E&P sector’s policy issue

It is interesting how the oil and gas exploration and production companies are most likely to suffer despite higher oil price environment. This suffering comes from the policy amendment, which will affect the earnings of the companies. The first quarter of FY18 brought in not only higher volumes but also higher oil prices that boosted the revenues of the E&P firms.

However, the government as recently as December 2017 is reported to have made an amendment to Petroleum Policy 2012, which reinstated Windfall Levy on crude oil and condensate for all fields in accordance with Petroleum Policy 1994 and 1997. A windfall levy is an additional tax levied by the government against certain industries that experience above-average profits – these industries are those that have benefited from economic windfall, usually commodity-based businesses.

Of the listed oil and gas exploration and production companies, Pakistan Oilfields Limited has been the first one to be affected by the amendment as it showed in its recently announced 1HFY18 financial performance that it incorporated the effect of reinstating windfall levy on oil/condensate where the firm’s revenues for 2QFY18 were down by 15 percent, and earnings by five percent, year-on-year.

The government has asked all E&P companies to submit Supplemental Agreements (that modify the existing agreement) incorporating the retrospective windfall levy, failing which the companies shall not be entitled to enhance gas pricing incentive.

This reinstating of windfall tax has been challenged by Pakistan Oilfields Limited in courts, and is likely to be challenged by other firms as well. Market is of the view that the E&P companies will have no choice but to revert back to previous petroleum policies for their fields in case the government does not take back the amendment made to PP2017. Going back to previous policies mean lower prices but no windfall levy. The government has given 90 days to the E&P firms to submit Supplemental Agreements for changes made. What will be interesting is how OGDC and PPL, the two largest E&P companies respond to the issue.

The companies are yet to release their latest financial performance (1HFY18).