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Enhancing Exploration Activity through Further Incentives and Building Investor Confidence

Enhancing Exploration Activity through Further Incentives and Building Investor Confidence. Mazhar Farooq Secretary General PPEPCA. Hydrocarbon Potential Basins Overview. Sedimentary Basins. Hydrocarbon Potential.

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Enhancing Exploration Activity through Further Incentives and Building Investor Confidence

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  1. Enhancing Exploration Activity through Further Incentives and BuildingInvestor Confidence Mazhar Farooq Secretary General PPEPCA Pakistan Petroleum Exploration & Production Companies Association

  2. Hydrocarbon PotentialBasins Overview Sedimentary Basins

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

  4. Oil & Gas Discovered - By Basin Energy Year Book Note: Potwar and Lower Indus basins are now mature and declining.

  5. Discoveries & Reserve size Trends of Mature Basins MMboe • Declining field size trends indicate future discoveries of less than 10 MMboe (57 Bcf) in mature basins • Go for deeper horizons and infill drilling? • How to make smaller fields commercially attractive? Source: Energy Year Book 2009

  6. Major Issues of E&P Companies • SECURITY • STABILITY OF CONTRACT PROVISIONS • CLEAR POLICIES ON REGULATION • COMPETITIVE GAS PRICING The Fraser Global Survey 2010 also highlights some of the major irritants to investment in Pakistan.

  7. Fraser Survey - Comparison of Factors Pakistan Specific Source: Global Petroleum Survey – Fraser Institute

  8. Pakistan – India Comparison PPEPCA Paper 2010

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

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

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

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

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

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

  15. Elements of Successful Petroleum Regulation

  16. COMPETITIVE GAS PRICING Gas Pricing is a function of the following elements: Geological Risk Reserve Size Risk Oil Price Risk Country's Economic Risk Security Risk Market Risk – discovery rendered uneconomic for various reasons Investment decision by the Investor is related to Risk & Reward – it is not only a relation to the crude oil price but depends on many other factors.

  17. COMPETITIVE GAS PRICINGPresent Realized Price per barrel Crude Note: Policy 2001 capped at $ 36/bbl & 2009 at $100/bbl. One bbl crude = 5.62 MMbtu Out of the above, 40 % is retained by the Government as taxes, Royalty and other take.

  18. COMPETITIVE GAS PRICING • Since 1999, There has been a successive reversal of the de-regulation policy which was started with the 1994 Petroleum Policy. • PPEPCA recommends the following: • To accelerate work on natural gas exploration, there is a strong need to establish direct linkage of domestic natural gas price with the import substitution options. Such a linkage will ensure that: • the producers’ returns are based on the prevailing energy prices in the market for comparable commodity; and • the country gains from lower netback energy prices. • Domestic producer gas price may be linked to average price of imported energy with reasonable zonal indexation; and • Ceiling on the producer gas prices imposed under 2001/2009 policies be removed.

  19. Oil Imports Exploration Activity Trend by Foreign Companies 50 65% of export earnings 40 > 37% decline in gas ressrves add 74 320 5.9 > 66% less area under exploration 28 > 38% lower awards 30 24 19 22 20 3.7 46 17 10 12 US$ Billion 9 7 8 12 10 7 7 4 3 3 3 3 0 (1) (1) (2) 107 (3) (6) (10) (12) (Source: Economic survey 2008 – 09) (14) (14) (20) (21) Petroleum Imports Imports Balance Exports (30) Licenses Granted Area for Licenses (000 Sq. Kms Gas Recoverable Reserves (TCF) 2001 2002 2003 2004 2005 2006 2007 2008 2009 1994-2000 2001 Onwards Impact of Oil Price on Cost of Business Import Options : Fossil Fuel Comparison 160 600 600 566 545 16.0000 Drilling Cost (US$/ft) 140 IPI Border Price HSFO Landed Price LNG Landed Price Oil Price (US/bbl) 500 500 459 14.0000 IP Border Price @ 78% crude oil parity LNG Landed Price @ 3.95% crude oil parity+ 75% Henry Hub+1.58 HSFO assumed at 75% of crude oil Henry Hub assumed @50% of crude oil 120 12.0000 400 400 100 320 US$/feet 10.0000 305 US$/Barrel 80 300 300 US$/MMBtu 8.0000 242 215 209 60 6.0000 171 200 200 120 40 4.0000 100 100 2.0000 20 0.0000 0 $25 $50 $75 $100 2000 2000 2001 2001 2007 2007 2008 2008 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2009 2009 Paradigm Shift in Oil Market

  20. Global Investment ClimateFor Petroleum Upstream Development Most Attractive 2nd Quintile 3rd Quintile 4th Quintile Least Attractive Unmeasured Fraser Global survey 2010

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