Ministry of Petroleum Government of Pakistan

New Onshore Incentives Package

New Offshore Incentives Package

SALIENT FEATURES OF THE NEW ONSHORE POLICY

The main features of the package for the three onshore zones which is available for all new awards to the E&P Companies, are enumerated in the following paragraphs:

ROYALTIES
Royalty schedule is payable @ 12.5% of Wellhead Value

CORPORATE INCOME TAX
Corporate income tax is capped at 40% of profits and gains with royalty payments allowed as expense item.

PROSPECTIVITY ZONATION
Onshore divided into three prospectivity zones based on risk and investment as follows:
ZONE-I High risk, High cost

ZONE-II Medium risk, Medium to high cost

ZONE-III Low risk, Low to medium cost

STATE AND LOCAL COMPANIES' MANDATORY PARTICIPATION
No direct Government participation in the joint venture operated by foreign companies where local companies hold working interest as follows:
ZONE-I 15%
ZONE-II 20%
ZONE-III 25%
Where there is no local participating, Government Holding (Private) Limited can acquire the mandatory working interest on full payment basis.

PRODUCTION BONUSES
Production Bonuses are payable as follows:-
On start of commercial production - US$ 0.5 million
After producing30 MMBOE - US$ 1 million
After producing 60 MMBOE - US$ 1.5 million
After producing 80 MMBOE - US$ 3.0 million
After producing 100 MMBOE - US$ 5.0 million

IMPORT DUTIES AND TAXES
In accordance with SRO 678(I)/2004 dated 7 th August 2004 a consolidated import duties and sales tax at the rate of 5% applies during the exploration, development and production phases. This applies to all zones.

TRAINING CONTRIBUTIONS
Training fee is applicable as follows:
US$ 10,000 per year - Exploration phase
US$25,000 per year - Development and Production Phase

SOCIAL WELFARE
During Exploration phase:
- US$ 10,000/year for blocks located in ZONE-I
- US$20,000/year for blocks located ZONE-II & III
During Development and Production phase:
- US$20,000/year for fields producing<2,000 BOE/Day
- US$40,000/year for fields producing>2,000<5,000 BOE/Day
- US$75,000/year for fields producing>5,000<10,000 BOE/Day
- US$150,000/year for fields producing>10,000<50,000 BOE/Day
- US$250,000/year for fields producing>50,000 BOE/Day

OIL, GAS, LPG and CONDENSATE PRODUCER PRICE
(i) OIL
The price of crude oil deliverable at the refinery gate is based on the C&F. price of a comparable crude oil or a basket of Arabian Gulf crude oils, plus or minus a quality differential between the comparable crude oil or a basket of crude oils and the local crude oil. No other adjustment or discount applies.

(ii) CONDENSATE
The price of condensate delivered at the refinery gate is the FOB price of internationally quoted comparable condensate. No other adjustment or discount is applied.

(iii) NON-ASSOCIATED GAS:
The Producer Policy Price for nonassociated gas of acceptable pipeline quality specifications is indexed at 67.5%, 72.5% or 77.5% (for ZONE III, ZONE II and ZONE I respectively) of C&F price (based on quoted FOB price) of a basket of imported Arabian/Persian Gulf Crude Oils (Marker Price) delivered at the transmission system. This basket reflects the actual mix of imported crude oils in the previous Six months (January to June and July to December). For purchases of non-associated gas by GOP nominated entity, the payment to the companies is made on the following basis with floor of US$ 10/Barrel and ceiling of US$ 36/Barrel:

Over US$ 10/Barrel and upto US$ 16/Barrel:
100% of Marker Price (A).
Over US$ 16/Barrel and upto US$ 21/Barrel:
A + 50% of incremental Marker Price above US$ 16/barrel (B).
Over US$ 21/Barrel and upto US$ 26/Barrel:
B + 30% of incremental Marker Price above US$ 21/barrel (C).
Over and above US$ 26/Barrel:
C + 20% of incremental Marker Price. above US$ 26/barrel.

(iv) ASSOCIATED GAS
The price of associated gas is equal to the price of non-associated gas as applicable to each zone for acceptable gas specifications.

(v) LIQUEFIED PETROLEUM
For new projects, the LPG price is determined by the market under a deregulated regime.

TRANSMISSION TARIFF
E & P companies are allowed transmission tariff for the gas pipeline connecting the field to main transmission system, if such system is constructed and operated by them.

EXPLORATION PERIOD
Exploration period consists of an initial term of 5 years comprising Phase-I of three years and Phase-II of two years together with two subsequent renewals of two-years each, for a total period of 9 years.

RETENTION PERIOD
A maximum retention period of upto 5 years is allowed on a case by case basis to enable the companies to evaluate commercial aspects of the discovery and to make market arrangements for disposal of discovered gas.

TERM OF THE LICENCE
Total term of the agreement is upto 39 years, which also includes the retention period and the longer exploration period.

