiry of Lease Term  

5.2         Block System 

A block system based on latitudes and longitudes as indicated in Annexure 1 and 2 will be followed for grants and relinquishments of all onshore / offshore acreage. 

5.3         Rentals 

1. All holders of exploration licence will be required to pay an advance rental charge at the following rates: 
   1. In respect of the five years of the initial term of the licence; Rs.3500 per square kilometre or part thereof;  or in respect of each year of the initial term of the licence; Rs.800 per square kilometre or part thereof; 
   2. In respect of each renewal of the licence; Rs.5000 per square kilometre or part thereof; or in respect of each year of the renewal of Licence; Rs.2750 per square kilometre or part thereof. 
   3. During the lease period, the following annual advance rental charges will apply: 
      1. Rs.7,500 per square kilometre or part thereof covering the lease area during the initial lease period. 
      2. Rs.10,000 per square kilometre or part thereof covering the lease area during the renewal period of a lease and further lease term extension. 

5.4         Non Fulfilment of Work Obligations 

A holder of a reconnaissance permit or exploration licence will be liable to pay the Government financial compensation for non-performance of work obligations (work units), within the stipulated timeframe. In respect of an exploration licence, the compensation to be paid will be calculated based upon the number of work units unfulfilled multiplied by the applicable USD rate for work units whereas for a reconnaissance permit, such compensation will be based on minimum expenditure obligation specified in the permit deed.  

6.          Offshore Production Sharing Agreement (PSA)

The economic package for Licensing Zone O is detailed below and will be included in a model PSA to be released in line with this Policy. Licensing Zone O covers three distinct offshore areas; shallow, deep and ultra deep as defined in Annexure 2. 

This Policy will apply to all new grants of offshore PSAs. 

6.1         Royalties, Corporate Tax and Windfall Levy 

6.1.1         Royalties 

Following Royalty schedule will be applied: 

 First 48 Calendar Months after Commencement 

No royaltyof Commercial Production 

          Months 49 to 60 inclusive                                           5% of field gate price

          Calendar Months 61 to 72 inclusive                              10% of field gate price

          Calendar Months 73 and greater                                   12.5% of field gate price

1. The royalty will be paid in cash or kind at the option of GOP on liquid and gaseous hydrocarbons (such as LPG, NGL, Solvent oil, gasoline and others) as well as all substances including sulphur, produced in association with such hydrocarbon. The lease rent paid during the year shall not be deductible from the royalty payment. 
2. Royalties will be treated as an expense for the purpose of determination of income tax liability. 

6.1.2          Corporate Income Tax 

Subject to any incentives offered to Operators by GOP, corporate tax will be payable at the rate of 40% of profit or gains in accordance with the Fifth Schedule of the Income Tax Ordinance, 2001.   

6.1.3         Windfall Levy  

Windfall Levy (WLO) will be applicable on crude oil and condensate using the following formula: 

WLO = 0.5 x (P-R) x SCO 

            Where:  

                       WLO -  Windfall Levy on share of crude oil and condensate; 

P        - Market Price of crude oil and condensate as set out in paragraph 11 below; 

                        SCO -  Share of crude oil and condensate allocated to a Contractor;                          R      - Base Price, which will be as under: 

1. The base price for crude oil and condensate will be USD 30 per bbl.  
2. This base price for crude and condensate will escalate each calendar year by USD 0.25 per barrel starting from the date of first commercial production in contract area. 

Notwithstanding above, in the event Market Price of Crude Oil/Condensate exceeds US$ 100/barrel,  the 100% benefit of Windfall Levy will pass on to the Government. The ceiling would be reviewed as and when the pricing dynamics significantly change in the international market.   

For sale of natural gas to parties other than GOP, Windfall Levy (WLG) will be applicable on the difference between the applicable GOP Zone price and the 3^rdparty sale price using the following formula: 

WLG = 0.5 x (PG-BR) x V Where: 

                      WLG -  Windfall Levy on share of natural gas;

                      PG     - Third Party Sale Price of natural gas; 

                      BR     - Base Price; 

                      V       - Volume of gas sold to third party excluding royalty. 

The Base Price will be the applicable Zone price for sale to GOP as outlined in paragraph 11 below. Where the 3^rdparty sale price of gas is less or equal to the base price, the windfall shall be zero. The windfall levy shall not apply on sales of natural gas made to GOP. 

6.2         Depreciation 

The following depreciation rates will apply: 

Carry forward of any unabsorbed depreciation until such depreciation is fully absorbed. 

6.3         Direct Government Participation 

A sliding scale production sharing arrangement will be used instead of direct government participation.  

6.4         Production Sharing 

1. The agreement will be a sliding scale production sharing arrangement. 
2. The production sharing agreement will be executed by the Contractor with GHPL who will be granted the Exploration Licence and Development and Production Lease. The Contractor will therefore initially receive the profit oil and profit gas shares and will be responsible for the management of the production sharing agreements.  

6.5         Cost Limit 

Cost limit is 85% including the royalty of 12.5%. The Contractor can recover 100% of the costs from up to a maximum of 85% of the gross revenues. 

