Energy: Oil & Gas 2022 Comparisons

Last Updated August 09, 2022

Contributed By Kabraji & Talibuddin

Law and Practice

Authors



Kabraji & Talibuddin is a corporate and commercial law firm in Pakistan with a market-leading and innovative practice focused on project finance and energy, oil and gas, mergers and acquisitions, and dispute resolution. The firm was formed in Karachi in 1997 by the two name partners, who have over 60 years of legal experience between them. Kairas Kabraji is prominently recognised in Pakistan and abroad as one of the country’s leading corporate and commercial lawyers. Salman Talibuddin is independently recognised as a renowned litigation and dispute resolution lawyer who has acted in several high-profile and major disputes. The firm brings together an award-winning team with diverse experience to provide a full range of legal services. From routine matters to complex transactions and disputes, clients benefit from the team’s collective expertise through continual and valuable partner involvement in each matter handled by the firm.

Prior to 2010, ownership of oil and gas vested in the Federal Government pursuant to the Mineral (Acquisition and Transfer) Order, 1961 (President’s Order No. 8 of 1961)). However, following the 18th Amendment to the Constitution of Pakistan, 1973 (the “Constitution”) in 2010, the ownership of oil and gas was divided between the Federal Government and the Provincial Governments, under Article 172(2) and 172(3) of the Constitution as follows:

  • Article 172(2) of the Constitution states that all land, minerals and other things of value within the continental shelf or underlying the ocean beyond the territorial waters of Pakistan shall vest with the Federal Government.
  • Article 172(3) states that mineral oil and natural gas within any province or the territorial waters adjacent thereto shall vest jointly and equally between the province and the Federal Government.

There is a difference of opinion between the Provincial Governments and the Federal Government as to the consequence of Article 172(3). From a legal perspective, it is important to highlight that the entry of “mineral oil and natural gas” has been retained in the Federal Legislative List of the Constitution and that under Article 142(a) of the Constitution, Parliament has exclusive power to make laws with respect to any matter enumerated in the Federal Legislative List. Accordingly, the Federal Government is of the view that Article 172(3) does not affect the legislative powers of the Parliament with regard to mineral oil and natural gas. However, the Provincial Government of Khyber Pakhtunkhwa has argued, inter alia, that Article 172(3) allows the Provincial Assemblies to legislate on matters pertaining to mineral oil and natural gas. It has been argued by the Federal Government that the Petroleum Exploration and Production Policy, 2012 (the “E&P Policy”) and the Pakistan Onshore Petroleum (Exploration and Production) Rules, 2013 implementing the E&P Policy were promulgated after consultation with all the provinces and that all petroleum concession agreements executed after 2012 include the holding company of the respective province. Furthermore, the Federal Government has the executive authority, in accordance with Article 97 of the Constitution, in respect of the matters over which the Parliament has the power to make laws. Similarly, the executive authority of the province, in accordance with Article 137 of the Constitution, extends to the matters with respect to which the Provincial Assembly has power to make laws.

The current legal framework for regulating mines relating to nuclear substances, oil fields and gas fields and the development thereof is set out in the Regulation of Mines and Oil Fields and Mineral Development (Government Control) Act, 1948, which confers the Federal Government the authority to regulate mines and their development relating to nuclear substances, oil fields and gas fields, whereas other mines and mineral development are a provincial subject.

The exploration, transport, storage, processing, distribution and sale of petroleum in Pakistan are regulated by (i) the Ministry of Energy (MOE), specifically through the Directorate General Petroleum Concessions (DGPC) which falls under the policy wing of the MOE, and (ii) the Oil and Gas Regulatory Authority (OGRA).

The MOE is divided into the Petroleum Division and the Power Division. The Petroleum Division is the main authority for, among others, all matters concerning:

  • policy, legislation and planning regarding exploration, development and production;
  • import, export, refining, distribution, marketing, transportation and pricing of all kinds of petroleum and petroleum products;
  • matters bearing on internal aspects; and
  • federal agencies and institutions for the promotion of special studies and development programmes.

The functions of the DGPC include:

  • grant of petroleum rights, ie, reconnaissance permits, exploration licences, and development and production leases;
  • facilitation of exploration and production and services companies/activities;
  • oil and gas fiscal regime analysis and recommendation of adequate policies in view of international practices;
  • promotion of petroleum exploration, and negotiations with foreign and local petroleum exploration companies including petroleum concessions/production sharing agreements;
  • management of petroleum exploration, development and production operations in accordance with good international oil field practices, applicable rules and petroleum concessions; and
  • ensuring realisation of government receipts (dividends, royalties, rents, application fees, etc) and compilation of investment data and management of technical data.

OGRA was established pursuant to the Oil and Gas Regulatory Authority Ordinance, 2002, and its objectives are to foster competition, increase private investment and ownership in the midstream and downstream petroleum industry and protect the public interest while respecting individual rights and providing effective and efficient regulations. Some of the major functions of OGRA are as follows:

  • determination of revenue requirement and prescribed prices of natural gas utilities and notification of prescribed consumers’ sale prices;
  • monitoring the pricing of petroleum products under the deregulated scenario;
  • enforcement of technical standards and specifications (best international practices) in all the regulated activities; and
  • resolution of public complaints and disputes against licensees and between licensees.

