Oil, gas sector irregularities unearthed

In Business
May 28, 2024



The Auditor General of Pakistan (AGP) has discovered numerous deviations from rules and policies by the Director General Petroleum Concession (DGPC) in dealings with oil and gas exploration companies, which have resulted in substantial losses to the national exchequer.

The auditors stated that an examination of annual data on oil and gas production over the past five years reveals a decrease in gas and crude oil production by approximately 11%. Specifically, gas production declined from 4,047.95 million cubic feet per day (mmcfd) to 3,597.36 mmcfd, and crude oil production fell from 86,481.375 barrels of oil per day (bopd) to 76,739.479 bopd, between 2015-16 and 2019-20. The production profile showed a downward trend in hydrocarbon production as well.

During the Performance Audit, the auditors found a number of deviations from relevant policies, laws, rules, and regulations by the DGPC. The Director General Audit, Petroleum and Natural Resources, Lahore, conducted a Performance Audit of the Management of Leases and Licenses for the period from 2010-11 to 2019-20, from September 8, 2020 to October 16, 2020. The main objective of the audit was to evaluate the extent to which the DGPC had effectively and efficiently managed leases and licenses to promote the exploration and production of indigenous hydrocarbon resources within the country. The audit was conducted in accordance with international auditing standards.

Article 154 of the Constitution of the Islamic Republic of Pakistan empowers the Council of Common Interests (CCI) to formulate and regulate policies in the field of exploration and production of hydrocarbons relating to matters in Serial No 2 of Part II of the Federal Legislative List. It exercises supervision and control over institutions related to the subject of mineral oil and natural gas, liquids, and substances dangerously inflammable as declared by federal law. The Ministry of Energy (Petroleum Division) is vested with the powers of administration and other allied matters on the subject under the Rules of Business, 1973, framed by the federal government. Besides these, the Economic Coordination Committee (ECC), constituted by the Cabinet Division under Rule 17(2) of the Rules of Business, 1973, also has the mandate to consider cases of agreements and licensing for oil prospecting and exploration.

During the Performance Audit, several deviations from relevant policies, laws, rules, and regulations by DGPC were observed. In its key audit findings, the auditors stated that the sub-optimal performance of DGPC led to the non-achievement of the formulated objectives of Petroleum Exploration and Production 2012. They further found that the non-monitoring of the terms of licenses, followed by litigation, resulted in losses to the government due to accepting unrealisable guarantees from non-recovery of liquidated damages and other financial obligations.

These deviations also resulted in significant losses due to the unauthorised grant of price incentives to Exploration & Production (E&P) operators. The non- or delayed approval of applications for renewal of leases by the regulator resulted in irregular production, non-deposit of social welfare obligations by E&P companies, discouraging investment companies (both local and foreign), and inviting potential litigation.

The auditors also noted the absence of integration among various E&P policies and poor liaison among the directorates of the Petroleum Division.

Recommendations

The auditors have recommended streamlining the mechanism of awarding concession rights and ensuring an effective monitoring and implementation mechanism of the terms of licenses. They further recommended managing contracts in a professional, transparent, and competitive manner. They advised approving Marginal/Standard-Gas Pricing Criteria and Guidelines from the competent forum (CCI), and devising Standard Operating Procedure (SOP)s with respect to the timeframe for the disposal of renewal of leases and licenses. They have also called for ensuring effective liaison between the directorates of the Petroleum Division.

Published in The Express Tribune, May 28th, 2024.

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