6.6         Profit Oil and Profit Gas Splits 

The profit split is set on the basis of a sliding scale for shallow, deep and ultra deep grid areas as shown in Annexure 2. The sliding scale is based on cumulative production permitting a rapid recovery of investments and a higher net present value. 

1. Profit oil & gas share for wells in shallow grid area of less than 200m water depth and depth to reservoir shallower than 4,000m   

1. Profit oil & gas share for wells in deep grid area of more than or equal to 200m and less than 1,000m water depth or deeper than 4,000m to reservoir in shallow grid area 

1. Profit oil & gas share for wells in ultra deep grid area of more than or equal to 1,000m water depth 

6.7         Production Bonuses 

Production Bonuses will be as outlined in the table below. 

1. The Production Bonus amount for offshore would be expensed in accordance with the guidelines to be issued by the Government from time to time. 

6.8         Import Duties and Taxes 

Incentives in respect of Import Duties/Taxes and Fees for the E&P companies and the “service companies” are as per applicable SRO on the effective date of execution of the Exploration Licences/PSAs. . 

. 

6.9 Marine Research and Coastal Area Development Fee 

A marine research and coastal area development fee will be applicable as per the following schedule: 

Out of the above fee 75% would be expensed on coastal area development and 25% for marine research.  

6.10       Local Employment, Training and Social Welfare Contributions 

Details of local employment, training and social welfare contributions for Pakistani nationals are given in Annexure 3. 

6.11       Exploration Period 

See paragraph 4.1.above. 

Upon a written request of an Operator DGPC may, on a case to case basis, extend the term of the licence on the following grounds only:  

1. If seismic and drilling services are not readily available in the country for the timely discharge of minimum work obligation, a proof to this effect  will be required before the Government  considers accepting or denying a request for extension of an exploration licence. Such a request for extension will be required to be made after the holder of the exploration licence has exhausted all other options including but not limited to pooling resources to undertake coordinated activities with other petroleum right holders, if possible;  
2. If a holder of an exploration licence commits to undertake additional work which is  equivalent to at least  20% more than the minimum work obligation of subsequent phase or renewal;  
3. If a holder of an exploration licence makes additional accelerated area relinquishment equivalent to 20% of the original licence area; or 
4. If the party was unable to perform work because of circumstances beyond his reasonable control such as law & order situation, unforeseeable reasons including but not limited to flood, earthquake etc.   

Notwithstanding above, in no circumstances shall an extension or extensions cumulatively exceed 36 months during the currency of an exploration licence.  

6.12       Extended Well Testing 

1. Subject to approval from DGPC, a Contractor may be permitted to undertake extended well testing (EWT) during the appraisal phase and before declaration of commerciality and approval of the development plan. Such approval will be granted provided that the Operator inter-alia complies with the requisite royalty, tax, rentals, marine research & coastal development fee and training/social welfare commitments as applicable under the lease.  
2. A request for approval of EWT (including associated temporary production facilities) will be made to DGPC providing information with regard to (a) technical justification for EWT; (b) proposed duration for EWT and (c) a plan with regard to disposal of gas during the proposed EWT period. The duration of EWT will be allowed keeping in view the reservoir uncertainty and the proposed investment outlay on EWT. DGPC will not grant approval to undertake flaring for EWT for a period longer than 30 days if the gas infrastructure is located within 25 kms radius of the discovery well, unless under exceptional circumstances.  
3. Where the specification and quality of the gas from an approved EWT is acceptable to the buyer, the gas price shall entail a 10% discount from the applicable gas price for that Zone.  
4. The facilities that are required to undertake EWT shall be constructed and operated in accordance with good international oilfield practices. 
5. In the case of a significant gas discovery, a retention period of up to 5 years will be considered for offshore licences, on a case to case basis, provided such discovery can be declared a commercial discovery when inter-alia adequate gas pipeline transportation facilities are installed and gas markets have been sufficiently developed for sale of natural gas on commercial basis. A further period of up to 5 years will be available subject to justification acceptable to DGPC. No such retention provision is available for an oil discovery. 
6. A discovery containing oil and gas or oil, gas and condensate is considered to be a gas discovery for the purposes of obtaining a retention period only when liquid production is not considered economic without marketing the gas stream. 

6.13          Retention Period 

6.14       Total Lease Term 

Initial term of the development and production lease will be up to 25 years in offshore area with one possible renewal of up to 5 years, subject to paragraph 6.15 below. 

6.15       Five Year Lease Term Renewal  

A Contractor may, on behalf and with the consent of GHPL, apply to DGPC for the production period of a lease to be renewed for one term of five years.  A revised field development plan will be required to be submitted for approval by DGPC. In order to obtain such a renewal the Operator must meet the following conditions:  

1. The submission of a request for a renewal has been submitted not less than three  years in advance of  expiry of initial term of the production period; and 
2. That the exploitation area has been producing on a regular basis on the date of the request. 
3. DGPC will invite bids using the call for bids from pre-qualified companies seeking to act as Contractor to GHPL, over the lease area, in relation to any producing field for an additional ten years either one year before the end of the initial term of a lease or if a renewal has been granted, one year before the end of the lease renewal. The bids will be evaluated on the basis of Signature Bonuses, which would be spent in accordance with the guidelines issued by GOP from time to time.  
4. Each bidder(s) shall provide a bid bond of 10% of the offered signature bonus at the time of bidding. 
5. DGPC shall be under no obligation to grant any extension.  
6. The existing lease holder can have the right to match the highest bid as allowed by the Government on case to case basis but this cannot be claimed as a matter of right. 