The URLs for the MOE, OGRA and the DGPC are petroleum.gov.pk, ogra.org.pk and petroleum.gov.pk/Detail/ZTljOTk5OTAtNTUyZC00ZWM4LTg2N2QtYWJkNTAyMzYyOTIx respectively.

The following list of companies are those where the Government of Pakistan is the majority and controlling shareholder:

  • Pakistan State Oil Company Limited: the largest oil marketing company in Pakistan that is engaged in the marketing and distribution of various products such as motor gasoline, high speed diesel, furnace oil and jet fuel;
  • Pakistan Petroleum Limited: a major explorer, producer and supplier of natural gas crude oil, natural gas liquid and liquefied petroleum gas (LPG);
  • Oil and Gas Development Company Limited: the leading national company involved in the exploration and production of hydrocarbons;
  • Pakistan Refinery Limited: a hydro skimming refinery designed to process various imported and local crude oil (indirectly through Pakistan State Oil Company Limited);
  • Pak-Arab Refinery Limited (PARCO): PARCO has the most modern refinery in Pakistan, having a capacity of 120,000 barrels per day and over 2,000 km of cross-country pipeline network;
  • Sui Southern Gas Company Limited: Pakistan’s leading integrated gas company, engaged in the business of transportation and distribution of natural gas; and
  • Government Holdings (Private) Limited, a non-operator exploration and production company which is also a holding company for the Federal Government’s petroleum interests.

The following laws regulate the exploration, transport, storage, processing, distribution and sale of petroleum:

  • Oil and Gas Regulatory Authority Ordinance, 2002 (the “Ordinance”), which established OGRA and sets out its powers and functions;
  • Pakistan Oil (Refining, Blending, Transportation, Storage and Marketing) Rules, 2016 (the “2016 Rules”), which set out the processes for seeking licences and terms and conditions applicable to all regulated activities in the midstream and downstream sectors;
  • Petroleum Act, 1934, which regulates the import, transport, storage, production, refining and blending of petroleum and other inflammable substances;
  • Regulation of Mines and Oil Fields and Mineral Development (Government Control) Act, 1948, which grants the Federal Government power to enact rules in relation to the development of hydrocarbons;
  • Pakistan Onshore Petroleum (Exploration and Production) Rules, 2013 (the “Onshore Rules”), which regulate all petroleum rights except those relating to coal bed methane and apply to the onshore areas of Pakistan; and
  • Pakistan Offshore Petroleum (Exploration and Production) Rules, 2003 (the “Offshore Rules”), which regulate exploration, development and production of petroleum in offshore areas, which are defined as, inter alia, all the areas that lie completely seaward from the high-water mark within the jurisdiction of Pakistan.

There does not appear to be any specific requirement for the method of private investment in upstream interests, which can be made through debt or equity in a project company or by direct acquisition of the asset or interest by a private investor.

Rule 5 of the Onshore Rules permits any company to apply for the following: (i) a reconnaissance permit; (ii) an exploration licence; and/or (iii) a development and production licence. The expression “company” includes both local and foreign companies.

Rule 6 of the Offshore Rules permits any company (whether incorporated in Pakistan or abroad) to file an application for entering into a reconnaissance agreement or an agreement with respect to any offshore area to carry out petroleum exploration and/or production activities.

The 2016 Rules do not expressly state that only a company is permitted to apply for a licence for, inter alia, refineries, transportation, storage, distribution, marketing and sale of petroleum. However, the conditions that are attached to the application include disclosing its corporate identity; therefore, it can be inferred that only a company may participate in the businesses mentioned under the 2016 Rules.

In order to seek a petroleum right (defined under the Onshore Rules as a permit, licence or lease issued under the Onshore Rules for: (i) reconnaissance; (ii) exploration; and/or (iii) development and production), an application addressed to the DGPC is required to be made under Rule 6 of the Onshore Rules. The DGPC shall assess the information provided in the application based on the financial, technical and business experience of the applicant. Every application shall be accompanied by the following items:

  • applicable fee for the grant or renewal of a permit, licence or lease;
  • corporate information of the applicant;
  • financial information – inter alia, total investment, total turnover and net income;
  • health, safety and environmental management processes to be implemented by applicant;
  • management systems;
  • worldwide operating systems;
  • field management resources;
  • training policy;
  • technical capacity of the applicant – inter alia, proven oil and gas reserves booked as per standards set under good international oil field practices and production of oil and gas;
  • operational experience of the applicant;
  • five copies of a map which delineates the boundaries of the area of which the petroleum right is being applied for. Either the map must be taken from the Survey of Pakistan, or if the area is identified by a block system, the block number will suffice; and
  • any additional information that the DGPC may require, which must be provided within three months from date of request.

Pursuant to Rule 6(6) of the Onshore Rules, the Federal Government may accord the status of Strategic Partner (defined under the Onshore Rules as a “foreign state owned and controlled company to whom the petroleum right to explore for and develop petroleum with a given acreage has been granted following direct negotiations between the Federal Government and the government of the strategic partner”) to the applicant in accordance with the E&P Policy and the Onshore Rules. Strategic Partners will be given privileged award of petroleum rights (without following competitive bidding for certain blocks selected by the DGPC) on mutually acceptable terms and conditions.

