The Petroleum Ministry is said to be using all its energy to pass on the benefits of increase in international oil prices to the oil exploration and production (E&P) companies, in the name of settlement of discount rate on crude oil and condensate prices, official sources told Business Recorder.
They said that the disputed proposal is being placed before the Economic Co-ordination Committee (ECC) of the Cabinet, scheduled to meet on October 31. Though recommendations have been finalised by an inter-ministerial committee, the main role behind this proposal, waiting for final approval, is said to be of the sponsoring ministry, sources added.
They said that the government purchases crude oil from different E&P companies in accordance with the pricing provisions of various Crude Oil Sales Agreements (COSAs)/Petroleum Concession Agreements (PCAs) signed between them and the GOP.
Under the provisions of some of the agreements which were signed prior to Petroleum Policy 2001 with British Petroleum (BP), Orient Petroleum International Inc (OPII), Pakistan Oilfields Limited (POL) and Oil and Gas Development Company Limited (OGDC), the sellers of the crude oil receive price for their share sold to the government after applying a sliding scale discount.
The government is beneficiary of this discount and the same is deposited in government treasury. The COSAs/PCAs provide that in the event, the net international crude oil prices exceed $50 per barrel; the parties shall meet to determine an appropriate discount for prices above $50/bbl.
From March 2005 onwards, crude oil prices started registering increase in the international market above $50 per barrel. Therefore, in order to negotiate the discount rates with the producing companies (BP, POL, OPI, OGDC), under the provisions of the respective agreements, Petroleum Secretary constituted a committee comprising representatives of Finance Division, Financial Advisor Petroleum and Petroleum Ministry. The committee held several meetings with the companies to negotiate the discount, and submitted its report.
Sources said that producing companies were of the view that due to increase in crude oil prices in the international market, cost of production had also increased manifold. The fields under negotiation had been in production since long and as such it had become technically difficult, and expensive, to maintain production at optimal level without additional cost for which all benefit/windfall of increase in prices beyond $50/bbl should be passed on to them for maintaining the production.
After detailed deliberations, the committee recommended that provisions of the agreements should be honoured to uphold the confidence of the investors in government policies.
The discount should, however, be so agreed that its benefit is also passed on to the government on the basis of some established principles. In this regard, the existing Petroleum Policy 2001 has a provision to share the windfall profits on the basis of 50:50 in case the oil prices increase in the international market beyond $30/bbl.
The committee, therefore, recommended that the principle of the approved Petroleum Policy 2001 can be considered as a logical basis for negotiations. The comparison between the offers of the E&P companies and formula of Petroleum Policy 2001 revealed that in case the windfall provision of the existing Petroleum Policy 2001 is applied for prices above $50/bbl, the gain to GoP would be higher than the gain resulting from proposals presented by the producing companies.
The Committee, therefore, recommended that the crude oil price differential between $50/bbl and the net market price be shared equally between the government and the producers.
Similarly, in case of condensate, the agreements provide that if prices exceed $34/bbl in case of Qadirpur, Block-20 and Tajjal blocks and $50/bbl for Ratana field, the parties shall meet to determine an appropriate discount for prices exceeding the above ceiling.
OGDCL, OMV and OPII have also approached to negotiate discount for condensate above the existing ceiling available in the relevant agreements. The committee also recommended that the condensate price differential between the existing ceiling provisions of the relevant agreements and the net price may also be shared equally between the government and the producers on 50:50 basis on the analogy of crude oil discount as recommended by the committee under provisions of the Petroleum Policy 2001 on windfall sharing.
The Ministry of Petroleum endorses the recommendations of the committee as, according to the Ministry, it was a win-win situation both for the producers and the government.
The Ministry has recommended to the ECC that present discount rates, applicable under the respective agreements, may continue up to the ceiling limits mentioned in the respective agreements and, in case the net prices exceed the present ceiling limits mentioned in the respective agreements, windfall be equally shared between the government and the companies both for crude oil and condensate.
The Ministry has estimated that on the basis of these proposals an amount of $127.723 million will accrue to the government for the period the prices started exceeding the existing ceiling limits up to May, 2007. 3net price may also be shared equally between the Government and the producers on 50:50 basis on the analogy of crude oil discount as recommended by the Committee and provisions of the Petroleum Policy 2001 on windfall.
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