6.16 Policy for Grant of Lease after Expiry of Lease Term  

6.17       Block System 

A block system based on latitudes and longitudes as indicated in Annexure 1 & 2 will be followed for grants and relinquishments of all offshore acreage. 

6.18       Rentals 

Contractors will be required to pay an advance annual acreage rental for the area covered under the PSA of fifty thousand US dollars plus a further rate of ten dollars per square kilometre or a part thereof every year. 

6.19       Non Fulfilment of Work Obligations 

A Contractor working under an Exploration licence will be liable to pay GHPL financial compensation for non-performance of work obligations (work units) not accomplished within the stipulated timeframe. Such compensation will be deposited in Federal treasury by GHPL within fortnight of receipt from defaulting Contractor. The compensation to be paid will be calculated based upon the number of work units unfulfilled multiplied by applicable USD amount for work units.  

Section III - Regulatory Process & Obligations  

7.         Regulatory Process 

7.1         Miscellaneous 

1. This Policy will be applicable to all petroleum operations including but not limited to seismic activities, exploration, drilling, development and production, except coal bed methane for which the concerned provincial regulator will be responsible for all matters related thereto. 
2. The Operator shall conduct all petroleum operations in accordance with Good international oil field practices and the principles and standards as laid down in the Rules.  Consistent with this requirement, the Operator shall endeavour to minimize exploration, development, production and operation costs and maximize the ultimate economic recovery of Petroleum. 
3. All definitions/terms in this document will be interpreted in line with the Rules, which will prevail in case of any conflict. 
4. In order to expedite commercialization of discoveries, model Sale and Purchase Agreements for Gas, Condensate and Crude Oil will be finalized in consultation with the industry and made part of bidding documents.  
5. A policy for dormant/low BTU fields and that of tight gas i.e., unconventional hydrocarbon reservoirs, will be prepared separately. 

7.2         Application Fees 

The following fees will be payable on application for the following rights: 

• Reconnaissance Permit  - Rs 50,000 
• Exploration Licence -  Rs 100,000 
• Development and Production Lease – Rs 200,000 
• In addition, the Government may require Contractor or Company holding petroleum right to bear the cost of third party independent evaluation/ assessment of notice of commercial discovery and proposed development plan submitted by the concerned party for consideration and approval  

7.3         Non-compliance 

Any company non-compliant with the terms of a permit, licence, lease, agreement and/or the Rules will result in enforcement action by DGPC. 

Grounds for the suspension and/or revocation of any permit, licence or lease will be set out in detail as part of the rules, permit, licence or lease. 

7.4         Confidentiality of Data and Records 

1. All data and records concerning operations within the permit area, licence area or lease area are required to be submitted to DGPC. All data is to be treated as confidential and may not be disclosed by the parties except as provided for in the agreement or where the data is in the public domain.  
2. The parties may disclose data to affiliates and subcontractors, banks, bona fide intending assignees and their employees, consultants, etc. in connection with petroleum operations, and as required by laws and the applicable stock exchange regulations.  
3. All data, including, but not limited to, well logs, maps, magnetic tapes, cores, samples and any other geological and geophysical information obtained as a result of petroleum operations under a permit, licence, lease or an agreement is the property of GOP and must be delivered to DGPC as soon as it becomes available. The Operator/Contractor and other interest owners retain the right to make use of such data, free of cost, in connection with petroleum operations.  
4. Geological and geophysical data is to be kept confidential by GOP for a period of three years from the date of its acquisition, with the exception of disclosure required by the laws and Rules of Pakistan. However, GOP may disclose data earlier if the Agreement terminates or upon relinquishment of the area to which the data relates.  
5. DGPC may agree to keep the data confidential for longer period if such data is gathered for commercial purposes under a multi client arrangement with DGPC provided; however, all such data will be made available by DGPC within five years.  
6. DGPC reserves the right to charge a reasonable fee for the purchase of this data by third parties to cover data storage, handling, reproduction and marketing costs. 

7.4.1             Geological & Geophysical Data 

7.4.2             Operational, Commercial & Financial Data 

Operators and Contractors have the obligation to provide DGPC with relevant information related to exploration and production activities.  

DGPC will disclose information into the public domain according to the following conditions: 

1. Operational: daily, monthly and annually. 
2. Commercial & financial: after five years, except commercial sensitive information which may give unfair advantage to third-parties. 