Similarly, Rule 7 of the Offshore Rules requires any applicant to make an application addressed to the DGPC seeking a reconnaissance permit, exploration licence or production and development lease for any offshore area. The term “offshore area” is defined under the Offshore Rules as all areas that lie completely seaward from the high-water mark within the jurisdiction of Pakistan, and includes all areas within the territorial waters, the historic waters, the contiguous zone, the continental shelf and the exclusive economic zone, as each is defined in the Territorial Waters and Maritime Zones Act, 1976. The applicant must provide the following information/items along with the application:

  • applicable fee for the grant or renewal of a permit, licence or lease;
  • corporate information of the applicant;
  • period over which the petroleum right is being applied for;
  • location and size of the area for which the application is being made;
  • previous experience in petroleum exploration, production and development in Pakistan and abroad;
  • amount of capital available for the activities required under the application; and
  • any further information as may be required under the Onshore Rules.

Under Rule 18 of the Offshore Rules, once an applicant is successful, the Federal Government may require the applicant to enter into an agreement with Government Holdings (Private) Limited (GHPL). GHPL has been established under the Offshore Rules to secure the Federal Government’s petroleum rights over the area(s) designated by an interested exploration and production company.

Rule 16(1) of the Onshore Rules provides that successful applicants for a petroleum exploration licence shall furnish an irrevocable and unconditional guarantee with respect to the obligations and liabilities of the holder of such licence on or before the execution of the licence. Rule 16(2) further provides that the DGPC may, in its sole discretion, accept a guarantee in one or more of the following forms:

  • bank guarantee equal to 25% of the financial obligation from a bank of international repute acceptable to the DGPC;
  • parent company guarantee of a multinational exploration and production company with a proven track record;
  • corporate guarantee of a Pakistan-registered exploration and production company having operatorship with a majority working interest in producing fields within Pakistan;
  • in case of local production, first and preferred lien on petroleum production equal to 100% of the minimum financial obligation; and/or
  • deposit of 25% of the minimum financial obligation in an escrow account with a bank of international repute acceptable to the DGPC.

Rule 29(1) of the Onshore Rules provides that in relation to a licence, rent shall be payable by a licence holder to the Federal Government:

  • in respect of the first five years of a licence, PKR3,500 per square kilometre and thereafter PKR800 per square kilometre; and
  • in case of renewal of a licence, PKR5,000 per square kilometre for the first five years and thereafter PKR2,750 per square kilometre.

Rule 32 of the Offshore Rules also requires rent to be paid to the Federal Government, as specified in the licence, which may be adjusted annually pursuant to an appropriate index. Similarly, rent shall also be payable to the Federal Government under Rule 44 of the Offshore Rules in case of a lease.

Furthermore, Rule 38 of the Onshore Rules provides that a royalty rate of 12.5% of the wellhead value of petroleum on the basis of petroleum produced shall be payable to the Federal Government unless a different rate is notified. Such royalty rate shall also be payable on a monthly basis within a period of 45 days, which if delayed will attract a fine at the rate of LIBOR plus 2%. If such obligation remains undischarged for a period of two consecutive months, then the DGPC may take any actions it deems fit within its power under the Onshore Rules.

Rule 41 of the Offshore Rules also provides a royalty rate of 12.5% on the petroleum produced unless a different rate is notified. Such royalty may also be paid in kind through the petroleum produced. Such royalty rate shall also be payable on a monthly basis within a period of 45 days, which if delayed will attract a fine at the rate of LIBOR plus 1.5%. If such obligation remains undischarged for a period of two consecutive months, then the DGPC may take any actions it deems fit within its power under the Offshore Rules.

Taxation advice should be sought from specialist tax advisers in Pakistan.

No special rights have been granted to any government-owned oil and gas company pursuant to the laws stated in 1.4 Principal Petroleum Law(s) and Regulations.

Pursuant to Rule 62 of the Onshore Rules, the holder of a petroleum right must ensure the use of qualified Pakistani goods and services to the extent that those goods and services are competitive with regard to price, quality, quantity and delivery schedule. Only those local producers that are qualified under the Customs General Orders for the supply of goods and services may be invited to tender. A similar requirement has been imposed under Rule 65 of the Offshore Rules.

Moreover, Rule 63 of the Onshore Rules requires that the holder of a petroleum right must give first preference to Pakistani nationals for employment in its organisations including their technical, financial, commercial, legal and administrative divisions. There is a further obligation to arrange for training for Pakistani personnel both in Pakistan and abroad. Rule 63 of the Onshore Rules further emphasises that the operator and its contractors must ensure the employment of unskilled workers from the locals of the area in which exploration and production activities are in progress to the extent of at least 50% of their total strength of unskilled workers. Any application for the grant and/or renewal of any licence under the Onshore Rules must contain a description of the measures proposed by the applicant during the exploration, appraisal, development and production phases so as to ensure compliance with Rule 63 of the Onshore Rules. Furthermore, the Federal Government may require the holder of a petroleum right to provide training to the personnel of the Federal Government and Provincial Governments to develop their capability and efficiently perform their duties. In contrast, Rule 66 of the Offshore Rules requires that any petroleum right holder must consult with the DGPC to determine the number of Pakistani personnel to be employed by such organisation.

