Pakistan's Ministry of Petroleum and Natural Resources has rejected a gas pricing proposal by Lasmo PLC that had sought the same price the government agreed in August 1999 with OMV AG, operator of Miano gas field. The refusal is aimed at convincing gas producers to agree on using the traditional pricing formula rather than considering the OMV agreement as a blueprint for a new formula.
The two parties are negotiating to reach a gas price agreement related to three planned field developments.
According to the OMV pact formula, when the "international oil price" is $10-$16/bbl, the producers will be paid according to 1994 petroleum policy. (In the 1994 policy, gas pricing was linked with international oil prices, and Pakistan was signing gas deals with foreign companies at 67.5% of the dequivalent per-barrel oil price on the international market.) But when prices are $16-21/bbl, the policy price would be 50% greater. When prices reach $21-$26, it would be 30% greater; and when prices are above $26/bbl, it would be 20% more.
As a result of recent high oil prices, the petroleum ministry devised a new mechanism: When oil prices are $10-$15/bbl, the producer gets a 50% increase; when they are above $20, the producer gets 30% more; and when oil prices are above $25/bbl, the producer gets 20% more. The formula was later altered in the signing of the OMV gas purchase deal, but this older formula is the one to which Pakistan wants Lasmo to agree.
Pakistan and Lasmo are continuing negotiations on pricing.
Consequences
Up to 9 tcf of gas is estimated to have been discovered in six or seven fields in Pakistan in the last 3 years, but most of the development work has stalled because of delays in setting a gas price. The government's refusal of Lasmo's offer will not only delay Lasmo's proposed initial investment of $250 million to develop gas fields, but it will also send negative signals to potential foreign investors intending to take part in oil and gas exploration in Pakistan.
Lasmo plans to develop its new fields-Andhra, Bhadra, and Kirthar West in Sindh province-in the coming years.
Lasmo and Kirthar Pakistan, a subsidiary of Royal Dutch/Shell Group, also have equal stakes in the Bhit gas field in Sindh province. The discovery was announced in March 1999 with estimated reserves of 1 tcf of gas.
By 2002, Pakistan could add as much as 900 MMcfd to its 2 bcfd of gas production after the newly discovered gas comes on stream.