7.5         Performance Guarantees 

DGPC shall require successful applicants for petroleum exploration licences to furnish, in an acceptable form, a guarantee or guarantees, with respect to its work commitments on or before the execution of the petroleum exploration licence. In the event, the successful applicant elects to provide any guarantee other than a Parent Company Guarantee during 

exploration phase, the guarantee so provided would only be released in case all work obligations including but not limited to social welfare, training, data, rental etc. are fully discharged. DGPC reserves the right to deduct payment for non-performance of all such obligations from the performance guarantee. 

The guarantee will be irrevocable and unconditional and in a standard format satisfactory to DGPC such as the following: 

1. Bank guarantee equal to 25% of the minimum financial obligation from a bank of international repute acceptable to the Government on the prescribed format in PCA/PSA. 
2. Parent Company Guarantee of a multinational exploration and production company of international repute with a proven track record. 
3. Petroleum production lien 
4. First and preferred assets lien 
5. Escrow Account  

7.6Profit Sharing 

The Federal Government in consultation with the Provincial Government may share with locals of the area, its revenues of royalty, rentals etc., or revenues raised through any other method i.e., increase of gas price etc., whereby the profitability of the E&P Companies are not affected. 

8     Foreign Exchange  

1. Contractor/Operator will be required to contribute all funds required for the Expenditure in respect of petroleum operations in foreign exchange and in Pakistani Rupees as required.  
2. Subject to domestic supply obligations and export duties, each foreign E&P Companies shall be entitled to export its share of the petroleum acquired under an agreement, in accordance with the applicable laws. Each foreign Contractor/Operator (and its registered branch in Pakistan) shall have the right to retain abroad and to freely make use of sale proceeds from the export of its share of petroleum. 
3. Foreign E&P companies shall have the right to remit sale proceeds from the sale of petroleum within Pakistan in foreign currency abroad in accordance with applicable regulations of the State Bank of Pakistan. GOP shall ensure that the State Bank of Pakistan shall permit all remittances of funds without any delay or additional cost to such companies.  
4. If a foreign working interest owner assigns its interest in a licence, lease and/or agreement to a foreign entity with the consent of GOP, such working interest owner will be allowed to retain abroad all proceeds resulting from such assignment. 
5. E&P company shall have full right of control over movement of funds out of bank accounts established for the purpose of petroleum operations but may be required to provide to the State Bank of Pakistan or any Government designated office, bank statements with an explanation of each deposit, or payment from such account, and shall supply on a quarterly basis, in a form acceptable to the State Bank, or such designated office full particulars of foreign exchange transactions related to an agreement.
6. For all currency conversion transactions and calculations in relation to petroleum operations the rate of exchange shall be at the rate as established by the State Bank of  Pakistan (SBP) prevailing on the date of each transaction. In case SBP ceases to publish this rate, the arithmetic average of the average inter-bank mid rate may be used. 
7. For foreign currency provisions relating to Local Pakistani Companies, please refer to sub-paragraph 5.1.3.5 above. 
8. The working interest owner shall not sell, assign, transfer, convey or otherwise dispose of all or any part of its rights and obligations under a licence, lease and/or an agreement, to a third Party or any of its affiliates without the previous written consent of DGPC, which shall not be unreasonably withheld. 
9. In giving this consent DGPC may impose any such conditions as DGPC considers appropriate including but not limited to conditions which are for the purpose of ensuring full payment of royalty, corporate tax and windfall levy by the assignee in respect of the interests assigned or transferred.  
10. DGPC will require payment of an administration fee of Rs 50,000 in relation to any one application for assignment or transfer of interest. 

9           Assignment or Transfer of Interest  

10        Domestic Supply Obligation & Gas Allocation 

10.1       Domestic Supply Obligation 

Subject to the considerations of internal requirements and national emergencies, E&P companies will be allowed to export their share of crude oil and condensate as well as their share of gas based on export licences to be granted by the concerned regulator. The Wind Fall price levy shall be applicable on such export licences. For the purpose of the grant of such export licenses for gas, the export volumes will be determined in accordance with “L15” concept provided a fair market value for such gas is realized at the export point. Under the “L15” concept the gas reserves that exceed the net proven gas reserves in Pakistan including the firm import commitments vis-à-vis the projected gas demand for next fifteen years can be considered for export. Once gas has been dedicated for exports, licenses for such export volumes shall not be subsequently revoked. 

10.2       Remittance of Proceeds Abroad 

1. If the foreign E&P Companies sell gas to third parties in Pakistan and want to remit sale proceeds in foreign currency abroad, GOP shall allow these companies to freely remit a “guaranteed percentage” of their sale proceeds.   
2. The “guaranteed percentage” shall be 75% of the total gross revenues from any Lease in Zone O and I, 70% of the total gross revenues from any Lease in Zone II and 65% of the total gross revenues from any Lease in Zone III. The remaining gross income in Rupees can be used to pay royalties, taxes, windfall levy and any other payments to the Government as well as to meet local operating costs. 

10.3      Delivery Point and Field Gate for Natural Gas       

1. For the purpose of pricing and delivery obligations for natural gas, the field gate shall be selected from the following two options: 

(a)          For Zones I,II and III: Anywhere within a 25-km radius from the outlet flange of a production facility;  

(b)          For Zone O : At the nearest access point to an existing regulated transmission system; or at the shore within Zone II or III coastal locations.  