Under Rule 26 of the Onshore Rules, upon completion of appraisal and evaluation work including extended well testing, the holder of a licence may submit a notice for declaration of commercial discovery to the DGPC along with a report setting out all relevant geological information including estimates of recoverable reserves and daily production. Upon such declaration, the licence holder shall be entitled to apply for the grant of a licence along with submission of a development plan which must set out, inter alia, proposals for the development and production of each discovery area, proposals relating to the spacing, drilling and completion of wells, the production and storage installations and transport and delivery facilities required for the petroleum production and the projected production profiles for crude oil, condensate and natural gas and other products for the life of the field. Upon being satisfied that the terms and conditions of a licence have been duly complied with or that the petroleum right holder’s progress in accordance with its work programme is satisfactory, the Federal Government shall grant a development and production lease to the applicant. Pursuant to Rule 34 of the Onshore Rules, a lease period may not exceed 25 years.

Under Rule 29 of the Offshore Rules, upon completion of appraisal and evaluation work including extended well testing, the holder of a licence may submit a notice for declaration of commercial discovery to the DGPC along with a report setting out all relevant geological information including estimates of recoverable reserves and daily production. Upon declaration, the licence holder shall be entitled to apply for the grant of a licence along with submission of a development plan which must set out, inter alia, proposals for the development and production of each discovery area, proposals relating to the spacing, drilling and completion of wells, the production and storage installations and transport and delivery facilities required for the petroleum production and the projected production profiles for crude oil, condensate and natural gas and other products for the life of the field. Upon being satisfied that the terms and conditions of a licence have been duly complied with or that the petroleum right holder is making satisfactory progress with its work programme along with the development programme, the DGPC shall grant a development and production lease to the applicant. The period of lease may not exceed 25 years under Rule 37 of the Offshore Rules.

The key terms of an upstream licence under the Offshore Rules require the licensee to enter into a production sharing agreement not later than 30 days after the licence is granted. The licence also sets out, inter alia, the areas where the licensee has the exclusive right to perform activities in connection with petroleum exploration, the validity period of the licence and that the production and exploration company shall undertake such coring and other tests and registrations as the DGPC may regard as necessary in order to estimate possible petroleum finds.

Similar terms are present under a licence issued under the Onshore Rules whereunder the licensee is required to enter into a concession agreement with the President of Pakistan (nominally representing the state). Additionally, where there is more than one production and exploration company, such companies are required to enter into a joint operating agreement.

Rule 9 of the Onshore Rules prohibits the assignment of any petroleum right (ie, a permit for the carrying out of a reconnaissance survey or an exclusive petroleum exploration licence or a development and production lease or a mining lease, and any extension thereto) without the prior written approval of the DGPC. If such petroleum right is required to be assigned, an application to the DGPC must be made under Rule 10 of the Onshore Rules, which must be accompanied by a fee of PKR100,000. The application must also provide the particulars and details of the proposed assignee. The same restrictions are applicable under the Offshore Rules. No time limit has been set out under the Onshore Rules or Offshore Rules as to the time frame within which an application for assignment shall be granted.

The standard form of the development and production lease annexed in the Onshore Rules and Offshore Rules provides that “petroleum shall be produced in accordance with a production profile approved from time to time by the Government”. No express restrictions on production rates are contained in the Onshore Rules or the Offshore Rules.

There is no restriction under the 2016 Rules on the types of private investment that may be made in the midstream and downstream petroleum industry. However, it is pertinent to mention that the standard form of licences for regulated activities under the 2016 Rules requires an applicant to set out the total investment to be injected, including setting out the equity and debt components of such investment. Debt and equity are the typical forms of private investment used in downstream operations.

Pakistan’s largest oil marketing company, Pakistan State Oil Company Limited (PSO), has been granted various licences under the 2016 Rules. Although details of the exact terms and conditions of the licences granted to PSO are not publicly accessible, we note that pursuant to the 2016 Rules PSO is required to comply with the following requirements:

  • maintain minimum stocks of petroleum as may be notified by the Federal Government from time to time;
  • display the maximum sale price of petroleum products at every retail outlet for the information and convenience of consumers;
  • ensure steady supply to its licensed retail outlets, agents, dealers or bulk consumers; and
  • ensure petroleum products meet the specifications set out at its retail outlets.

There are also general conditions for all licence holders under Rule 53 of the 2016 Rules which include, inter alia, the following:

  • comply with all applicable laws, rules and regulations relevant to the regulated activity;
  • supply petroleum products of the laid-down specifications;
  • refrain from exercising discrimination against or showing undue preference towards any licensee or class of consumers in the discharge of its obligations;
  • enter into proper commercial contracts with other licensees or classes of consumers in the discharge of its obligations;
  • supply petroleum products to such far-flung areas as may be specified by OGRA keeping in view the policy guidelines issued by the Federal Government under the Ordinance; and
  • provide to OGRA or an authorised officer such information in respect of its business activities, expansion programmes and any other matter relevant for the exercising of any of its powers by OGRA in such form and within such time as OGRA may in writing reasonably require in accordance with the provisions of its licences.

