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Gas Regulation 2011

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Pakistan

1 Overview of Natural Gas Sector

1.1 A brief outline of Pakistan’s natural gas sector, including ageneral description of: natural gas reserves; natural gas

production including the extent to which production is

associated or non-associated natural gas; import and

export of natural gas, including liquefied natural gas

(LNG) liquefaction and export facilities, and/or receiving

and re-gasification facilities (“LNG facilities”); natural gas

pipeline transportation and distribution/transmission

network; natural gas storage; and commodity sales and

trading.

The oil and gas sector in Pakistan has seen unprecedented growth

since the independence of Pakistan in 1947. The petroleum

industry has been a major contributor to the national development

of Pakistan as a result of the large indigenous gas discoveries. Asof 1st January 2010, the recoverable reserves of natural gas have

been estimated at 28.33 trillion cubic feet (‘tcft’) which are

adequate for meeting the gas requirement of Pakistan for 6 years at

the current rate of production. Natural gas production during July-

March 2009-10 was 4,048.76 million cubic feet per day (“mmcfd”)

as compared to 3986.53 mmcfd during the corresponding period the

previous year, showing an increase of 1.56% (Pakistan Economic

Survey 2009-2010, Chapter 13 Energy). Over the years the natural

gas share in primary energy supply mix has increased from 40% in

1999-2000 to over 48% in 2009 (Pakistan Energy Yearbook 2009).

The supply of gas has exhibited an increase of 1.6% during the

period July-March 2009-2010. This increase has been due to higher

production of natural gas during this period. (Pakistan Economic

Survey 2009-2010.)

Currently, natural gas distribution is exclusively undertaken by two

state-owned corporations, namely, Sui Southern Gas Company

Limited (“SSGCL”) and Sui Northern Gas Pipelines Limited

(“SNGPL”). The gas is supplied to consumers through 10,667

kilometres of transmission networks and 95,866 kilometres of

distribution system, which is one of the largest transmission and

distribution infrastructures in the developing world (Investment

Opportunities in Pakistan Oil and Gas Sector, Ministry of

Petroleum and Natural Resources).

The present constrained demand of gas for 2009-10 is 5190.5

mmcfd. The gas shortfall in January 2010 was 1,295 mmcfd. At

the current pace of economic development, Pakistan’s gas demand

and supply projections indicate a widening gap of approximately

2.7 billion cubic feet per day (“bcfd”) by 2015, rising to 5.8 bcfd in

2020 and up to 10.3 bcfd in 2025.

In order to bridge this widening gap the Government of Pakistan

(“GOP”) has adopted a three-fold strategy. This comprises of

maximising domestic production for which the new Petroleum

Policy 2009 has been approved, importing natural gas through

trans-national pipelines and importing LNG through the private and

the public sector.

While the trans-national pipelines are yet to commence operation,

the GOP is working towards the LNG import option, which will be

quicker to put in place. For this purpose, the GOP nominated

SSGCL as the project facilitator for the establishment of a 3.5

million tonnes per annum (equivalent to 500 mmcft of gas) LNG

import project, with a regasification facility to be located near the

port city of Karachi. The project was to be operational from the end

of 2011. However due to certain constraints this project will be

commissioned by June 2012.

Pakistan Gasport Ltd is also trying to set up an LNG Floating

Terminal with a handling capacity of 3 million tonnes per annum.

1.2 To what extent are Pakistan’s energy requirements met

using natural gas (including LNG)?

Natural gas plays a key role in Pakistan’s energy balance as it

currently accounts for more than 48% of Pakistan’s primary energy

supplies.

At present all local demand is met through indigenous natural gas

and the demand supply gap has been widening since 2007-2008, as

evidenced by natural gas rationing during the winter months in

certain parts of the country.

As already mentioned in question 1.1 above, Pakistan has already

taken steps towards setting up facilities for the import of LNG.

1.3 To what extent are Pakistan’s natural gas requirements

met through domestic natural gas production?

Currently, 100% of the country’s natural gas requirements are met

through local production. As mentioned in response to question 1.1

above, the GOP is working towards the LNG import option, by

facilitating the establishment of a 3.5 million tonnes per annum

(equivalent to 500 mmcft of gas) LNG import project with a re-

gasification facility to be located near the port city of Karachi. The

project was to be operational from the end of 2011. However due

to certain constraints this project will be commissioned by June

2012. Additionally, Pakistan Gasport Ltd is also trying to set up anLNG Floating Terminal with a handling capacity of 3 million

tonnes per annum.

Zahra Ahmad

Aisha Ghazi

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Vellani & Vellani Pakistan

1.4 To what extent is Pakistan’s natural gas production

exported (pipeline or LNG)?

At present Pakistan is not exporting natural gas or LNG. However,

as already mentioned, it is looking to import LNG for its rising

demand supply gap.

The Pakistan Iran Gas Sale and Purchase Agreement, signed in

2009, became effective on 13th June, 2010. The pipeline will

supply 750 mmcfd. The construction of the pipeline will begin in

January 2012 and the first gas flow shall be available by mid-2015.

2 Development of Natural Gas

2.1 Outline broadly the legal/statutory and organisational

framework for the exploration and production

(“development”) of natural gas reserves including:

principal legislation; in whom the State’s mineral rights to

natural gas are vested; Government authority or

authorities responsible for the regulation of natural gas

development; and current major initiatives or policies of

the Government (if any) in relation to natural gas

development.

The principal legislations (including government policy) relating to

natural gas are as follows:

(a) Petroleum Exploration and Production Policy 2009 (“the

Policy”). This explains the GOP’s policies, procedures, tax

and pricing regime for the petroleum exploration and

production (E&P) sector. This new policy amended the 2007

policy by revising the gas prices and by providing certain

incentives in order to promote investment and attract direct

foreign investment.

(b) Regulation of Mines and Oilfields and Mineral Development(Government Control) Act, 1948 and the rules framed

thereunder. This is the principal statute empowering the GOP

to regulate the exploration and production of petroleum.

