Centralized Versus Decentralized Petroleum Sector and Revenue Management

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1 Centralized Versus Decentralized Petroleum Sector and Revenue Management Dr Gulfaraz Ahmed World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4th 1

2 FEDERATION OF PAKISTAN Pakistan came about on August 14, 1947 upon partition of India under the Independence of India Act The federation was created by the people of five provinces through general elections in , vote by Shahi Jirga (Balochistan) and referendum (NWFP & Sylhet) in Resulting from tensions of population asymmetry and physically separated by 1000 miles of foreign land, the federation lost its eastern part in December 1971 with the emergence of Bangladesh Constitution provided political federalism through bicameral parliament and residuary powers to provinces but expediently centralized power through a concurrent list to be abolished in ten years which has not happened. World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4th 2

3 FEDERATION OF PAKISTAN Country suffered from frequent military rule over half its independent life which distorted and stultified democratic process. Military rulers made regressive changes in 1973 Constitution and transferred powers from Prime Minister to the ceremonial office of the President. A Parliamentary Committee is working on annulling infamous 13 th and 17 th amendments, abolishing concurrent list and enhancing provincial autonomy. Recent Seventh NFC award provides fiscal autonomy to provinces and lays a good base for imminent political reforms. World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4th 3

4 LAND AREAS & POPULATION (1998 CENSUS) Province Land area Population Population sq km % Millions % density persons/sq km Balochistan NWFP Punjab Sindh FATA Islamabad Pakistan * * Current estimate % growth rate (new census expected in 2010). World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th 4

5 OIL AND GAS IN PAKISTAN Oil and gas are not core/central issues in Pakistan. All provinces are producers: Sindh 60% oil & 72% gas, Punjab 20% oil & 5% gas, Balochistan 21% gas and NWFP 20% oil & 2% gas. Oil and gas revenues equal 0.33 % of GDP, 3.0 % of federal and 1.0 % to 17.0 % of provincial revenues. Pakistan has environmentally ideal primary energy mix. It has an energy deficit, and imports b oil/products daily. Energy demand-supply outlook requires unprecedented growth in oil and gas exploration and production. Petroleum policy dynamically improves incentives to attract investment in petroleum exploration. World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th 5

6 OIL AND GAS PRODUCTION Province Oil (b/d) % Gas (MMSCFD) % Balochistan NWFP Punjab Sindh Pakistan World Bank Headquarters, Washington, DC - Black Auditorium - March 3-4 6

7 OIL & GAS REVENUES ESTIMATES (2009/2010) Billion Rupees Balochistan NWFP Punjab Sindh Pakistan Royalty on crude oil Royalty on natural gas GDS Excise duty on gas Total % of total revenues *3.0 * 0.33% of GDP. World Bank Headquarters, Washington, DC - Black Auditorium - March 3-4 7

8 PRIMARY COMMERCIAL ENERGY MIX /08 (62.8 mtoey ~ boed) Hydel 10.9% Nuclear 1.2% Coal 9.2 % Indig Oil 5.5% Imported Oil 25.2% Gas 47.6% Total energy consumed ~ 100 mtoe Traditional energy ~ 37 mtoe Commercial energy ~ 63 mtoe World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th

9 ENERGY SUPPLY-DEMAND OUTLOOK mtoe NUCLEAR POWER IMPORT OF GAS AGGRESSIVE EXPLORATION INDIGENOUSE SUPPLY IMPORTED OIL GAP World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th

10 ROLE OF PRIVATE SECTOR Thrust of Pakistan s E&P business lies in private sector. Public sector competes for new exploration licenses on even ground on the basis of work commitment and enjoys no precedence on private sector. No history of nationalization or forced take-over right from independence in Presently 23 private sector companies are operating and 39 have working interests. Oldest and largest producers are in the private sector reflecting long term stability of E&P operations. Concession based licenses onshore allow title of oil and gas reserves to producers. World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th

11 HISTORY OF OIL AND GAS EXPLORATION (As on July 1, 2008) Exploratory Wells: 716 (First well in 1866) Development Wells: 931 Sedimentary Area: Exploration Density: Discoveries: ,268 km² 1well/1376 km² (Very Low) Oil 67 (936 Million BBL Reserves; 14 Million BBL/discovery) Gas/Condensate 146 (54 TCF Reserves; Average Discovery: 41.2 MMBOE 0.37 TCF/Discovery) Overall Success Rate: 1:3.3 against world average of 1:7 World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th

12 OIL AND GAS RESERVES (July 01, 2008) Oil (million barrels) Natural Gas (trillion cubic feet) Discovered Produced Remaining Production/day 69554(b/d) 4 000(MMSCFD) Production/year Reserve/production 13 years 18 years. World Bank Headquarters, Washington, DC - Black Auditorium - March

