The International Comparative Legal Guide to:

Gas Regulation 2011

A practical cross-border insight into Gas Regulation work
Published by Global Legal Group, in association with Ashurst LLP, with contributions from:
LEX Ali Budiardjo, Nugroho, Reksodiputro Allens Arthur Robinson Bell Gully BNG Legal Chandler & Thong-ek Law Offices Limited CMS Cameron McKenna Cogan & Partners LLP Criales, Urcullo & Antezana Debarliev, Dameski & Kelesoska Dr Kamal Hossain & Associates Duane Morris LLP Estudio Glvez Abogados Fortunati & Asociados Garrigues Gorrissen Federspiel Haavind AS Hogan Lovells InterJuris Abogados, S.C JeantetAssocis AARPI KALO & ASSOCIATES King & Spalding LLP Loyens & Loeff N.V. Mohamed Ridza & Co O'Flynn Exhams Pachiu & Associates Rosenberg, Hacohen, Goddart & Ephrat Schoenherr SNR Denton Studio Legale Bonora e Associati TGC Corporate Lawyers Ura Menndez Vellani & Vellani

Chapter 27

Pakistan
Vellani & Vellani

Aisha Ghazi

Zahra Ahmad

1 Overview of Natural Gas Sector

1.1 A brief outline of Pakistans natural gas sector, including a general 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.

(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 Pakistans energy requirements met using natural gas (including LNG)?

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. As of 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 JulyMarch 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, Pakistans 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

Natural gas plays a key role in Pakistans energy balance as it currently accounts for more than 48% of Pakistans 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 Pakistans natural gas requirements met through domestic natural gas production?

Currently, 100% of the countrys 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 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. Additionally, Pakistan Gasport Ltd is also trying to set up an LNG Floating Terminal with a handling capacity of 3 million tonnes per annum.

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1.4 To what extent is Pakistans natural gas production exported (pipeline or LNG)?

Pakistan
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. Subject to the existing commitments and obligations, mineral oil and natural gas within the Province or the territorial waters adjacent thereto shall vest jointly and equally in that Province and the Federal Government.

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.

Pakistan

(3)

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 States 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.

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 States 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?

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 GOPs 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. 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. 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. 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. Oil and Gas (Safety in Drilling and Development) Regulations, 1974. Provides detailed requirements for health, safety and environment. Natural Gas (Price for Supplies by Purchasers) Rules, 1976. Empowers the fixation of price for natural gas. 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. Natural Gas Rules, 1960. Regulates issuance of licences, distribution pipelines and charges. Natural Gas Regulatory Authority (Licensing) Rules, 2002. The aim of the rule is to provide a comprehensive guideline on the issuance of licences. 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.

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).

(b)

(c)

(d)

(e)

(f) (g)

(h) (i)

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.

(j)

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

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(b) Petroleum Exploration Licence:
2.5

Pakistan
How does the State derive value from natural gas development (e.g. royalty, share of production, taxes)?

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 and leases are granted pursuant to a PSA. (a) Reconnaissance Permit: Through this permit GHPL is allowed to carry out through the participants 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)?

2.6

Are there any restrictions on the export of production?

Subject to the countrys 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 countrys 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 months 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?

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.

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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Pakistan

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 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.

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Pakistan

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 for accounting purposes under domestic law?

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).

Pakistan

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?

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.

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 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.

4 Transportation
4.1 Outline broadly the ownership, organisational and regulatory framework in relation to transportation pipelines and associated infrastructure (such as natural gas processing and storage facilities).

b)

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?

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.

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.

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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? 4.6

Pakistan
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? If so, how are the costs (including costs of interconnection, capacity reservation or facility expansions) allocated?

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?

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, nondiscriminatory 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 nonexclusive distribution facilities on mutually-agreed terms and conditions, provided spare capacity not being used by it is available and the interconnection is technically feasible; and to 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?

Land has to be acquired for laying pipelines. Where government land 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, OGRAs 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?

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.

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-operation between different transportation systems established and regulated?

5 Transmission / Distribution
5.1 Outline broadly the ownership, organisational and 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?

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.

Please refer to questions 4.1 and 4.2 above.

5.3 How is access to the natural gas distribution network organised?

Please refer to question 4.1 above.

5.4 Can the regulator require a distributor to grant capacity or expand its system in order to accommodate new customers?

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?

Pakistan
supplying regasified LNG (RLNG) to the domestic market. The LNG Developer would enter into a longterm 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-onBoard purchase, the LNG buyer would, in addition, enter into an agreement with a shipping company to transport LNG to the receiving terminal.

E&P companies operating in Pakistan cannot access the distribution system.

Pakistan

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 OGRAs approval.

6 Natural Gas Trading

6.1 Outline broadly the ownership, organisational and 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.

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 and regulations. 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?

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?

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?

Please refer to question 6.1 above.

7 Liquefied Natural Gas

7.1 Outline broadly the ownership, organisational and 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) (b) (c) Liquefied Natural Gas (LNG) Policy, 2006. Oil and Gas Authority (Liquefied Natural Gas) Rules, 2007 (LNG Rules). 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

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. 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

(b)

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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.
Outline any third-party access regime/rights in respect of LNG Facilities.

Pakistan
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 anothers 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?

7.4

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 (the Competition 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?

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. 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. 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. 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

(ii)

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

(iii)

(iv)

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second phase review. (b) (c) the power to issue interim orders [section 32 of the Competition Act]; the power to enter and search premises for reasonable grounds which are recorded in writing [section 34 of the Competition Act]; the power to call for information relating to an undertaking [section 36 of the Competition Act]; 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 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.
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 gas sector, 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?

Pakistan
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.

Pakistan

(d) (e)

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?

(f)

8.4

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?

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 the value 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 such conditions 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

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 at the 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 Investment Disputes between States and Nationals of Other States (ICSID)?

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 Pakistans 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).

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.

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Aisha Ghazi
Vellani & Vellani 148, 18th East Street, Phase I Defence Officers Housing Authority Karachi-75500 Pakistan

Zahra Ahmad
Vellani & Vellani 148, 18th East Street, Phase I Defence Officers Housing Authority Karachi-75500 Pakistan

Pakistan

Tel: Fax: Email: URL:

+92 21 3580 1000 +92 21 3580 2120 aisha.ghazi@vellani.com www.vellani.com

Tel: Fax: Email: URL:

+92 21 3580 1000 +92 21 3580 2120 zahra.ahmad@vellani.com 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, edible oils, tea, shipping and trade, banking and finance, telecom and civil aviation, and coal washing and coal purification.

Ms. Zahra Ahmad is an LLB Honours graduate from the University College London and Barrister at Law of the Lincolns 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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