(c) The Pakistan Onshore Petroleum (Exploration and

Production) Rules, 2009. Regulates the issuance of licences

and permits for exploration and production onshore and the

conditions under which such activities may be undertaken.

(d) Pakistan Offshore Petroleum (Exploration and Production)

Rules, 2003. Regulates the issuance of licences and permits

for exploration and production for areas offshore and the

conditions under which such activities may be undertaken.

(e) Oil and Gas (Safety in Drilling and Development)

Regulations, 1974. Provides detailed requirements for

health, safety and environment.(f) Natural Gas (Price for Supplies by Purchasers) Rules, 1976.

Empowers the fixation of price for natural gas.

(g) Natural Gas Distribution (Technical Standards) Regulations,

2004. Regulates the issuance of licensees for, and the terms

on which a licensee may undertake the regulated activity of,

distribution of natural gas.

(h) Natural Gas Rules, 1960. Regulates issuance of licences,

distribution pipelines and charges.

(i) Natural Gas Regulatory Authority (Licensing) Rules, 2002.

The aim of the rule is to provide a comprehensive guideline

on the issuance of licences.

(j) Natural Gas Tariff Rules, 2002. The aim of the rules is to

provide guidelines for the determination, approval,

modification or revision of the tariff charged by licensees.

Following the 18th amendment to the Constitution of Pakistan

1973, the provinces and the GOP shall have joint control and equal

share over the oil and gas explorations in Pakistan, pursuant to the

amended Article 172 which provides the following:

(2) “All lands, minerals and other things of value within the

continental shelf or underlying the ocean beyond the

territorial waters of Pakistan shall vest in the Federal

Government.”

(3) “Subject to the existing commitments and obligations,

mineral oil and natural gas within the Province or theterritorial waters adjacent thereto shall vest jointly and

equally in that Province and the Federal Government.”

Furthermore, under the Constitution of Pakistan, the National

Assembly together with the Senate (Parliament/Majlis-e-Shoora)

has exclusive legislative authority in matters relating to oil and

natural gas.

Upstream activities in the oil and gas sector are administered and

regulated through the Directorate General of Petroleum

Concessions (“DGPC”), Ministry of Petroleum and Natural

Resources.

2.2 How are the State’s mineral rights to develop natural gas

reserves transferred to investors or companies

(“participants”) (e.g. licence, concession, service contract,

contractual rights under Production Sharing Agreement?)

and what is the legal status of those rights or interests

under domestic law?

Licences are granted under the Regulation of Mines and Oilfields

and Mineral Development (Government Control) Act, 1948, read

with the Pakistan Onshore Petroleum (Exploration and Production)

Rules, 2009 or as the case may be, the Pakistan Offshore Petroleum

Rules, 2003.

For onshore operations, participants are granted concessions

through a Petroleum Concession Agreement (“PCA”), pursuant to

which exploration licences and production leases are granted.For offshore operations, exploration licences and production leases

are granted to Government Holdings (Private) Limited (“GHPL”)

and participants enter into a Production Sharing Agreement

(“PSA”) with GHPL.

All local and foreign companies operating in Pakistan are eligible to

acquire such rights. Foreign companies not operating in Pakistan

may also be eligible if they are able to demonstrate technical and

financial capability. Every company interested in acquiring

petroleum rights is required to provide details of the business and

evidence of its financial and technical qualification to conduct the

relevant activities.

Any question or dispute relating to the licence is to be resolved by

arbitration in Pakistan in accordance with laws of Pakistan.

2.3 If different authorisations are issued in respect of different

stages of development (e.g., exploration appraisal or

production arrangements), please specify those

authorisations and briefly summarise the most important

(standard) terms (such as term/duration, scope of rights,

expenditure obligations).

For onshore operations, the following permits, licences and

leases are granted pursuant to a PCA:

(a) Reconnaissance Permit:

This permit grants to the licensee the right to carry out geophysical,

geochemical and geological operations, including the drilling of stratigraphic wells. The maximum acreage under this permit is

unlimited in open areas and is valid for an initial term of one year

with a possible renewal for a further year.

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(b) Petroleum Exploration Licence:

This licence grants an exclusive right for exploration, including

drilling and production. The duration of the licence is five years.

The initial term of five years is divided into two phases, phase I

(which is for three years) and phase II (which is for two years), with

two possible renewals of two years each for exploration.

The maximum acreage granted under this licence is 2,500 sq km

(which in a special case may be extended up to 7,500 sq km), with

a subsequent progressive area relinquishment of 30% of the original

area after phase I, 20% of the remaining area after phase II, and

10% of the remaining area on or before the second renewal.

(c) Petroleum and Development and Production Lease:

Upon making a commercial discovery and subject to the GOP

approving a development plan prepared by the participants, the

GOP will grant to the participants a development and production

lease in respect of the discovery area. Such leases grant exclusive

rights to develop and produce hydrocarbons for up to 25 years, with

a possibility of renewal for a further term of five years.

For offshore operations, the following permits, licences andleases are granted pursuant to a PSA.

(a) Reconnaissance Permit:

Through this permit GHPL is allowed to carry out through the

participant’s preliminary surveys including, geophysical,

geological, geochemical and geotechnical surveys and geological

information bore hole. Such permits are granted for a term of one

year, with the possibility of a renewal for a further term of one year,

subject to fulfilment of the agreed work programme for the initial

term.

(b) Petroleum Exploration Licence:

The petroleum exploration licence grants exclusive right for

exploration, including drilling and production testing. The duration

of the licence is five years, which is divided into three phases, Phase

I and II of two years each and Phase III of one year, with two

possible renewals of two years each for exploration. The maximum

acreage is 2,500 km with a subsequent area relinquishment of 30%

of the original licence area at the end of Phase I, 30% of the

remaining licence area at the end of Phase II, and 20% of the

remaining licence area at the end of the first renewal.

(c) Petroleum Development and Production Lease:

Upon completion of the agreed appraisal and evaluation and

commercialisation work and upon approval of a development plan,

the GOP will grant to GHPL a lease in respect of the discovery area

for a term of 25 years, with a possible renewal for a further term of

five years if commercial production is then continuing.