1. In the event there is more than one field located in a block; the secondary or subsequent fields will be connected to either the transmission system, any point inside the outlet flange of the production facility of the primary field or the pipeline connecting the primary field to transmission system, as may be approved by DGPC.  
2. All field gate locations will be approved by DGPC on case to case basis within the above criteria following the submission of proposed field development plan by the concerned company. 
3. E&P companies operating in Pakistan will be allowed to contract with gas transmission and distribution companies and third parties, other than residential and commercial consumers, for the sale of their share of gas in Pakistan at negotiated prices in accordance with the applicable laws, rules, and regulations. 
4. Subject to overall market demand, E&P Companies may request and GOP will purchase their share of pipeline specification gas through a nominated buyer which is effectively controlled by it in acceptable daily, monthly and yearly volumes to meet the internal demand in an economical manner provided there are no infrastructure constraints. The delivery point shall be at the field gate, as outlined in paragraph 10.3 (above). GOP/gas buyer nominated by GOP shall pay the price for gas at the field gate as set out in this Policy. In addition, the "guaranteed percentage" for foreign exchange remittance as contained in sub paragraph 10.2.2 above will apply to such sales. 
5. Where a government nominated buyer agrees in principle to purchase gas pursuant to sub paragraph 10.4.2 above, the gas producer shall construct and operate and maintain the gas pipeline connecting the field to the field gate in accordance with the Policy, applicable law, rules and regulations. All costs associated with such pipeline will be borne by the gas producer and no transportation tariff will be paid by the Government/ gas buyer nominated by the Government for this purpose.   
6. The gas producer can arrange for the construction and operation of the connecting gas pipeline outlined in sub paragraph 10.4.3 above, through an independent third party provided the title of such pipeline is transferable to the Government on expiry or early termination of relevant petroleum rights. For avoidance of doubt, it may be noted that no tariff will be payable by the Government/ gas buyer nominated by the Government for this pipeline.   
7. E&P companies operating in Pakistan will be allowed to construct and operate pipelines for local requirements and for exports of their share of petroleum which shall be regulated by the regulator concerned in accordance with applicable laws, rules, regulations and the Policy based on an open-access (third party) regime. The E&P Companies constructing such pipelines would be allowed priority access based on a firm utilization plan.  
8. Whether a connecting pipeline from field gate to the nearest transmission system, is constructed and operated by a producer, a third party or a government nominated entity; such a pipeline shall be regulated pursuant to the provisions of sub paragraph 10.5.1 above, unless the regulator concerned decides that the pipeline shall be a non-regulated pipeline. 
9. At the request of the producer, the buyer nominated by GOP for purchase of the gas may also consider laying the pipeline, if required, starting from the field gate to the nearest transmission system, at his cost.  
10. If an inter-connecting pipeline is proposed to be constructed by a third party or the buyer, the producer will be required to confirm the requisite gas supply volumes, pressures, reserves and other technical parameters on standard supply term contract basis for a period to be agreed between the parties.  
11. Subject to sub paragraph 10.5.9 below, the basis of the tariff allowed and paid monthly for delivery from field gate into the transmission system will be determined by the regulator based upon a ‘rate of return on equity’ basis at the rate of 12% with the capital cost being amortized over a minimum of 15 years. Allowable costs will include operating cost and interest payable on the initial capital over the minimum 15 year amortization period. Post the repayment period the Operator will be able to make a 12% margin over operating costs. If such pipeline is used by more than one shipper, the calculation basis for each year shall be done on an overall pipeline volume nomination basis at the start of each year, through the aggregation of all shippers nomination. Any shortfall or excess of volume delivered from the nomination in the year shall be deducted/ received from the tariff payment of that year or charged to the party responsible for such a shortfall. 
12. Unless a pipeline is specifically constructed in order to facilitate a third party access agreement agreed between Operators/Contractors and a third party duly approved by the regulator; all pipelines from field to field gate, in case of offshore, shall be constructed with an excess capacity equal to thirty percent, depending upon projected plateau rates unless otherwise allowed by DGPC based on an objective assessment of future likely use of such capacity.  
13. E&P companies are expected to exhaust options to make efficient use of the current transmission system and may co-operate in the construction and operation of pipelines upstream of the field gate or transmission system. Shared ownership and spare capacity shall be based upon the combined planned coincidental shared plateau of the Operators unless otherwise agreed by DGPC or the regulator concerned. Companies are encouraged to co-operate in any extension of an initial system to ensure economies of scale, maximum utilization and to ensure that the overall pipeline stays below the tariff limit as specified in para 10.5.9 hereunder. 

10.4       Sale of Natural Gas within Pakistan 

10.5       Pipeline Construction and Operation 

1. In the event such pipeline is located in offshore area and the excess capacity is subsequently utilized by a third party, the tariff will be charged by the party providing access to such pipeline as approved by DGPC and revenues generated therefrom will be treated as a part of profit oil/profit gas for its production sharing purposes. 
2. The tariff payable to any third party or the producer for pipeline connecting the field gate to the transmission system shall not exceed $0.5/MMBTU in aggregate. Any tariff in excess of this limit will be determined by the regulator on a case to case basis but only in exceptional circumstances, and subject to the approval of GOP. The indexation of the tariff limit will be based on OGRA’s recommendation and approved by GOP. The public utility companies will continue receiving tariff under a separate tariff regime within the frame work of OGRA Ordinance.   

