Unfulfilled promises: Windfall levy on oil and its impact on KP

The Council of Common Interest (CCI) in its meeting held on 8th August 2012 while approving Petroleum Policy 2012 decided that “In accordance with the provisions of constitution of Islamic Republic of Pakistan giving joint ownership and equal control to the Federal Government and provinces over mineral oil and natural gas under Article 172 read with Article 154, the benefit of Windfall Levy will be shared over and above the base price of US$40 per barrel and distributed among Federal Government and the concerned province on 50:50 basis”. Accordingly, this provision was incorporated in Petroleum Policy 2012 in Clause 4.1.4.

Standing at the close of 2023 outcomes of the above-mentioned decision haven’t taken shape the way CCI had approved. The adoption of Petroleum Policy 2012 (PP 2012) was discretionary as a comprehensive package rather than selecting specific components. The companies operating in Tall Block, Kohat Block and Baratai Block have chosen to opt for the PP 2012; however, the nuances of each agreement differ.

Let’s first take Tal Block - an oil and gas field located in Kohat District. The field accounts for 20% of Pakistan’s oil production, amounting to 17,000 barrels per day. Six discoveries have been made in the block; the first in 2002 and the most recent in 2011. The field has a 55 percent success ratio of discovery in Tal Block, compared to 33 percent in other areas.The MOL Group is responsible for making further discoveries and has added 145 million cubic feet of natural gas per day. There are other partners to MOL including OGDCL, PPL, GHPL and POL in Tal Block.

Tal Block under the PP 1997 subsequently converted to PP 2012 through a Supplemental Agreement in August 2015. Contrary to the clause 13.6 of the PP 2012, the windfall levy on oil (WOL) clause was not included in the supplemental agreement.

The exclusion of the WOL from the conversion package, without consultation with the Khyber Pakhtunkhwa government, contradicted the essence of Article 172(3) of the Constitution. In response, the KP government referred the matter to the Council of Common Interest (CCI), receiving favorable consent.

Subsequently, the Petroleum Division issued a notification in 2017, affirming that the WOL is considered part of the revised agreement with MOL. Challenging this decision, MOL Pakistan sought legal recourse in the Islamabad High Court (IHC) and obtained a stay.

Simultaneously, the KP government filed a writ petition in the IHC in 2018. The case has been pending since then, with the most recent meeting on the subject matter held in June 2019. The estimated loss between 2015 and 2023 is USD 401 million, approximately PKR 115 billion, to be distributed 50:50 between federal and KP government.

Now take the example of Kohat block - granted to M/S OGDCL under PP 2001, subsequently, OGDCL opted for conversion to PP 2012. The aggregate amount received by Finance Division on account of WOL is PKR 635 million (USD 3.2 million) till June 2023.

Finance Division is liable to pay Khyber Pakhtunkhwa Government its share of PKR 318 million (USD 1.6 million) but failed to pay so far. The KP government is time and again making efforts for the timely resolution of this matter to ensure quick reconciliation and transparency but receiving no response from the federal government.

Finally, the Baratai Block (Dhok Hussain lease) where OGDCL holds a dominant 97.5 percent stake, while KPOGCL possesses the remaining 2.5 percent. The Baratai Block was granted under the PP 2012, which includes conditions for the payment of WOL. OGDCL successfully discovered oil in this block, leading to the approval of the Dhok Hussain by DGPC.

OGDCL has consistently paid WOL to the Finance Division, the government of Pakistan, with a cumulative payment totaling Rs 424 million (USD 2.1 million) as of June 2023. However, the federal government has yet to transfer the due share of KP, amounting to USD 1.041 million, approximately PKR 212 million, between 2020 and 2023. Despite numerous appeals, the Finance Division has not fulfilled the obligation to remit the KP’s share.

The non-realization of key revenue sources has consistently weakened the fiscal position of the KP government, posing significant challenges to effective governance. Reports highlight several worrying issues, including delayed salary and pension payments, and stalled development projects due to funding shortages.

On top of that, the KP government is also expected to manage the development in newly merged areas, and provide for the economic devastation caused by recurrent floods, and the ongoing burden of security concerns. All this paints a grim picture, raises serious doubts about provincial government’s capacity to invest in crucial areas like human development and sustainability, potentially jeopardizing the well-being of the province’s population.

Copyright Business Recorder, 2024