2.4 To what extent, if any, does the State have an ownership

interest, or seek to participate, in the development of

natural gas reserves (whether as a matter of law or

policy)?

Onshore areas are divided into three zones with minimum local

participation requirement for zone 1, zone 2 and zone 3 being 15%,

20% and 75% respectively. If locally-incorporated exploration and

production companies (majority owned by nationals of Pakistan) do

not participate in the minimum participation requirements

mentioned above, GHPL is entitled to participate in the concession.

GHPL will not in any event act as operator.

As mentioned above, in the case of offshore operations, GHPL is

granted all licences and leases and the participants enter into a PSA

with GHPL, under which the participants operate and manage the

concession and participants may recover 100% of the costs up to a

limit of 85% of gross revenues.

2.5 How does the State derive value from natural gas

development (e.g. royalty, share of production, taxes)?

The GOP derives value from natural gas development through

royalties at the rate of 12.5% of the wellhead value. Tax on income

is also payable at the rate of 40% of the profits. In addition, the

GOP also charges ground rent for the acreage covered by an

exploration or production licence.

2.6 Are there any restrictions on the export of production?

Subject to the country’s internal requirements, E&P companies

incorporated outside Pakistan are allowed to export their share of

petroleum in accordance with export licences. The volumes that

may be exported will be calculated on the basis that the gas reserves

that exceed the net proven gas reserves in Pakistan with regard to

the projected gas demand for the next 15 years can be considered

for export. PCAs and PSAs usually make provisions for GOP

assistance for the export of petroleum by such E&P companies.

2.7 Are there any currency exchange restrictions, or

restrictions on the transfer of funds derived from

production out of the jurisdiction?

All remittances out of Pakistan are subject to control of the State Bank

of Pakistan (which is the country’s central bank), under the Foreign

Exchange Regulation Act 1947. Under the Policy, foreign companies

may remit a guaranteed percentage of the sale proceeds. This

guaranteed percentage varies between 65% and 75% of the total gross

revenue, depending on the licensing zone. Generally, PCAs and PSAs

will contain a provision under which the GOP agrees to assist in

procuring SBP permission, where required, for remittance of net sale

proceeds arising in Pakistan from the sale of petroleum.

2.8 What restrictions (if any) apply to the transfer or disposal

of natural gas development rights or interests?

The working interest owner cannot sell, assign, transfer, convey or

dispose of all or any part of its rights and obligations under a

licence, lease or an agreement, without the written approval of

Director General of Petroleum Concessions (“DGPC”). As regards

assignment to affiliates, the PCA or PSA (as the case may be) would

need to make appropriate provisions permitting such arrangement.

The DGPC may impose such condition as he may consider

appropriate, to ensure full payment of royalty, corporate tax and

windfall levy by the assignee in respect of the interests assigned or transferred.

If a licence holder wishes to surrender his right he will have to

provide the DGPC with one month’s notice of his intention to do so

and once he has fulfilled all his obligations under the licence he

may be able to surrender all or part of his right.

2.9 Are participants obliged to provide any security or

guarantees in relation to natural gas development?

Under the Pakistan Onshore Petroleum (Exploration and Production)

Rules 2009 and the Pakistan Offshore Petroleum (Exploration and

Production) Rules 2003, once a licence is granted, the GOP will

require the participants to provide an irrevocable and unconditional

guarantee. The could be in the form of a bank guarantee equal to 25%

of the minimum financial obligation from a bank of international

repute or a parent company guarantee from a company of international

repute. In case of local production or local assets, the GOP may

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require security in the form of a first and preferred lien on the

petroleum production or the assets as the case may be. They may also

accept deposits in an escrow account as a guarantee.

2.10 Can rights to develop natural gas reserves granted to a

participant be pledged for security, or booked foraccounting purposes under domestic law?

Section 70 of the Pakistan Offshore Petroleum (Exploration and

Production) Rules, 2003 allows a company, subject to permission

and consent of the GOP, to create a security interest for obtaining

financing for petroleum operations.

2.11 In addition to those rights/authorisations required to

explore for and produce natural gas, what other principal

Government authorisations are required to develop

natural gas reserves (e.g. environmental, occupational

health and safety) and from whom are these

authorisations to be obtained?

An E&P company prior to commencing petroleum operations will

have to submit an environmental protection plan and a safety plan to

the GOP for approval. The various steps and measures to be taken by

an E&P company are set out in The Pakistan Onshore Petroleum

(Exploration and Production) Rules, 2009 and the Pakistan Offshore

Petroleum (Exploration and Production) Rules, 2003.

Furthermore, an E&P company will also have to ensure that they

follow the guidelines set out in the following:

a) the Pakistan Environmental Protection Act, 1997 and the

rules framed thereunder, which essentially requires clearance

from the Pakistan Environmental Protection Agency through

the submission of an Environmental Impact

Assessment/Initial Environmental Examination; and

b) the Oil and Gas (Safety in Drilling and Production)

Regulations, 1974 (Safety Regulations), which contains

regulation and detailed requirements for health and safety

and the protection of the environment.

2.12 Is there any legislation or framework relating to the

abandonment or decommissioning of physical structures

used in natural gas development? If so, what are the

principal features/requirements of the legislation?

Under section 60 of The Pakistan Onshore Petroleum (Exploration

and Production) Rules 2009 and Section 63 of the Pakistan

Offshore Petroleum (Exploration and Production) Rules, 2003,abandonment of any area requires the prior written approval of the

DGPC. Furthermore, areas which are abandoned or relinquished

will have to be of a sufficient size to enable petroleum operations to

be carried out in the future.

2.13 Is there any legislation or framework relating to gas

storage? If so, what are the principle

features/requirements of the legislation?