10.Ownership/operation of the pipeline connecting field to the field gate and the field gate to the transmission system shall pass to the government consequent upon the expiry or early termination of the lease that initiated the pipeline unless such pipeline is not used for shipment of gas from another adjacent area for which specific approval of the Government and/or the regulator concerned will be required. The transfer should be free of any lien or encumbrance or other liabilities. 

Section IV – Pricing and Incentives for Petroleum Exploration & Production 

11        Oil and Gas Pricing  

11.1     Crude Oil, Condensate and Liquefied Petroleum Gas (LPG) Pricing 

11.1.1       Crude Oil 

The Producer Policy Price for crude oil delivered at the nearest refinery gate shall be equal to 

C&F price of a comparable crude oil or a basket of Arabian/Persian Gulf crude oils (Reference Crude or RC) plus or minus a quality differential between the RC and the local crude oil. No other adjustment or discount will apply other than Windfall Levy. C&F price will be arrived at on the basis of FOB price of imported crude oils into Pakistan plus freight on AFRA, which is deemed chartered rate.  

11.1.2       Condensate 

The Producer Policy Price for condensate will be the FOB price of internationally quoted comparable condensate delivered at the nearest refinery gate plus or minus a quality yield differential, based on the value in the Arabian Gulf spot products market of the crude oil/condensate. No other adjustment or discount will apply other than Windfall Levy.  

11.1.3        Liquefied Petroleum Gas 

For new projects, the LPG producer price will be as notified by the regulator. 

11.2       Gas Pricing 

For all gas pricing, a Reference Crude Price (RCP) equal to the C&F price of a basket of Arabian/Persian Gulf Crude Oils imported in Pakistan during the first six months period of the seven months period immediately preceding the relevant price notification period (Import Basket) as published in an internationally recognized publication acceptable to the parties will be used. C&F price will be arrived at on the basis of FOB price of imported crude oils into Pakistan plus freight on AFRA, which is deemed chartered rate. 

The gas pricing shall be calculated according to the following formula: 

Pg = Pm * Dz / Cf 

Where Pg is the Gas Price in USD per MMBTU 

           Pm is the Applicable Marker Price in USD per barrel determined as follows: 

When RCP is upto USD 20/barrel, Pm equals RCP; 

When RCP is higher than USD 20/barrel and not over USD 30/barrel, Pm equals 20 plus 50% of the incremental RCP above USD 20/barrel; 

When RCP is higher than USD30/barrel and not over USD 40/barrel, Pm equals 25 plus 30% of the incremental RCP above USD 30/barrel; 

When RCP is higher than USD 40/barrel and not over USD 70/barrel, Pm equals 28 plus 20% of the incremental RCP above USD 40/barrel; 

When RCP is higher than USD 70/barrel and not over USD 100/barrel, Pm equals 34 plus 10% of the incremental RCP above USD 70/barrel 

The RCP ceiling of USD 100/barrel would be reviewed after every five years or as and when the pricing dynamics significantly change in the international market.   

Dz is the zonal index which shall have the value of 67.5% for Zone III; 72.5% for Zone II, 77.5% for Zone I /Zone O (Offshore shallow) and 82.5% for Zone O (Offshore deep & ultra deep). 

Cf is the Applicable Conversion Factor, the weighted average of the heating values expressed in MMBTU per barrel for the basket of Arabian/Persian Gulf Crude Oils imported in Pakistan. 

Illustration of the gas price working under 2009 Policy at C&F price of US$ 35/barrel & US$ 140/barrel is attached as Annexure 7. 

11.3       Associated Gas Pricing  

The price for associated gas shall be equal to the price of non-associated gas in the respective Zones. 

11.4   Royalty Calculation in case of Sale of Gas to Third Parties 

For the purpose of calculating the amount due by way of royalty, the value of the petroleum produced and saved shall be determined by using actual selling price in the following manner, namely:- 

(a)          If the petroleum is sold to the national market, the actual selling price means the price determined in accordance with the relevant sale and purchase agreement between the petroleum right holder and the Government or its designee less allowed transportation cost beyond the delivery point. 

(b)          In all other cases, the actual selling price means the greater of- 

(i)           the price at which the petroleum is sold or otherwise disposed of less allowed transportation costs; or 

(ii)          the fair market price received through arm’s length sales of the petroleum less the allowed transportation costs; or 

(iii)        the price applicable to the sales made under sub-rule (a) above. 

11.5       Extended Well Testing Gas Pricing  

Gas from Extended Well Tests (EWT) will be priced as per paragraphs 5.1.6 and 6.12 above. 

11.6       Ring Fencing 

In accordance with the Fifth Schedule of the Income Tax Ordinance 2001, there will be no ring fencing for the purpose of calculation of corporate tax. 

