In Pakistan, the wellhead gas price refers to the price at which natural gas is sold by the producers (exploration and production companies) to gas distribution companies at the point of extraction (wellhead). The determination of wellhead gas prices is regulated by the government and involves a detailed formula that considers various factors. Here’s how it works:
Key Components of Wellhead Gas Price Determination:
1. Pricing Formula (Gas Pricing Agreement):
– The wellhead price for gas is usually determined based on a pricing formula agreed upon between the gas producer and the government. This agreement is often defined in a Gas Pricing Agreement (GPA) or in line with government policy frameworks.
– Different policies apply based on the vintage of the gas field (e.g., pre-1994, 1994 Policy, 2001 Policy, etc.), as successive government policies have altered pricing mechanisms.
2. Crude Oil Parity:
– The wellhead price is often linked to international oil prices, particularly the price of Brent crude oil, reflecting the principle of oil parity pricing. The price is calculated as a percentage of the Brent crude oil price, with different slabs based on the production level of the gas field.
– For example, the price could be calculated as 55% of the Brent crude price for one slab and 60% for another, depending on the field’s production and the applicable policy.
3. Royalty:
– The government imposes a royalty on gas production, which is typically around 12.5% of the wellhead price. This royalty is paid by the gas producers to the provincial government where the gas field is located.
– The wellhead price includes this royalty, meaning the producers’ revenue is calculated after paying the royalty.
4. Exploration Costs (Recoverable Costs):
– The pricing mechanism allows producers to recover the costs incurred during exploration and development. These costs include drilling, geological studies, and other expenses necessary for bringing gas into production.
– Recoverable costs can impact the price agreed upon in the Gas Pricing Agreement.
5. Field-Specific Factors:
– The price can also vary based on the characteristics of the gas field, such as:
– Field size and production volume: Larger fields with higher production volumes may have more favorable pricing due to economies of scale.
– Gas quality: The energy content (BTU value) of the gas also affects pricing. Higher-quality gas with a higher BTU value may command a higher price.
6. Government Policies and Incentives:
– The government may offer different pricing incentives or premium prices for gas produced from offshore or deep-sea fields, marginal fields, or fields located in challenging terrain.
– For example, under the 2012 Petroleum Policy, producers were offered a higher price for gas extracted from certain types of fields, especially unconventional ones like tight gas or shale gas.
7. Currency Exchange Rate:
– Since the price is often indexed to international benchmarks like Brent crude (which is in US dollars), the exchange rate between the Pakistani Rupee and the US Dollar also plays a role in determining the final price in local currency terms.
8. Annual Review and Adjustments:
– Wellhead gas prices are usually reviewed and adjusted annually or semi-annually by the Oil and Gas Regulatory Authority (OGRA). Adjustments are based on changes in international oil prices, exchange rates, and other economic factors.
Example Calculation of Wellhead Gas Price:
Let’s consider a hypothetical example based on a gas field operating under the 2012 Petroleum Policy with the following assumptions:
– Brent Crude Oil Price: $80 per barrel
– Percentage of Brent Price for Gas Field: 60% (as per the pricing formula)
– Royalty Rate: 12.5%
– Exchange Rate: 1 USD = PKR 300
Step-by-Step Calculation:
1. Base Price in USD:
– Price per MMBTU (Million British Thermal Units) = 60% of Brent Crude Price
– Assuming 1 barrel of oil is equivalent to 5.8 MMBTU (approx. energy content):
– Gas price per MMBTU = 60% of ($80 per barrel / 5.8) = 60% of $13.79 = $8.27 per MMBTU
2. Conversion to PKR:
– Gas price per MMBTU in PKR = $8.27 × 300 (exchange rate) = PKR 2,481 per MMBTU
3. Deduction of Royalty:
– Royalty = 12.5% of PKR 2,481 = PKR 310 per MMBTU
– Wellhead price after royalty = PKR 2,481 – PKR 310 = PKR 2,171 per MMBTU
Thus, the wellhead gas price that the producer would receive would be PKR 2,171 per MMBTU after accounting for the royalty payment.
Conclusion:
The wellhead gas price in Pakistan is determined through a complex formula that factors in international crude oil prices, government policies, recoverable exploration costs, field-specific conditions, and royalties. The price is indexed to Brent crude and adjusted for local factors like currency exchange rates and regulatory reviews. This price-setting mechanism aims to ensure a balance between incentivizing gas exploration and production and keeping gas affordable for end consumers.