Furthermore, the power to issue tariffs in relation to the prices that oil marketing companies charge to consumers rests solely with OGRA under Section 7(1) of the Ordinance, which provides that “subject to policy guidelines, the Authority shall determine or approve tariffs for regulated activities whose licences provide for such determination or such approval or where authorised by this Ordinance”. Section 7(2) of the Ordinance also provides that the criteria for determination, approval, modification and revision of tariffs shall be prescribed in the rules and in the terms and conditions of each licence and shall include:

  • provision for the protection of users of regulated activities and consumers against monopolistic or oligopolistic pricing; 
  • cost of research, development and capital investment programmes;
  • provision of reasonable returns to attract investment in quantitative and qualitative improvements of regulated activities;
  • encouragement and reward of efficiency;
  • sending of appropriate price signals regarding the relative abundance or scarcity of supply of such regulated activity;
  • minimising economic distortions; and
  • keeping in view the costs of alternative or substitute sources of energy.

All midstream and downstream activities are subject to the 2016 Rules and include the activities of oil refining, blending of lubricating oils and grease, transportation of oil, commercial storage of oil and petroleum, marketing of petroleum, lubricant marketing and oil testing.

The information and items required by OGRA for the construction and operation of an oil refinery are as follows:

  • corporate structure and information;
  • proposed location and capacity;
  • clearance from the relevant provincial environmental protection authority;
  • refinery configurations;
  • estimated cost of the project, including the debt and equity components;
  • status of availability of utilities;
  • status of availability of port/terminal storage facilities;
  • proposed arrangements for disposal of product for local consumption;
  • disposal of waste product in accordance with the National Environment Quality Standards;
  • detail of work programme and schedule for completion; and
  • details of health, safety and environmental management arrangements to be adopted.

The information and items required by OGRA for the construction and operation of an oil blending plant, reclamation plant or grease plant are as follows:

  • corporate structure and information or partnership deed;
  • proposed location;
  • estimated cost of the project including the debt and equity components;
  • financial due diligence certificate from a bank/financial institution or details of income tax paid in the last five years in case of self-financing;
  • clearance from the relevant provincial environmental protection authority;
  • capacity of the proposed plant;
  • detail of work programme and schedule for completion;
  • details of health, safety and environmental management arrangements to be adopted;
  • proposed source of lube base oil; and
  • organogram to operate the plant.

The information and items required by OGRA for the construction and operation of an oil pipeline are as follows:

  • corporate structure and information;
  • estimated cost of the project including the debt and equity components;
  • financial due diligence certification;
  • proposed route of the oil pipeline;
  • capacity of the oil pipeline;
  • name of the products to be transported;
  • economic feasibility;
  • main design features of the pipeline;
  • operating parameters of the pipeline;
  • throughput commitment with the users; and
  • details of health, safety and environmental management arrangements to be adopted.

The information and items required by OGRA for the construction and operation of oil storage facilities are as follows:

  • corporate structure and information;
  • estimated cost of the project including the debt and equity components;
  • details of the storage facility and its capacity along with its location;
  • clearance from the relevant provincial environmental protection authority;
  • names of products to be stored;
  • source of the product to be stored;
  • conceptual engineering design of the storage facility and specifications of material;
  • economic and financial feasibility;
  • detail of work programme and schedule for completion;
  • mode of transportation of the product;
  • undertaking that the storage will not be used for any purpose other than the storage of petroleum products;
  • details of health, safety and environmental management arrangements to be adopted; and
  • details of proposed emergency response system.

The information and items required by OGRA for the grant of a licence to undertake oil marketing activities are as follows:

  • names of directors and shareholders of the company;
  • certificate of incorporation under the company laws of Pakistan. The applicant company must not be affiliated with an existing oil marketing company;
  • proof of financial competence from a scheduled bank confirming that the company is able to invest to the amount as notified by the Federal Government from time to time during the initial three-year period for developing infrastructure for oil marketing and has the upfront equity to the amount as decided by the Federal Government, to finance the proposed oil marketing company;
  • proof of technical competence;
  • details of proposed marketing plan;
  • details of infrastructure to be developed;
  • province-wise break-up of storage capacity to provide a minimum of 20 days’ cover of proposed sale;
  • detailed transport plan; and
  • an affidavit confirming that:
    1. none of the sponsors/relatives of the sponsors/directors of the company are involved in any criminal case and/or bank/loan or direct or indirect federal tax default; and
    2. no case is pending in any national or international courts for the recovery of a loan, tax fraud, etc against the company or its directors/sponsors.

The most common forms of commercial arrangement for downstream operations are fuel supply agreements for thermal power plants that utilise furnace oil and high speed diesel for the production of energy. Such agreements are guaranteed by the purchaser through guarantees, standby letters of credit and various other forms of payment security.

Furthermore, Section 4 of the Petroleum Products (Development Surcharge) Ordinance, 1961 (the “Surcharge Ordinance”) provides that no company may sell any petroleum product at a price higher than the fixed sale price determined by the Federal Government. Such fixed sale price includes the ex-refinery, ex-installation, ex-retail outlet or ex-depot sale price as well as the inland transportation expenses that are incurred by the companies transporting such petroleum products. Section 3 of the Surcharge Ordinance also empowers the Federal Government to levy a development surcharge equal to the differential margin in respect of petroleum products produced or, as the case may be, purchased by it for resale (except for export) on every company set out in the Surcharge Ordinance.