The storage of gas is a regulated activity by the Oil and Gas

Regulatory Authority (“OGRA”), under the Oil and Gas Regulatory

Ordinance 2002 and the Natural Gas Regulatory Authority

(Licensing) Rules, 2002, which continue to apply notwithstanding

the repeal of the Natural Gas Regulatory Authority Ordinance,

2002. Under section 23 of the OGRA Ordinance a general or

specific licence is required to construct and operate any natural gas

or LPG, LNG or CNG storage facilities. These licences contain the

conditions upon which such activity is to be carried out.

3 Import / Export of Natural Gas (including LNG)

3.1 Outline any regulatory requirements, or specific terms,

limitations or rules applying in respect of cross-border

sales or deliveries of natural gas (including LNG).

Presently, Pakistan does not import or export natural gas. However,

work is underway on a pipeline running over 2,775 km from the

Persian Gulf in Iran to a port in Karachi (the Iran-Pakistan

Pipeline). The Gas Sales and Purchase Agreement (“GSPA”)

signed in June 2009 became effective on 13 June, 2010. The

construction of the pipeline, that will supply 750 mmcfd of gas, will

begin in January 2012 and the first gas flow is expected to be

available by mid 2015.

Furthermore, Turkmenistan Afghanistan Pakistan and India signed

a gas pipeline framework agreement in September 2010 ,which

envisages the import of 1.35 bcfd gas into Pakistan through a 1,680

km-long pipeline through Turkmenistan and Afghanistan. This

project is expected to come into effect by 2017.In light of the above, the GOP has incorporated Inter-State Gas

Systems (Private) Limited (a joint venture between SSGCL and

SNGL, the two state-owned utilities) to work as an interface

between the GOP and external agencies to facilitate import of

natural gas.

Please refer to questions 7.1 and 7.2 below for a detailed discussion

on the import of LNG.

4 Transportation

4.1 Outline broadly the ownership, organisational and

regulatory framework in relation to transportationpipelines and associated infrastructure (such as natural

gas processing and storage facilities).

This area of activity is also regulated by OGRA under the Oil and

Gas Regulatory Ordinance 2002 and the Natural Gas Regulatory

Authority (Licensing) Rules 2002. At present all natural gas

transportation pipelines and associated infrastructure is owned and

controlled by two state-owned corporations, namely, Sui Southern

Gas Company Limited (“SSGCL”) and Sui Northern Gas Pipelines

Limited (“SNGPL”).

SSGCL holds an exclusive distribution and sales licence in the

Southern and Western provinces of Sindh and Baluchistan. SSGCL

is a public limited company which is listed on the Karachi, Lahore

and Islamabad Stock Exchanges.

SNGPL is the largest gas transmission and distribution company in

Pakistan, with exclusive rights to distribute and sell natural gas to

customers in the Northern provinces of Punjab and NWFP. SNGPL

is a publicly-listed company which is listed on the Karachi, Lahore

and Islamabad Stock Exchanges.

In addition to these, OGRA has issued licences to seven additional

operators also engaged in transmission and sale of natural gas.

These contribute to approximately 20% of the total natural gas sale.

The law requires the gas companies to obtain licences for the

construction of pipelines/storage, transmission, distribution and

sales of natural gas. These licences contain the conditions upon

which such activity is to be carried out.E&P companies operating in Pakistan are allowed to lay

transportation pipelines within their lease area (from the wellhead

to the field gate) from where the gas distribution to the (residential

and commercial) consumers is taken over by SSGCL and SNGPL.

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4.2 What Governmental authorisations (including any

applicable environmental authorisations) are required to

construct and operate natural gas transportation pipelines

and associated infrastructure?

As stated in question 4.1 above, E&P companies can only lay gas

transportation pipelines from the wellhead to the field gate. For this purpose, E&P companies will have to submit to DGCP an

environmental management and protection plan along with a safety

plan. Furthermore, under the Environmental Protection Act 1997,

an environmental impact assessment will have to be submitted to

the Federal Environmental Protection Agency.

4.3 In general, how does an entity obtain the necessary land

(or other) rights to construct natural gas transportation

pipelines or associated infrastructure? Do Government

authorities have any powers of compulsory acquisition to

facilitate land access?

Land has to be acquired for laying pipelines. Where governmentland is available, whether Federal or Provincial, such land is

generally provided by the relevant government by way of lease or

by granting a right of way. If the land required is privately-owned,

then the provincial government will acquire such land under the

Land Acquisition Act, 1894 through compulsory acquisition, and

will then provide such land on lease.

Section 33 of the Oil and Gas Regulatory Authority Ordinance,

2002 authorises OGRA to certify in such manner and on such terms

and conditions, as may be prescribed in the rules, on an application

by a licensee, that the requirement of a licensee to acquire property

is for a public purpose and for the purpose of the Land Acquisition

Act, 1894, OGRA’s certificate is conclusive proof that the proposed

acquisition for such licensee is for a public purpose.

4.4 How is access to natural gas transportation pipelines and

associated infrastructure organised?

As mentioned in question 4.1, all natural gas transportation pipelines

and associated infrastructure is owned and controlled by SSGCL and

SNGPL. The two companies’ core business is to buy natural gas in

bulk from E&P companies, transmit it to load centres over its high

pressure transmission system and sell it to its customers (domestic,

commercial and industrial) through its supply network.

4.5 To what degree are natural gas transportation pipelines

integrated or interconnected, and how is co-operationbetween different transportation systems established and

regulated?

The gas is supplied to consumers through over 10,667 kilometres of

transmission networks and 95,866 kilometres of distribution

systems, the majority of which is owned by SSGCL in Sindh and

Baluchistan and SNGPL in Punjab and N.W.F.P. Both of these

utilities are state-owned and are managed by a board of directors.

4.6 Outline any third-party access regime/rights in respect of

natural gas transportation and associated infrastructure.

For example, can the regulator or a new customer

wishing to transport natural gas compel or require the

operator/owner of a natural gas transportation pipeline or

associated infrastructure to grant capacity or expand its

facilities in order to accommodate the new customer? Ifso, how are the costs (including costs of interconnection,

capacity reservation or facility expansions) allocated?