13 OIL & GAS PROVINCES Mainly Oil Mainly Gas Gas/Condensate Peshawar POTWAR Islamabad Quet ta ZARGHOO N DHODAK Mult an NANDPUR PANJPIR Lahor e SUI PIRKOH MARI ETC. BHIT SARI/ HUND I Karach i BADI N Sedimentary Axial belt High Mountains Shield. World Bank Headquarters, Washington, DC - Black Auditorium - March

14 PETROLEUM PROSPECTIVE ZONES Zone-0 Zone- I Zone-II Zone-III Offshore High Risk - High Cost Medium Risk - High Cost Medium Risk - Low to High Cost Zone-I Zone-II Zone-III Zone-I Zone-0 I. World Bank Headquarters, Washington, DC - Black Auditorium - March

15 OWNERSHIP ISSUE Ownership of offshore petroleum deposits vests explicitly with federal government. Provincial territory extends up to the coast line. Ownership of oil and gas found on land in provinces vests implicitly with provinces but somewhat explicitly with the federal government. Benefits of oil and gas production (royalty, excise duty and gas development surcharge) is collected by federal government but transferred straight to producing provinces. No contention since provinces get all the benefits and enjoy precedence for use of gas. World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th 15

16 MANAGEMENT JURISDICTION Management jurisdiction over petroleum exploration, production, pricing and regulation onshore or offshore vests explicitly with the federal government. Federal government alone has power to tax oil and gas Constitution provides the mechanism of Council of Common Interest for matters of oil and gas. Provinces have never referred any oil and gas issue to CCI. Provinces would like to increase royalty rate beyond 12.5% but federal government historically seized with promoting E&P by ever offering competitive financial incentives for attracting investment to increase indigenous production of energy and reduce imports. World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th 16

17 PETROLEUM RENT AND SECURITY ISSUE No rent is levied on petroleum extraction by private or public companies. Policy requires some minor benefits for local community in the vicinity of petroleum production. Production bonuses are earmarked for social works of community welfare. Current status of front line state of war on terror taking heavy toll on security and law and order and seriously affecting E&P operations. No new foreign companies taking exploration licenses. Expatriates moved out and foreign consultants not coming for essential consultations. World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th 17

18 CONCLUSIONS/POLICY QUESTIONS Oil and gas ownership regime and management jurisdiction is well established and accepted by all stake-holders. The system aims at an optimal equation of central facilitation of exploration investment through federal control backed by sovereign guarantees and provincial benefits through straight transfers of all the revenues to producing provinces. Country is largely under-explored and federal government changes petroleum policy dynamically offering competitive terms to attract investment. Process of award of petroleum licenses made increasingly transparent and results are announced in the bid opening session on the basis of the highest work units offered. Pakistan s front line role in war against terror is wrecking economy and especially upsetting E&P operations World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th 18

19 TENSIONS ASSOCIATED WITH SIZE ASYMMETRY As a coming together federation areas and boundaries of CUs are protected in the Constitution. Punjab with 56% members in National Assembly and % of federal receipts created a wide-spread perception of Punjab leaning policies that led to federal tensions. Population based horizontal distribution of revenues had been main source of tensions. Punjab pro-actively supported new formula of population 82 %, poverty 10.3%, revenue collection/generation 5% and inverse population density 2.7% in 7 th NFC award. The Award also increased provincial share from 47.5% to 57.5%. This will substantively reduce federal tensions. World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4th 19

20 SEVENTH NFC AWARD (Horizontal Distribution Shares) Province Population % % of Provincial Share of DP Balochistan NWFP * Punjab Sindh ** * 1% of undivided DP equivalent to 1.83% of provincial DP as seed fund for war ** 0.66% special transfer from federal government. World Bank Headquarters, Washington, DC - Black Auditorium - March

21 TENSIONS ASSOCIATED WITH SIZE ASYMMETRY Enhanced provincial autonomy expected from the ongoing work of the parliamentary Committee will also reduce the effect of size asymmetry on federal tensions. There is a greater asymmetry in revenue capacity of the CUs than in population creating an anomalous fiscal horizontal imbalance. Vertical imbalance resulting from centralized revenue collection can therefore be used with advantage for horizontal fiscal equalization. This issue has also been addressed effectively in 7 th NFC award. Newfound independent judiciary has created an outlook of stability of constitutional democracy and protection of the letter and spirit of the Constitution. World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4th 21

22 Thank you! World Bank Headquarters, Washington, DC - Black Auditorium - March 3 rd 4 th 22