While the prices of petroleum and related products are regulated by the Federal Government, it is empowered to delegate such function to OGRA pursuant to Section 6(2)(r) of the Ordinance, which may accordingly notify the prices at which such petroleum products are to be sold to consumers. OGRA has also been granted the power, under Section 7 (1) of the Ordinance and subject to policy guidelines, to determine and approve tariffs applicable to “regulated activities” as defined in the Ordinance which include, inter alia, oil marketing, storage, transport via pipelines and refining.

Taxation advice should be sought from specialist tax advisers.

No special rights have been granted to any national oil or gas company pursuant to the 2016 Rules which govern all midstream and downstream activities.

There do not appear to be any positive obligations under the Ordinance and the 2016 Rules (which regulate midstream/downstream activities) to use local goods and services for undertaking any of the regulated activities; however, it cannot be categorically ruled out that OGRA might impose additional conditions on an applicant of a regulated activity including but not limited to the requirement to use only local goods and services.

Nevertheless, if a licence holder wishes to use foreign goods and services, it shall be subject to various taxes that may be applicable on such goods and services.

While no standard format of licence has been annexed to the 2016 Rules, Rule 53 thereof sets out the licence conditions applicable to all forms of midstream and downstream licences as follows:

  • comply with all applicable laws, rules and regulations relevant to the regulated activity;
  • supply petroleum products of the laid-down specifications;
  • refrain from exercising discrimination against or showing undue preference towards any licensee or class of consumers in the discharge of its obligations;
  • enter into proper commercial contracts with other licensees or classes of consumers in the discharge of its obligations;
  • supply petroleum products to such far-flung areas as may be specified by OGRA keeping in view the policy guidelines issued by the Federal Government under the Ordinance;
  • provide to OGRA or an authorised officer such information in respect of its business activities, expansion programmes and any other matter relevant for the exercising of any of its powers by OGRA in such form and within such time as OGRA may in writing reasonably require in accordance with the provisions of its licences;
  • enter into all contracts on an arm’s length basis and not enter into any contract or other arrangement with any of its associated companies except with the prior written approval of OGRA;
  • carry out the regulated activity in accordance with the technical standards applicable to the midstream and downstream petroleum industry or prescribed by OGRA, from time to time, in consultation with all stakeholders;
  • strictly follow the requirements of the Pakistan Environmental Protection Act, 1997 and applicable laws;
  • not to abandon any regulated activity, in part or in whole, resulting in the discontinuation of supply of petroleum products or their sale in any area without the prior written consent of OGRA;
  • ensure prudence and cost-efficiency in operation of the regulated activity and cost-effective supplies to the consumer;
  • obtain and maintain insurance cover against any accident causing loss of life and/or property;
  • maintain a planned programme for maintenance and obtain prior approval of OGRA for the temporary closure of any operation of the regulated activity;
  • maintain minimum stocks of crude oil or petroleum products as directed by OGRA having due regard to the storage capacity of the licensee;
  • comply with any other condition which OGRA may impose at the time of grant of licence; and
  • take all measures for the benefit of the local labourers as well as the welfare of the people and area of the provinces concerned to give a social boost to the region.

There are no condemnation/eminent domain rights that are available to the Federal Government under the Ordinance or the 2016 Rules. However, under the Land Acquisition Act, 1894 (LAA), any land can be declared to be required for a “public purpose” and can be compulsorily acquired by the Federal or Provincial Government. Furthermore, Section 33 of the Ordinance also permits OGRA to assist potential licensees by declaring that land required for the production of oil and gas is required for a “public purpose” under the LAA.

Furthermore, private investment in Pakistan is protected under Section 8 of the Protection of Economic Reforms Act, 1992, which provides that no foreign, industrial or commercial enterprise established or owned in any form by a foreign or Pakistani investor for private gain in accordance with law, and no investment in share or equity of any company, firm or enterprise, and no commercial bank or financial institution established, owned or acquired by any foreign or Pakistani investor, shall be compulsorily acquired or taken over by the Government.

Third-party access in the midstream and downstream sectors does not appear to be a regulated activity; therefore, granting third-party access appears to be at the discretion of the licence holder of a regulated activity.

There are no restrictions on the sale of products that can be made to the local market for a midstream/downstream licence holder under the laws mentioned in 1.4 Principal Petroleum Law(s) and Regulations. However, any holder of a licence to perform a regulated activity under the 2016 Rules will still be subject to the Competition Act, 2010 as well as the relevant consumer protection laws that are applicable in each province of Pakistan in respect of product sales into the local market.

There do not appear to be any prohibitions on the export of petroleum, natural gas and crude oil; however, due to the scarcity of such products in Pakistan they are very unlikely to be exported.

Rule 64(1) of the 2016 Rules provides that the any transfer, assignment or sub-lease of any licence granted under the 2016 Rules may not be made without the prior written approval of OGRA. Once an application is made under Rule 64(1), OGRA shall determine the genuineness, capacity and capability of the transferee, assignee or sub-lessee. OGRA may ask for additional information or documents including affidavits, undertakings and any other information OGRA deems fit.