All licensees are obligated under Rule 20 of the Natural Gas

Regulatory Authority (Licensing) Rules 2002:

to provide, for a fee determined by the Authority, non-

discriminatory open access to its transmission or distribution

facilities, provided spare capacity not being used by it is

available;

to provide interconnection to its transmission or non-

exclusive distribution facilities on mutually-agreed terms

and conditions, provided spare capacity not being used by it

is available and the interconnection is technically feasible;

andto extend and expand its transmission or distribution

facilities at the request of a person, provided that it is

technically feasible and apportionment of the cost is agreed.

However, no regulations have as yet been framed by OGRA in this

regard.

4.7 Are parties free to agree the terms upon which natural

gas is to be transported or are the terms (including

costs/tariffs which may be charged) regulated?

All transportation terms including costs/tariffs are regulated by

OGRA through the Natural Gas Regulatory Authority (Licensing)

Rules, 2002 and Natural Gas Tariff Rules 2002. The licensee is not permitted to charge in excess of the tariff approved by OGRA. The

2002 Tariff Rules provides a procedure for petitioning OGRA to

determine or alter tariffs.

5 Transmission / Distribution


regulatory framework in relation to the natural gas

transmission/distribution network.

Please refer to question 4.1 above.

5.2 What Governmental authorisations (including any

applicable environmental authorisations) are required to

operate a distribution network?

Please refer to questions 4.1 and 4.2 above.

5.3 How is access to the natural gas distribution network

organised?


5.4 Can the regulator require a distributor to grant capacity or

expand its system in order to accommodate newcustomers?

An increase in capacity or expansion of the system is the exclusive

responsibility of the two state-owned utilities.

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5.5 What fees are charged for accessing the distribution

network, and are these fees regulated?

E&P companies operating in Pakistan cannot access the distribution

system.

5.6 Are there any restrictions or limitations in relation to

acquiring an interest in a gas utility, or the transfer of

assets forming part of the distribution network (whether

directly or indirectly)?

As mentioned above, the transmission, transportation and

distribution of natural gas is at present exclusively carried out by

SSGCL and SNGPL. The utilities are publicly-listed companies, in

which the GOP owns majority shares, over 70% and 54%

respectively. Interest in the companies may be privately acquired to

the extent of the free float in the market.

However, by virtue of Rule (xxxi) of the Natural Gas Regulatory

Authority (Licensing) Rules 2002, a licensee may not permit any

change in its ownership or controlling interest without prior approval of OGRA. A licensee may permit a change in security

interest over its assets to secure finances obtained in the normal

course of business, but a change in security interest in any other

case requires OGRA’s approval.

6 Natural Gas Trading


regulatory framework in relation to natural gas trading.

Please include details of current major initiatives or

policies of the Government or regulator (if any) relating to

natural gas trading.

Pakistan does not engage in natural gas trading.

6.2 What range of natural gas commodities can be traded?

For example, can only “bundled” products (i.e., the natural

gas commodity and the distribution thereof) be traded?


7 Liquefied Natural Gas


regulatory framework in relation to LNG facilities.

There is currently no LNG facility available in Pakistan. As

mentioned in question 1.1 above, in order to bridge the widening

gap between gas demand and supply, the GOP is working towards

the LNG import option. In anticipation of such, the GOP has set out

the following Policy and Rules:

(a) Liquefied Natural Gas (LNG) Policy, 2006.

(b) Oil and Gas Authority (Liquefied Natural Gas) Rules, 2007

(“LNG Rules”).

(c) Pursuant to the LNG policy 2006, an LNG import project

may be structured in the following two ways:

(i) Integrated Project Structure: Under this an “LNG

Developer”, which may be a private or public sector party, joint venture or consortium would be

responsible for purchasing LNG supplies, transporting

them to its LNG import terminal (comprising

receiving, storage and regasification facilities) and

supplying regasified LNG (“RLNG”) to the domestic

market. The LNG Developer would enter into a long-

term Gas and Sales Purchase Agreement directly with

a Government-designated buyer, gas utility or bulk

customer.

(ii) Unbundled Project Structure: Under this project

structure LNG would be imported from another country by a GOP-designated buyer (gas utility or

bulk consumer), under a sale purchase agreement

which could be on a delivered ex-ship basis or on a

Free-on-Board (FOB) basis. The LNG buyer would

enter into an agreement with the LNG Terminal

Owner or Operator for the provision of LNG

receiving, storage and regasification services at its

terminal under a tolling agreement. For a Free-on-

Board purchase, the LNG buyer would, in addition,

enter into an agreement with a shipping company to

transport LNG to the receiving terminal.

The Oil and Gas Regulatory Authority is responsible for issuing

licences to LNG Developers or LNG Buyers, who will be allowed

to import LNG in accordance with applicable import laws, rules andregulations. The LNG Developer or Terminal Operator and/or

owner is required to obtain from OGRA a licence to design,

construct, operate and own an LNG terminal, subject to site

approval and satisfaction of technical, financial, health, safety and

environmental standards. During the operating period, OGRA will

regulate access rights to the terminals based on negotiated third

party access or regulated third party access, based on objective non

discriminatory tariffs. Capacity utilisation rates and tariffs will

have to be published at regular intervals as may be determined by

OGRA.

7.2 What Governmental authorisations are required to

construct and operate LNG facilities?

A licence to construct, own and operate LNG facilities is granted by

OGRA under the LNG Rules, subject to compliance with HSE and

Technical Standards, and the other provisions of the LNG Rules.

Under the 2006 LNG Policy, an LNG import project may be

structured under two alternatives, an integrated project structure or

an unbundled project structure.

Further, the LNG Developer, LNG Terminal Owner/Operator, LNG

Buyer and RLNG Buyer each require permits and licences from

Government departments such as the Ministry of Defence, Naval

Headquarters, Port Authorities, Environmental Protection Agency,

Chief Inspector of Explosives, and provincial and local government

agencies, to carry out their respective activities.

7.3 Is there any regulation of the price or terms of service in

the LNG sector?

