Petroleum (Exploration & Production) Policy 2001 was announced in May 2001 by the Ministry of Petroleum & Natural Resources (MPNR), Government of Pakistan with an objective to create an investor friendly climate and attract exploration investment in the country. Besides offering certain fiscal incentives the Policy was specifically formulated to give a revised gas pricing mechanism to the E&P sector to achieve that objective. Since gas pricing mechanism given in the earlier Petroleum Policy announced in 1997 had no oil price floor and ceiling limits; hence the gas price under the said Policy was more susceptible to the price shocks, the MPNR, therefore, wanted to rationalize the gas pricing framework of all Petroleum Concession Agreements (PCAs) signed under 1997 Policy with the improved pricing mechanism of the upcoming 2001 Policy.

However, when keenly awaited 2001 policy was announced, much to MPNR’s frustration, its gas pricing criteria was termed as vague by most of the E&P companies. That so called uncertainty later turned into an all-time-big controversy between the MPNR and the petroleum companies when the latter approached the Ministry for the determination of gas prices of their discoveries made under the new 2001 Policy.

The underlying paper thoroughly reviews the gas pricing mechanism given in 2001 petroleum policy and its various interpretations given by the Government and the E&P sector. The paper also highlights the limitations of each of the interpretations using examples based on actual data. At the end paper explains the gas pricing mechanism as given in 2001 policy and concludes that pricing mechanism is not incorrect or wrongly worded but it is primarily the wrong interpretation of the gas pricing formula and the misunderstanding which has led to the controversy between the Government and the E&P companies.

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