One of the aims of the current petroleum policy in Pakistan (ie, the E&P Policy) is to encourage foreign direct investment in Pakistan. Under the E&P Policy, foreign companies that are operating in Pakistan are eligible to acquire a petroleum right (ie, a reconnaissance permit, an exploration licence or a development and production lease) in accordance with the Onshore Rules. Foreign companies operating outside Pakistan that have concessions in other areas of the world are eligible to acquire a petroleum right in Pakistan provided such companies demonstrate the necessary technical and financial capability. Further, the Federal Government may classify certain national oil companies that represent foreign governments as Strategic Partners and directly negotiate with these companies if it deems that this would improve the exploitation of petroleum resources in Pakistan. Strategic Partners will have the privilege of being awarded petroleum rights in respect of certain blocks of land (for the purposes of exploration and production) selected by the DGPC, without having to comply with the competitive bidding requirements.

Under the E&P Policy, foreign exploration and production companies have the right to remit abroad proceeds resulting from the sale of petroleum within Pakistan in accordance with the regulations of the central bank of Pakistan (ie, the State Bank of Pakistan, or SBP). In this context, the SBP, through paragraph 27 of Chapter 14 of the Foreign Exchange Manual, has permitted companies operating in the petroleum industry (oil and gas) under a concession agreement with the Federal Government to remit their eligible sale proceeds outside Pakistan, provided the necessary documents are submitted to the authorised dealer (ie, commercial banks licensed by the SBP to deal in foreign exchange). The rights of foreign companies are set out under the concession agreement entered into between those companies and the Federal Government. Under the model petroleum concession agreement (for onshore areas), disputes are to be submitted to the International Centre for Settlement of Investment Disputes.

Section 2 of the United Nations (Security Council) Act, 1948 (which was enacted to codify the decisions of the United Nations Security Council (the “Security Council”) into Pakistan law) provides that the Federal Government shall publish the decisions of the Security Council as well as provide for punishment for any person guilty of breaching any such decision. In the recent past, decisions have been codified for organisations and countries which include, inter alia, the Democratic People’s Republic of North Korea, Iran, Iraq, Libya and South Sudan. A complete list of sanctions is available via the following link: mofa.gov.pk/unsc-sanctions/.

The primary legislation for the protection, conservation, rehabilitation and improvement of the environment and for all matters connected therewith and ancillary thereto in Pakistan is the Pakistan Environmental Protection Act, 1997 (the EPA) and the Environmental Protection Agency (Review of Initial Environmental Examination and Environmental Impact Assessment) Regulations, 2000 made pursuant thereto. Following the 18th Amendment to the Constitution, the powers of review and approval of Environmental Impact Assessments (EIAs) and Initial Environmental Examinations (IEEs) are devolved to the provincial environmental protection agencies, which are as follows: the (i) Sindh Environmental Protection Agency (SEPA), which has jurisdiction over the province of Sindh; (ii) Provincial Environmental Protection Agency (PEPA), which has jurisdiction over the province of Punjab; (iii) Balochistan Environmental Protection Agency (BEPA), which has jurisdiction over the province of Balochistan; and (iv) Khyber Pakhtunkhwa Environmental Protection Agency (KEPA), which has jurisdiction over the province of Khyber Pakhtunkhwa. The links to the websites for each of the four provincial environmental protection agencies are as follows:

The powers of (i) SEPA are set out under the Sindh Environmental Protection Act, 2014, (ii) PEPA are set out under the Punjab Environmental Protection Act, 1997, (iii) KEPA are set out under the Khyber Pakhtunkhwa Environmental Protection Act, 2014, and (iv) BEPA are set out under the Balochistan Environmental Protection Act, 2012. The functions of the foregoing provincial environmental protection agencies include administering and implementing the provisions of the respective environmental acts and taking all necessary measures for the implementation of approved environmental policies.

Depending on the scope of the project, either an EIA or an IEE will be required under the relevant laws. Oil and gas extraction projects including exploration, production, gathering systems, separation and storage require an IEE.

The environmental protection laws (referred to in 5.1 Principal Environmental Laws and Environmental Regulator(s)) applicable in each of the provinces are largely similar and provide, inter alia, that the construction or operation of a project may not be commenced unless an IEE or an EIA has been filed with the relevant environmental agency and approval of the same has been obtained.

Upon receipt of an IEE approval (which may take anywhere between 45 and 90 days depending upon the relevant province where the approval is being sought), the project company is also required to provide an undertaking acknowledging acceptance of the terms of the IEE approval. Thereafter, and prior to operation of the project, the project company shall obtain a written confirmation from the relevant environmental protection agency that the conditions of the IEE approval and any requirements in the IEE checklist relating to the design and construction of the project, the adoption of mitigatory and other measures and other relevant matters have been duly complied with. Such confirmation shall be accompanied by an environmental management plan indicating the measures and procedures proposed to be taken to manage or mitigate the environmental impacts for the term of the projects, including provisions for monitoring, reporting and auditing.

If, at any time, on the basis of information or a report received or inspection carried out, the relevant environmental protection agency is of the view that the conditions of an approval have not been complied with, or that the information submitted in an approved IEE is incorrect, it shall issue a show cause notice within two weeks of receipt thereof as to why the approval should not be cancelled. If no reply is received or an unsatisfactory reply is received, the environmental protection agency may after giving the project company an opportunity of being heard: (a) require a project company to comply with such conditions within such period as it may specify, failing which the approval will stand cancelled; or (b) cancel the approval. Upon cancellation of the approval, the construction or the operation of the relevant project must cease.