Section V: -      Implementation and Removal of Difficulties:- 

12 Implementation of the Policy, removal of difficulties, addressing of anomalies, framework for institutional development and strengthening of the Policy Wing 

1. A Committee shall be constituted to address the issues of the implementation of this Policy, removal of difficulties, addressing of anomalies and approving framework for  institutional development and strengthening of the Policy Wing to enhance its  professional competence for Policy formulation and upstream regulation. The committee shall comprise of the following: 

                       Minister for Petroleum and Natural Resources                          Chairman 

                        Deputy Chairman Planning Commission                             Member                     Secretary, Finance Division                                                             Member 

                       Secretary, Petroleum and Natural Resources                               Member 

                       Director General Petroleum Concessions                      Member/Secretary

1. In order to meet the deadlines, a separate cell headed by Director General Petroleum Concessions {DG(PC)}, as already provided in Petroleum (Exploration &  Production) Policy 2001, shall be maintained comprising the following professionals on contract basis:  

(a)           Legal Advisor, 

(b)           Financial Consultant, 

(c)           Petroleum Economist,                 (d)       Petroleum Explorationist and                   (e)       Other professionals on need basis. 

1. The funds generated through sale of technical data and unspent training amount generated under PCAs and PSAs shall be utilized for capacity building, strengthening of the Policy Wing of Ministry of Petroleum and Natural Resources, remunerations of outside professionals engaged on contract, part time legal advisors/technical consultants, Policy promotional activities, workshops, seminars, conferences & symposia etc. 
2. Separate procedures/guidelines will be issued by the Ministry of Petroleum and  Natural Resources in relation to the provisions at paragraph 12.2 and 12.3  above. 
3. This Policy supersedes the 1991 Petroleum Policy, the 1993 Petroleum Exploration and Production Policy, the 1994 Petroleum Policy, the 1997 Petroleum Policy , the 2001 Petroleum Policy and the 2007 Petroleum Policy to the extent applicable to exploration and production sector only, without affecting the rights that may have accrued under the aforesaid policies. 
4. In addition to the protection of the Policy under Regulation of Mines and Oilfields and Mineral Development (Government Control) Act, 1948 and the Economic Reforms Act, 1992, GOP will ensure/facilitate implementation of the agreements by the Ministries/Divisions and Organizations concerned. 
5. For implementation of this Policy appropriate changes will be made in relevant rules, regulations and model agreements. 
6. GOP reserves the right to change terms of this Policy in response to changes in national energy Policy or significant changes in the domestic or international  energy market. These changes will not affect any rights that may have previously  accrued under this Policy. 
7. This Policy may be reviewed by GOP after 5 years for appropriate adjustments  keeping in view the then prevailing conditions. 
8. The incentives of this Policy shall apply to E&P companies who will apply for new petroleum rights after this Policy comes into effect as well as to those E&P  companies who opt for conversion to this Policy in accordance with section VI hereof. 

13        Applicability and Effect of Policy

Section VI – Conversion to 2009 Policy  

14        Conversion of Regimes  

1. The option for conversion to this Policy will be available to all new exploration efforts made under the exploration licences & PCAs/PSAs: 

(a)       that stand granted/executed; or 

(b)       for which provisional award has already been made; or 

(c)       for which applications are pending and bids have been invited before the date of approval of the Policy. 

1. For the purpose of this section, new exploration efforts means “Exploration Wells” under drilling and/or spudded, after the Effective Date of the petroleum exploration and production Policy, 2007 (i.e. 27^thNovember 2007). 
2. For all conversions pursuant to paragraph 14.1 above, the gas price allowed for new exploration effort under the respective exploration licences & PCAs/PSAs shall be the arithmetic average of gas price as determined under the formula given in the Policy 2001 and this Policy 2009. The illustration of the price calculation under the Policy 2001 is attached as Annexure-8. 
3. For all offshore areas, conversion would be in accordance with formula given at Annexure 9 and will be strictly applicable to those PSAs only, where the wells commitment is notified as per the contractual work programme of the PSAs or by 31^stDecember 2010, whichever is earlier and the well, unless otherwise already committed, is spud latest by 30^thJune 2011, with out any exception.  
4. All pending applications for which bidding process has not been initiated will be processed under this Policy. However, nothing contained herein will be construed to have created any right for the applicant.  
5. This Policy will not affect any obligation with regard to already agreed minimum work programme and minimum expenditure obligation and the State participation in an existing joint venture, if any. 
6. The conversion under this Policy will be opted as a package and the companies desirous of opting for conversion to this Policy shall be required to submit their written request to DGPC within 90 days from the date of announcement of the Policy failing which they will not remain eligible for the conversion. Similarly, for those blocks for which the exploration licences have not yet been granted and PCAs/PSAs have not been executed as mentioned in sub-paragraph 14.1 (b) and (c), the company concerned will have the option to apply, in writing, for conversion under this Policy within 90 days from the date of grant of such block. The option once exercised shall be final. The supplemental agreement to give affect to the conversion shall be executed as soon as possible but no later than 6 months from the date of exercise of the option. 
7. The Companies already exercising the option under Policy 2007 shall be deemed to have opted for conversion under this Policy provided however, such conversion will be allowed subject to signing of supplemental agreements within six months from the date of announcement of this policy. 