RELINQUISHMENTS
The companies are required to relinquish 30% of the Licence Area at the end of Phase-I of the initial Term, 20% at end of Phase-II of the initial Term and 10% of the Licence Area prior to the termination of the first renewal.

SALIENT FEATURES OF THE NEW OFFSHORE POLICY

This package is available for all new awards to the E&P Companies (or to the existing concession holders who opt for it) for a limited period of 5 years effective January 2002.

ROYALTIES

Royalty schedule is followed:

• First 4 years of production - 0% of Wellhead Value.

• Year 5 - 5%

• Year 6 - 10%

• Thereafter - 12.5%

CORPORATE INCOME TAX

Corporate income tax is capped at 40% of profits and gains with royalty payments allowed as tax credit.

DEPRECIATION

The following depreciation rates are applicable:

• On successful exploration wells 25% on Straight Line

• On facilities and offshore platforms 20% on Declining Balance

Carry forward of any unabsorbed depreciation is allowed until such depreciation is fully absorbed.

DIRECT GOVERNMENT PARTICIPATION

Sliding scale production sharing arrangement instead of direct Government participation has been introduced.

PRODUCTION SHARING

The production sharing agreement is executed by the Contractor with GHPL who is granted the Exploration Licences. This Contractor receives the profit oil and profit gas shares and is responsible for the management of the production sharing agreements. A provision has been made in the Model PSA for windfall price levy beyond specified prices of US $ 24 per barrel and US$ 2.5 per Million BTU gas respectively.

COST LIMIT

Cost limit is 85% including the royalty of 12.5%. The Contractor can recover 100% of the costs upto a limit of 85% of the gross revenues.

PROFIT OIL AND PROFIT GAS SPLITS

The profit split is set on the basis of a sliding scale. The sliding scale is based on cumulative production permitting a rapid recovery of investments and a higher net present value.

PRODUCTION BONUSES

Production Bonuses are payable as follows:-

• Within 90 days of start of production : US$ 1 million

• Upon reaching 200 MMCFD or equivalent BOE/D : US$ 2 million

• Upon reaching 600 MMCFD or equivalent BOE/D : US$ 5 million

WORK UNIT CONCEPT

For the purpose of providing flexibility to the contracts in discharge of work obligations under the production sharing agreements, a new concept of work units have been developed with enables the contractors to finalize the work programmes based on the best technical judgment as compared to the previous system of firm obligation of seismic coverage and number of wells.

MARINE RESEARCH FEE

A marine research fee is applicable as per the following schedule:

• US$ 50,000 per year till first discovery.

• US$ 100,000 per year thereafter till first commercial discovery.

• US$ 250,000 per year during development phase.

• US$ 500,000 per year during production phase.

TRAINING CONTRIBUTIONS

Training fee is applicable as follows:

• US$ 20,000 per year during Exploration phase

• US$100,000 per year during Development and Production phase

OIL, GAS, LPG and CONDENSATE PRODUCER PRICE

For sale to domestic market, the price is as per Government Policy or "Arms' Length Sales Value" which ever is less. As per current policy, the price of crude oil and condensate is based on comparable crude oil and condensate in the international market whereas the price of natural gas is payable @ 77.5% of the C&F price (Marker Price) of imported crude oil with floor of US$ 10/Barrel and ceiling of US$ 36/Barrel on the basis of following formula:-

• Over US$ 10/Barrel and upto US$ 16/Barrel:

100% of Marker Price (A).

• Over US$ 16/Barrel and upto US$ 21/Barrel:

A + 50% of incremental Marker Price above US$ 16/barrel (B).

• Over US$ 21/Barrel and upto US$ 26/Barrel:

B + 30% of incremental Marker Price above US$ 21/barrel (C).

• Over and above US$ 26/Barrel:

C + 20% of incremental Marker Price above US$ 26/barrel.

For sale to international market, the concept of Arms' Length Sales Value applies.

GAS TRANSMISSION PIPELINE

The first pipeline connecting a field to onshore gas transmission system is allowed as cost recoverable, if such system is constructed and operated by the E & P Companies.

IMPORT DUTIES AND TAXES

In accordance with SRO 678(I)/2004 dated 7 th August 2004 a consolidated import duties and sales tax at the rate of 5% applies during the exploration, development and production phases. This applies to all zones.

EXPLORATION PERIOD

Exploration period consists of an initial term of 5 years and two subsequent renewals of two-years each, for a total exploration period of 9 years.

RETENTION PERIOD

A maximum retention period of upto 10 years is allowed on a case by case basis
to enable the companies to evaluate commercial aspects of the discovery and to make market arrangements for disposal of discovered gas.

TOTAL TERM

Total term of the Contract is upto 44 years which also includes the retention period 10 years.

RELINQUISHMENTS

The Contractor is required to relinquish return 20% of the Original Contract Area prior to the termination of the initial Term, 30% of the Original Contract Area prior to the termination of the first renewal and another 30% of the Original Contract Area prior to the termination of the second renewal.