While no regulations have so far been framed with regard to price

or terms in the LNG sector, the LNG Policy 2006 provides as

follows:

(a) In the case of an integrated product structure, where RLNG

is procured by an RLNG Buyer in the public sector, the

purchase contract is expected to be for a minimum period of

20 years and LNG is procured from an LNG Developer

offering the lowest price at the designated delivery place.

(b) In case of an Unbundled Project Structure, where LNG is

procured by an LNG Buyer in the public sector the contract

shall be for a minimum period of 20 years, and the price for

RNLG will be determined by OGRA based on: (i) the LNG

purchase price; (ii) the direct and indirect costs of

transportation, storage and regasification incurred by the

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LNG terminal operator/owner; and (iii) a reasonable return

on the investment made by the LNG terminal

operator/owner.

(c) Except as mentioned above, LNG Developers and LNG

Buyers may sell RLNG to end users directly based on

negotiated prices, subject to approval of OGRA.

7.4 Outline any third-party access regime/rights in respect of

LNG Facilities.

All LNG terminals and associated facilities are operated on a

system of Regulated Third Party Access (“RTPA”), based on

published tariffs or tariff methodologies. These regulations are not

applicable to an LNG terminal constructed for own or dedicated

use. Access to such terminals will be based on negotiated third

party access (“NTPA”). The RTPA and NTPA are administered and

regulated by OGRA.

An LNG Developer will have priority access to its own LNG

terminal capacity, provided it has a firm capacity utilisation plan for

own or dedicated use.

8 Competition

8.1 Which Governmental authority or authorities are

responsible for the regulation of competition aspects, or

anti-competitive practices, in the natural gas sector?

By virtue of the provisions of section 6(2)(g) of the Oil and Gas

Regulatory Authority Ordinance, 2002, OGRA has the power to

promote effective competition and efficiency in the activities within

its jurisdiction.

Additionally, the Competition Commission of Pakistan (“theCompetition Commission”) established by the Competition

Ordinance, 2007, which in October 2007 replaced the erstwhile

Monopoly Control Authority which had been established by the

Monopolies and Restrictive Trade Practices (Control and

Prevention) Ordinance, 1970, is mandated to provide for free

competition in all spheres of commercial and economic activity in

Pakistan and to protect consumers from anti-competitive behaviour.

The Competition Act 2010 (“Competition Act”) was passed by the

Parliament and has recently been given Presidential assent bringing

it into effect. Under this Act the right of Appeal from the decisions

of the Competition Commission has shifted from the High Court to

a Competition Tribunal. Also the rate of penalties has been revised

from a cap of Rs 50 million to Rs 75 million for businesses where

annual turnover could not be determined. In case of businesses

where annual turnover can be determined, the rate of penalty was

reduced from 15% of the turnover to 10% of the annual turnover.

8.2 To what criteria does the regulator have regard in

determining whether conduct is anti-competitive?

All actions or matters that take place in Pakistan and distort

competition within Pakistan are prohibited. The Competition Act

applies to all undertakings, which includes any natural or legal

person or government body, including a regulatory authority, body

corporate, partnership, association, trust or other entity in any way

engaged, directly or indirectly, in the production, supply,

distribution of goods or provision or control of services, and include

an association of undertakings.

Under section 3 of the Competition Act, no person shall abuse its

dominant position; that is, a person who is in a dominant position

shall not undertake, maintain or continue a practice which prevents,

restricts, reduces or distorts competition in the relevant market. A

relevant market may be a product market or a geographic market.

Section 3(3) of the Competition Act sets out examples of practices

which prevent, restrict, reduce or distort competition in the relevant

market.

Pursuant to section 4 of the Competition Act, undertakings are

prohibited from entering into any agreement or, in the case of an

association of undertakings, prohibited from making a decision in

respect of the production, supply, distribution, acquisition or control

of goods or the provision of services which have the object or effect

of preventing, restricting or reducing competition within the

relevant market unless exempted by the Competition Commission.

Examples of prohibited agreements are set out in section 4(2) of the

Competition Act.

Pursuant to section 10 of the Competition Act, undertakings are

prohibited from entering into deceptive market practices.

Deceptive market practices is deemed to have occurred if an

undertaking resorts to: (a) the distribution of false or misleading

information that is capable of harming the business interests of

another undertaking; (b) the distribution of false or misleading

information to consumers, including the distribution of information

lacking a reasonable basis, related to the price, character, method or

place of production, properties, suitability for use, or quality of

goods; (c) false or misleading comparison of goods in the process

of advertising; or (d) fraudulent use of another’s trademark, firm

name, or product labelling or packaging.

Section 11 of the Competition Act prohibits undertakings from

entering in a merger which substantially lessens competition by

creating or strengthening a dominant position in the relevant

market.

8.3 What power or authority does the regulator have to

preclude or take action in relation to anti-competitive

practices?

The Competition Act grants the following powers to the

Competition Commission:

(a) the power to pass one or more of the following orders

specified in section 31 of the Competition Act:

(i) In the case of an abuse of dominant position, the

Competition Commission may require the

undertaking concerned to take such actions as may be

necessary to restore competition and not to repeat the

prohibitions or to engage in any practice with similar

effect.(ii) In the case of agreements entered into in contravention

of the provisions of the Competition Act, such

agreements may be annulled or the undertaking

concerned may be required to amend the agreement or

related practice and not to repeat the prohibitions

specified or enter into any other agreement or engage

in any other practice with a similar object or effect.

(iii) In the case of deceptive market practice require: (i) the

undertaking concerned to take such actions specified

in the order as may be necessary to restore the

previous market conditions and not to repeat the

prohibitions specified in section 10; or (ii)

confiscation, forfeiture or destruction of any goods

having hazardous or harmful effect.

(iv) In the case of a merger: (i) authorise the merger,

possibly subject to certain conditions; (ii) decide that

it has doubts as to the compatibility of the merger,

thereby opening a second phase review; or (iii) undo

or prohibit the merger, but only as a conclusion of the

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second phase review.