Annexure 1 - The Block System 

All Zones 

1. Blocks:
   1. The Offshore/Onshore area will be divided into Blocks. 
   2. Blocks shall be bounded on the east and west sides by successive integer meridians of longitude. 
   3. Blocks shall be bounded on the north and south sides by successive integer parallels of latitude. 
   4. A Block shall be referred to by the degree latitude and longitude of the southwest corner of the Block; for example, the Block with a southwest corner at 25 degrees latitude and 64 degrees longitude would be referred to as Block 2564. 
   5. Grid Areas: 

1. Every Block shall be divided into 144 Grid Areas 
2. Grid Areas shall be bounded on the east and west sides by meridians spaced at intervals of five minutes between the east and west boundaries of the Block. 
3. Grid Areas shall be bounded on the north and south sides by parallels spaced at intervals of five minutes between the north and south boundaries of the Block. 
4. A Grid Area shall be identified by the letters to which it corresponds in the following diagram: 

NW                                                                                                                   NE 

SW                                                                                                                     SE 

1. Sections:
   1. Every Grid Area shall be divided into 100 Sections. 
   2. Sections shall be bounded on the east and west sides by meridians spaced at intervals of thirty seconds between the east and west boundaries of the Grid Area. 
   3. Sections shall be bounded on the north and south sides by parallels spaced at intervals of thirty seconds between the north and south boundaries of the Gird Area. 
   4. A Section shall be identified by the number to which it corresponds in the following diagram: 

NW                                                                                                           NE

SW                                                                                                SE

1. Naming of Agreements, Sections and Wells: 
   1. An Agreement shall be referred to by the southwest corner of the Block in which the southwest corner of the Original Contract Area of the Agreement is located, separated by a hyphen, followed by the number (by historical signing date) of the Agreement in that Block; for example, the fourth Agreement having its southwest corner in Block 2564 would be referred to as "Production Sharing Agreement 2564-4". 
   2. Sections shall be referred to by specifying the Block, Grid Area and Section number, separated by hyphens, in declining order of size; for example, the Section 81 located in Block 2564, Grid Area Bb would be referred to as "2564-Bb-81". 
   3. A well will be described by the Section location of its wellhead. If there is more than one well drilled from the same Section, each well will be described by its Section location, separated by a hyphen, followed by the number (by historical spud-in date) of the well in that Section; for example, the first well drilled in Section 2564-Bb-81 will be referred to as "2564-Bb-81.1". 

Offshore Zones 

1. The map of the Offshore of Pakistan (Annexure 2) shows each Grid Area as being either "shallow" (having an average water depth of less than 200 metres) or "deep" (having an average water depth greater than 200 metres) or ultra deep having an average water depth greater than 1,000 metres.
2. Maximum Size 

A Reconnaissance Permit may be granted for an offshore area of any size.  

A Licence shall not be granted in respect of any area of more than 3,200 Sections.  

A Lease shall not normally be granted in respect of any area of more than 150 Sections and the maximum acreage assigned to any one field shall be defined as the vertical projection to the surface of the outer limit of the reservoir(s).  

Annexure 2 – Block Maps of Pakistan 

Block Map of Offshore Pakistan

Block Map of Onshore Pakistan 

Annexure 3 - Employment, Training and Social Welfare Program 

EMPLOYMENT  

Employment programs for Pakistani nationals shall be agreed upon with DGPC on an annual basis as per guidelines issued from time to time. 

TRAINING

Training shall be provided for capacity building of Pakistani employees and GOP officials by foreign and local E&P companies including internship/scholarships and training of the local inhabitants in different institutions, as per guidelines issued by DGPC from time to time. The E&P companies shall incur following expenditures at different levels of their activity: 

Onshore Zones 

This shall not form part of Government revenue and shall be used primarily for capacity building and to meet expenditures connected with infrastructure development as mentioned in Section V above for which separate guidelines shall be issued with the approval of the Principal Accounting Officer. 

SOCIAL WELFAREPROGRAM

The amount of social welfare funds pledged by the companies (local and foreign) in their respective agreements must be utilized to give lasting benefit to the communities. Social welfare projects must be agreed with the local community and the civil administration as per guidelines issued by GOP from time to time. 

The following minimum expenditure shall be incurred on welfare projects: 

1. During exploration stage until Commercial        USD 30,000 per Licence Year  Production
2. During Commercial Production Phase   Amount/Lease Year (USD) (For all Zones) 

(BOE/d) 

                     Less than  2,000                           50,000 (Zones O & I);  37,500 (Zones II & III) 

                      2,000 -     5,000                         100,000 (Zones O & I);  75,000 (Zones II & III) 

                     5,000 -    10,000                         200,000 (Zones O & I); 150,000 (Zones II & III) 

These amounts will be subject to review from time to time. Local E&P companies will incur these expenditures in equivalent Pak Rupees.