Duty/tax exemptions for low BTU gas policy: Ministry shelves plan on FBR opposition

The Petroleum Ministry has shelved its plan to extend special exemptions on low British Thermal Units (BTU) gas Exploration and Production Policy 2011 on stiff resistance by the Federal Board of Revenue (FBR). The policy will be considered by the Economic Co-ordination Committee (ECC) of the Cabinet, in its meeting, on Thursday.
According to official documents, Petroleum Ministry, in its initial proposal had recommended that the operating loss can be carried forward for a period not exceeding 15 years. However, FBR did not agree with the proposal on the arguments that it is not advisable to give special exemptions within the overall scheme of law. For all companies, the facility of the carry forward loss is available as per provisions of sections 57(2) of the Income Tax Ordinance, 2001.
Documents show that Director General Petroleum Concessions, a subsidiary of Petroleum Ministry, has agreed with the FBR. Petroleum Ministry had also recommended that low BTU gas producers may be allowed a tax holiday for a minimum period of 10 years. The documents show that FBR had adopted a cautious position of not granting any tax exemption. Rather it is further curtailing existing exemptions granted earlier to various sectors of the economy. Petroleum Ministry conceded to the viewpoint of FBR.
Regarding duties and other levies/ taxes, Petroleum Ministry had suggested that the producers be allowed a zero duty/tax regime for all imports for the development of low BTU gas field. FBR, in its comments stated that the facility of exemption from withholding tax will be available as per the existing provision of the Income tax Ordinance, 2011. Petroleum Ministry has also agreed with the proposal.
According to the Policy, the government being cognisant of the energy shortage in the country, envisaged in Petroleum (Exploration & Production) Policy, 2009 that Policy for Low BTU gas fields and unconventional hydrocarbon reservoir will be prepared separately to meet the growing energy requirements. Production from the existing reserves is declining rapidly and gas supplies from the new discoveries would be insufficient to meet increasing domestic, industrial and commercial demand.
In the backdrop of high international gas prices and to cope with the increasing energy requirement, the government has to explore and tap gas reservoirs of the unconventional hydrocarbons. Most of the countries in the world, including United State of America (USA), also depend on unconventional hydrocarbons. Gas being the largest component of energy supply in Pakistan is projected to decline from existing 4.1 billion cubic feet per day (bcfd) to 1.6 bcfd in 2022 unless additional reserves are added. Therefore, there is a dire need for providing incentives to the industry to produce and develop the Low BTU gas fields. At present, there are certain gas fields in the country having a heating value of less than 500 BTU (British Thermal Units) SCF (Standard Cubic Feet).
As an outcome of the meetings with Pakistan Petroleum Exploration & Production Companies Association (PPEPCA) and exploration & production companies on October 5, 2011, it was concluded that the gas having heating value of less than 450 BTU / SCF may be reckoned as Low BTU gas. The Low BTU gas fields are difficult to develop because of high carbon dioxide (CO2) and other inert gases and require additional investment or producing same energy contents.
The Ministry of Petroleum & Natural Resources has, therefore, prepared the low BTU Gas Policy in consultation with all the stakeholders to produce Low BTU Gas, supplementing the natural gas supply and to reduce burden of imported energy, to encourage industry to expeditiously develop the Low BTU gas fields for supply gas to power generation and other users. The Government has provided liberal incentives to the industry. However, the approval of Low BTU Gas Policy will encourage the producers to make available about 200 million cubic feet per day (mmcfd) more raw Low BTU gas for Power generation.
The proposed low BTU gas (Exploration & Production) policy is as follows:
Royalty: Royalty shall be payable as per Petroleum (Exploration & Production) Policy, 2009.
Retention Period: The Exploration & Production (E&P) companies shall be entitled for a minimum of five (5) years retention period to determine various development options and marketing of gas from the date of approval of development plan. The retention period may further be extended for another 5 years to implement the development plan. Such a retention period of five years or ten years as the case may be, shall not form part of total lease period.
Windfall levy: For the sale of Low BTU Gas to parties other than government, windfall levy equal to 25 percent amount will be paid to government on the difference between the applicable Low BTU Gas Policy price & its sale to third party. Import duties and other levies / taxes as per applicable Statutory Notifications (S.R.O).
Remittance of proceeds abroad: The provisions of Petroleum (Exploration & Production) Policy, 2009 will be applicable.
Production Bonus: The first production bonus applicable to the grant of a Development and Production (D&P) lease of a low BTU gas field shall be waived.
Allocation of pipeline quality gas for commingling with Low British Thermal Units (BTU) gas: The government may allocate pipeline quality gas for the purpose of commingling on case to case basis after giving due consideration to all relevant factors such as availability of gas to the system & infrastructure development by the producer provided the producer commits to contribute at least 50 percent of gas on heating value basis in commingled gas stream to be supplied to independent power producers (IPP), as already approved by the ECC.
Gas Pricing: Gas Prices are always calculated on the basis of its BTU content. The low BTU gas of 450 BTU / SCFT has been assigned the price of United State (US) $6 per million British Thermal Unit (MMBTU), which shall be increased by $0.01/MMBTU for each BTU/SCFT reduction below 450 BTU/Standard SCFT to 175 BTU for making it pipeline quality gas. The maximum price at 175 BTU / SCFT shall be $8.75/ Million MMBTU. Similarly, the Low BTU gas ranging from 450 to 600 Million MMBTU / SCFT would entail a price of US $6 per MMBTU for making it pipeline quality gas.
Review of low BTU gas policy: The low BTU gas (Exploration & Production) policy, 2011 may be reviewed by the government after every five years in the light of additional information, technological advancements and changes in circumstances including change in business dynamics.
The Policy will be instrumental in promoting the development of low BTU gas fields on fast track basis. Ministry of Petroleum & Natural Resources, therefore, recommends that the proposed Low BTU Gas (Exploration & Production) Policy, 2011, which provides sufficient incentives to the investors, may be approved to develop the low BTU gas fields in the country.