(b) the power to issue interim orders [section 32 of the

Competition Act];

(c) the power to enter and search premises for reasonable

grounds which are recorded in writing [section 34 of the

Competition Act];

(d) the power to call for information relating to an undertaking

[section 36 of the Competition Act];

(e) the power to conduct inquiries on its own in relation to any

matter for the purposes of the Competition Act [section 37 of

the Competition Act]; and

(f) the power to impose penalties [section 38 of the Competition

Act], which could extend to Rs. 75 million or 10% of annual

turnover, and in the case of a continuing default the

Competition Commission may impose a daily fine of up to

Rs. 1 million per day.

8.4 Does the regulator (or any other Government authority)

have the power to approve/disapprove mergers or other

changes in control over businesses in the natural gassector, or proposed acquisitions of development assets,

transportation or associated infrastructure or distribution

assets? If so, what criteria and procedures are applied?

How long does it typically take to obtain a decision

approving or disapproving the transaction?

As mentioned in question 8.2 above, the Competition Commission

has the power to prohibit mergers which substantially lessen

competition by creating or strengthening a dominant position in the

relevant market.

Pre-merger notifications are required to be given to the Commission

under section 11(2) of the Competition Act, where the undertakings

concerned meet the pre-merger notification thresholds stipulated in

regulations framed by the Competition Commission (the

Competition (Merger Control) Regulations 2007) and the approval

of the Competition Commission has to be sought before such

merger may take place.

The pre-merger notification thresholds are as follows:

the value of gross assets of the undertaking, excluding the

value of goodwill, is not less than three hundred million

rupees, or the combined value of the undertaking and the

undertaking to be acquired is not less than Rs 1 billion;

annual turn over of the undertaking, in the preceding year is

not less than Rs 500 million or the combined turnover of the

undertaking and the undertaking to be acquired, the shares of

which are not less than Rs 1 billion;

the transaction relates to acquisition of shares or assets of thevalue of Rs 100 million or more; or

in case of acquisition of shares by an undertaking, if an

acquirer acquires voting shares, which taken together with

the voting shares, held by the acquirer shall entitle the

acquirer to more than 10% of voting shares.

If within 30 days the Competition Commission does not respond to

a pre-merger notification, then clearance is deemed to have been

granted. If the Competition Commission initiates a second phase

review, this review must be completed within 90 days of the receipt

by the Competition Commission of the requested information. If no

decision is rendered within the said 90-day period, it is deemed that

the Competition Commission has no objection to the merger.

The Competition Commission may grant clearance subject to suchconditions as it may determine.

Where clearance has been granted subject to conditions, then the

Competition Commission may within one year review the order of

approval on the grounds that it is satisfied that the circumstances of

the relevant market or of the undertaking have so changed as to

warrant a review of the order.

The Competition Commission may undo the merger or modify its

order, if it is determined that the approval was granted on the basis

of false or misleading information or if the conditions specified in

the order have not been fully complied with.

9 Foreign Investment and International

Obligations

9.1 Are there any special requirements or limitations on

acquisitions of interests in the natural gas sector (whether

development, transportation or associated infrastructure,

distribution or other) by foreign companies?

As stated in the preceding questions, all natural gas transportation

pipelines and associated infrastructure are owned by the two state

utilities, SSGCL and SNGPL.

SSGCL and SNGPL are public limited companies, which are listed

on the Karachi, Lahore and Islamabad Stock Exchanges with over

70% and 54% direct share holding respectively by the Government

of Pakistan. In principle a foreign company could acquire a stake

in them, through the purchase of shares on the stock exchange.

Foreign companies not operating in Pakistan but having operated

concessions in other geographical areas of the world may only be

eligible to acquire petroleum rights subject to their financial and

technical capabilities.

9.2 To what extent is regulatory policy in respect of the

natural gas sector influenced or affected by international

treaties or other multinational arrangements?

International Treaties are not by themselves applicable or

enforceable in Pakistan. All international or multinational treaties

signed by Pakistan have to be ratified by Parliament in order for

them to be binding.

10 Dispute Resolution

10.1 Provide a brief overview of compulsory dispute resolution

procedures (statutory or otherwise) applying to the natural

gas sector (if any), including procedures applying in the

context of disputes between the applicable Government

authority/regulator and: participants in relation to natural

gas development; transportation pipeline and associated

infrastructure owners or users in relation to the

transportation, processing or storage of natural gas; and

distribution network owners or users in relation to the

distribution/transmission of natural gas.

Pursuant to section 6(2)(i) and (k) of the Oil and Gas Regulatory

Authority Ordinance, 2002, OGRA may resolve complaints and

other claims against licensees for contravention of the provisions of

the OGRA Ordinance, rules or regulations and resolve disputes

between licensees, and between licensees and any other person

regarding a regulated activity. Any interested person may file a

written complaint with OGRA against a licensee for contravention

of any provision of the OGRA Ordinance, or of any rule or

regulation.

Any person aggrieved by any order or decision may within 30 days

of receipt of such decision or order appeal to OGRA and OGRA is

required to hear and decide the appeal within ninety days from the

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date of its presentation (Sections 11 and 12 of the OGRA

Ordinance).

OGRA may review, rescind, change, alter or vary any decision, or

may rehear an application before deciding it in the event of a

change in circumstances or the discovery of evidence which, in the

opinion of OGRA, could not have reasonably been discovered atthe time of the decision.

In addition to the above, Rule 74 of the Pakistan Petroleum

(Exploration and Production) Rules, 2001 and Rule 81 of the

Pakistan Offshore Petroleum (Exploration and Production) Rules,

2003, provide that, unless otherwise agreed, any question or dispute

regarding petroleum right or an agreement or reconnaissance

agreement shall be resolved by arbitration in Pakistan and in

accordance with Pakistani laws (Arbitration Act, 1940).

10.2 Is Pakistan a signatory to, and has it duly ratified into

domestic legislation: the New York Convention on the

Recognition and Enforcement of Foreign Arbitral Awards;

and/or the Convention on the Settlement of InvestmentDisputes between States and Nationals of Other States

(“ICSID”)?