Under Rule 39 of the Offshore Rules, a petroleum exploration and production company is required to submit an environmental management and protection plan for approval by the relevant environmental protection agency. Rule 39(2) of the Offshore Rules provides that the plan shall include, inter alia, a description of the programme established to monitor the effect of routine operations on the natural environment and the measures adopted to minimise or mitigate the same; all contingency plans including without limitation response to, and mitigation of, the accidental spill of petroleum or hazardous substances; and a description of equipment and procedures for treatment, handling and disposal of waste material compliance monitoring programmes to ensure that the composition of spilled waste material is in accordance with the limits specified in the environmental management and protection plan. An environmental management and protection plan, if so required by the Federal Government, shall be accompanied by a review completed by a third party approved by the appropriate authority certifying that the environmental management and protection plan, the equipment proposed, the risks assessed, the practices and procedures identified, and all other necessary documents, have been reviewed and are reasonable and efficient and are consistent with good international petroleum industry practices for the protection of the environment.

The requirements for decommissioning will be set out under the lease agreements executed by the production and exploration companies with the DGPC.

The Pakistan Climate Change Act, 2017 (the Climate Change Act) has been enacted for the purposes of, inter alia, enabling Pakistan to meet its obligations under international conventions. One of the functions of the Pakistan Climate Change Council (established under the Climate Change Act) is to monitor the implementation of international agreements relating to climate change including the United Nations Framework Convention on Climate Change, Rio De Janeiro, 1992 (UNFCCC), the Kyoto Protocol to the UNFCCC, 1997 and the Paris Agreement, 2015. Additionally, the Climate Change Act also establishes the Pakistan Climate Change Authority, which is responsible for, inter alia, the formulation of low carbon and green growth strategies and for designing, establishing and maintaining a national registry and database on greenhouse gas emissions in accordance with internationally adopted emissions quantification methodologies, standards and protocols. The specific goals of the Federal Government in relation to climate change are set out in the Nationally Determined Contributions, which may be accessed at the following link: unfccc.int/sites/default/files/NDC/2022-06/Pakistan%20Updated%20NDC%202021.pdf

Under the laws of Pakistan, local governments are not empowered to regulate any matters pertaining to the development of oil and gas.

There are no special schemes for unconventional upstream interests.

The Federal Government through the Ministry of Petroleum and Natural Resources introduced the Liquefied Natural Gas (LNG) policy in 2011, to “facilitate expeditious implementation of the LNG Projects”. Under the 2011 LNG policy, regasified LNG may also be procured by the private sector and by the public sector in public-private partnership based on the lowest price demonstrable to the regulator.

In addition to the 2011 LNG policy, OGRA has introduced the Oil and Gas Regulatory Authority (Liquefied Natural Gas) Rules, 2007 (the “2007 LNG Rules”). The 2007 LNG Rules set out the manner and procedure for obtaining a licence for any one or a combination of more than one activity relating to LNG, ie, construction of an LNG production facility, operation of an LNG production facility, construction of an LNG processing facility, operation of an LNG processing facility, construction of an LNG testing facility, operation of an LNG testing facility, construction of an LNG storage facility, operation of an LNG storage facility, construction of an LNG terminal, operation of an LNG terminal, transportation of LNG, filling of LNG, and marketing and distribution of LNG.

As per the updated National Climate Change policy, the Federal Government intends to take certain measures to mitigate global greenhouse gas emissions which include prioritising the import of natural gas, LNG and LPG over the import of oil and coal, except in respect of specific fuel requirements such as liquid fuel for transport and cooking coal for the steel industry. Under the updated Nationally Determined Contributions, 2021 (the “NDCs”), Pakistan intends to shift to 60% renewable energy and 30% electric vehicles by 2030 and completely ban imported coal. However, as per the NDCs, the finance required to effect the energy transition in the country has been estimated to be USD101 billion. The effect of energy transition considerations on the development and utilisation of oil and gas assets remains to be seen. Presently, Pakistan’s energy sector is heavily dependent on oil and natural gas.

A unique characteristic in Pakistan is the method by which both the Federal and Provincial Governments exercise concurrent jurisdiction in respect of oil and gas ownership pursuant to Article 172(3) of the Constitution. While the de facto control over oil and gas is exercised by the Federal Government, the draft of the petroleum concession agreement currently approved by the Federal Government and the Provincial Government requires a special purpose vehicle of the Provincial Government to be a party thereto and thereby regulates the granting of such petroleum concessions from the perspective of the Provincial Government.

There have been no material changes in oil and gas regulation over the past calendar year.

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Law and Practice in Pakistan

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Kabraji & Talibuddin is a corporate and commercial law firm in Pakistan with a market-leading and innovative practice focused on project finance and energy, oil and gas, mergers and acquisitions, and dispute resolution. The firm was formed in Karachi in 1997 by the two name partners, who have over 60 years of legal experience between them. Kairas Kabraji is prominently recognised in Pakistan and abroad as one of the country’s leading corporate and commercial lawyers. Salman Talibuddin is independently recognised as a renowned litigation and dispute resolution lawyer who has acted in several high-profile and major disputes. The firm brings together an award-winning team with diverse experience to provide a full range of legal services. From routine matters to complex transactions and disputes, clients benefit from the team’s collective expertise through continual and valuable partner involvement in each matter handled by the firm.