Pakistan is a signatory to the New York convention of 1958 on

Recognition and Enforcement of Foreign Arbitral Awards and has

ratified the same by promulgating the Recognition and Enforcement

Arbitration Agreements and Foreign Arbitral Awards) Ordinance,

2007, as well as the Convention on the Settlement of Investment

Disputes between States and Nationals of Other States (“ICSID”)

ratified by promulgating the Arbitration (International Investment

Disputes) Ordinance 2007.

Pakistan is an observer state to the Energy Charter Conference and

has signed the 1991 Energy Charter Declaration.

10.3 Is there any special difficulty (whether as a matter of law

or practice) in litigating, or seeking to enforce judgments

or awards, against Government authorities or State

organs (including any immunity)?

Judgments may be obtained against the GOP and arbitral awards

may be enforced against the GOP. However, under the OGRA

Ordinance, OGRA does have immunity as no suit, prosecution or

other legal proceedings shall lie against the OGRA, the chairman,

or any member, employee, expert, consultant or adviser of OGRA

in respect of anything done or intended to be done in good faith.

10.4 Have there been instances in the natural gas sector when

foreign corporations have successfully obtained

judgments or awards against Government authorities or

State organs pursuant to litigation before domestic

courts?

Yes, there have been.

11 Updates

11.1 Please provide, in no more than 300 words, a summary of

any new cases, trends and developments in Gas

Regulation Law in Pakistan.

The Ministry of Petroleum and Natural Resources announced the

Petroleum Policy 2009 to ensure that the rules were in accordance

with the changing market conditions. It is focused on attracting

foreign investment to accelerate exploitation of indigenous natural

resources and provides a higher rate of return and lucrative

incentives to E&P companies, in order to attract investment. The

Policy is to be read with the Pakistan Onshore Petroleum

(Exploration and Production) Rules 2009, which have amended the

Onshore Rules 2001 and the Pakistan Offshore Petroleum

(Exploration and Production) Rules 2003.

In order to bridge the widening gap and increase exploration, the

GOP, during the year 2010, introduced the Draft Tight Gas

Exploration & Development Policy 2010, with the objective of establishing the policies, procedures, tax and pricing regime in

respect of exploration and production of tight gas in Pakistan.

Furthermore, in a bid to control gas theft, the GOP introduced the

Draft Gas Utilities Companies Act, 2010, empowering them to

impose a Rs 5 million penalty and three years’ imprisonment for

consumers if they are found to be involved in gas theft. Both of

these legislations are still in draft form.

Since Pakistan’s gas demand and supply projections indicate a

widening gap and in order to meet the rising demand, the GOP has

placed strong emphasis on importing gas. A number of LNG

Projects have been initiated by the government for this purpose.

Work has also commenced on the Iran-Pakistan Pipeline and the

first supply is expected by mid 2015. Furthermore, the GOP has set

a target of supplying gas to approximately 321,427 new consumers

and to more than 471 new towns/villages in 2010-2011. It is

planned by the gas companies to invest Rs 4,617 million on

transmission project, Rs 21,024 million on distribution projects and

Rs 3,278 million on other projects, bringing the total investment of

Rs 28,919 million for the said period (Planning Commission

Annual Report 2010-2011).

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Aisha Ghazi

Vellani & Vellani

148, 18th East Street, Phase I

Defence Officers’ Housing Authority

Karachi-75500

Pakistan

Tel: +92 21 3580 1000

Fax: +92 21 3580 2120

Email: [email protected]

URL: www.vellani.com

Ms. Aisha Ghazi is an associate in Vellani & Vellani and has been

involved in and conducted matters including general corporate

and commercial transactional work including matters relating to

finance and taxation, joint ventures, project financing, projects

involving the grant and exploitation of government concessions,

anti-trust, the setting up and operation of manufacturing facilities,

banking and financing transactions, privatisation deals, mergers,

acquisitions, foreign direct investment, incorporation of

companies, public floatation and tender offers for listed securities,

general commercial and corporate litigation and certain

arbitration matters. Such work has been conducted in the field of

petroleum, natural gas, minerals, cement, steel, tobacco, edibleoils, tea, shipping and trade, banking and finance, telecom and

civil aviation, and coal washing and coal purification.

Zahra Ahmad

Vellani & Vellani

148, 18th East Street, Phase I

Defence Officers’ Housing Authority

Karachi-75500

Pakistan

Tel: +92 21 3580 1000

Fax: +92 21 3580 2120


URL: www.vellani.com

Ms. Zahra Ahmad is an LLB Honours graduate from the

University College London and Barrister at Law of the Lincoln’s

Inn (London). She has primarily been involved in matters related

to intellectual property, corporate and commercial law including

drafting of contracts, advising on regulatory issues, mergers and

acquisitions, demergers, and advising national and international

clients in various fields, including pharmaceuticals, energy and

cement. She has assisted senior counsel in litigation

proceedings before the High Court. She is a member of the

General Council of the Bar of England and Wales.

Vellani & Vellani has been at the forefront of providing advice in relation to projects entailing the grant and exploitation of

government concessions in respect of oil, gas, and other minerals such as coal and copper, the exploration and production of oil

and gas, harnessing power through the setting up of hydel plants, as well as the marketing of refined petroleum and the production

and supply of natural gas and LPG in Pakistan. We have, in particular, drafted, reviewed and negotiated documentation in relation

thereto including Concession Agreements, Distribution and Marketing Agreements, Novations, Transfers and Assignments as well

as reviewed and advised government bodies with regard to various legislation proposed in regard thereto including rules and

regulations governing the grant and exploitation of rights to explore and exploit such natural resources in Pakistan.

Additionally we have also advised on other related matters in respect of such projects which include providing advice on Sale and

Purchase Agreements, Deeds of Conveyance and Deeds of Assignment of Leasehold Rights as well as capitalisation of locally

incorporated companies, foreign exchange regulations, taxation and licensing requirements and other general commercial advice

in relation thereto.

Our client profile consists mostly of multinational corporations engaged in the business of exploring and exploiting for such natural

energy resources and the refinement and marketing of such resources such as oil, gas, coal, coal-bed, methane, copper and other

minerals.


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