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OGEL Cover v2.1
Impact of 18th Constitutional Amendment on
Future of Exploration and Production Industry
of Pakistan
by M. Arif
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 Impact of 18th Constitutional Amendment on Future of Exploration and
Production Industry of Pakistan

by

Muhammad Arif*

Background:

In Pakistan, natural resources especially mineral oil and natural gas being part of the
Federal Legislative List were exclusively owned and regulated by the Federal
Government. However, under Article 161 of the Constitution net proceeds of the
federal duty of excise on natural gas levied at well-head as well as the royalty collected
by the Federal Government, have to be paid to the Province in which the well-head is
situated. Under Article 158 of the Constitution, the Province in which a well-head of
natural gas is situated has precedence over other parts of Pakistan in meeting the
requirements from the well-head subject to the commitments and obligations of the
Province producing the gas and other Provinces and areas as on the commencing day
i.e. 14 August, 1973 or an earlier date in accordance with a notification by the President
(Art 265).

A vital change to this position has been effected through the promulgation of
Constitution (Eighteenth Amendment) Act, 2010 (Act No. X of 2010), passed by the
Senate of Pakistan on 15th April 2010 and assented to by the President on 19th April
2010, ( the Eighteenth Amendment) whereby New Article 172 (3) has been inserted
pursuant to which ownership of oil and gas resources has been vested jointly and
equally in the Federal Government and the relevant Provinces.

Addition of Article 172(3) has triggered discussion on the modus operandi of

implementation of the said constitutional change. One of the objectives of the
Eighteenth Amendment being provincial autonomy and given that the petroleum
industry is rightly perceived to be a profitable as well as highly paid job oriented
industry, contrasting views as to the interpretation of the above Article are emerging and
false expectations are being raised for division of regulatory, institutional as well as
operational base as between the Federal Government and the Provinces.

In view of the constitutional amendments relevant to the oil and gas industry, this paper
seeks to find answers to the following questions:

1. Who has jurisdiction over legislative, regulatory and policy control of the oil and
gas resources in Pakistan?

2. Is there any contradiction in revised Article 172(3) and Article 161 of the
Constitution?

1
3. How should Article 172(3) be implemented within the ambit of the Constitution?

4. Will the perception of investment risk in Pakistan increase if foreign investors are
required to deal with the Provinces as well as Federal Government?

Legal Analysis:

1. Who has the jurisdiction over legislative, regulatory and policy control of
the oil and gas resources in Pakistan?

Revised Article 172 which is the key provision concerning oil and gas ownership
is reproduced below for ease of reference:

172. Ownerless property. (1) Any property which has no rightful

owner shall, if located in a Province, vest in the Government of that
Province, and in every other case, in the Federal Government.

(2) All lands, minerals and other things of value within the continental
shelf or underlying the ocean beyond [within the] the territorial
waters of Pakistan shall vest in the Federal Government.

(3) 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.

Insertion of the word beyond and deletion of the words within the in Article
172(2) demands an independent detailed analysis and assessment of
implications which are not considered to be relevant for the sake of finding
answers to the fundamental questions raised in this paper.

The very title of the Article i.e. Ownerless Property is self explanatory. By virtue
of Article 172(3), the ownership of mineral oil and natural gas, which were
previously owned exclusively by the Federal Government, has now been vested
jointly and equally in the relevant Province and the Federal Government. The
ownership of property in any person does not in any way vest the legislative,
regulatory, and policy control, which are separate functions, on the owner of the
property as the said functions are distinct from ownership or the right to title.
Powers relating to legislative, regulatory and policy are defined by the
Constitution itself.

By virtue of Sr. No. 51 of Part I of the Federal Legislative List, legislative,

regulatory, management and administrative authority is vested in the Federal
Government and the Federal Government, by virtue of entry regarding taxes on

2
 mineral oil, natural gas and minerals for use in the generation of nuclear energy,
exercises jurisdiction over the same. Moreover, Part-II of the said Federal
Legislative List refers at Sr. No. 2 to mineral oil and natural gas, liquids etc. and
as such institutional and policy control over the said mineral oil, natural gas,
liquids etc. vests in the Federal Government. Retention of the said two entries,
one at Sr. No. 51 of Part- I and two at Sr. No. 2 of Part II of Federal Legislative
List clearly demonstrates the intent of the legislature to retain administrative,
institutional and policy control on such resources with the Federal Government
as per past practice.

In view of the above, I am of the decided opinion that although pursuant to Article
172(3) ownership of mineral oil and natural gas now vests jointly and equally in
the Provinces and the Federal Government, policy control and the legislative
authority continues, by virtue of the Federal Legislative List, to vest in the Federal
Government. Hence, there is no requirement or justification for any change in
the existing institutional framework, which should remain intact, subject always to
administrative improvements, wherever required, to ensure implementation of the
revised Article 172 in letter and spirit.

2. Is there any contradiction in revised Article 172(3) and Article 161 of the
Constitution?

Article 161 of the Constitution which has also been altered by Eighteenth
Amendment, now reads as under:

161. Natural gas and Hydro-electric power.- (1) Notwithstanding the

provisions of Article 78,-

(a) the net proceeds of the Federal duty of excise on natural gas
levied at well-head and collected by the Federal Government and
of the royalty collected by the Federal Government, shall not
form, part of the Federal Consolidated Fund and shall be paid to
the Province in which the well-head of natural gas is situated;

(b) the net proceeds of the Federal duty of excise on oil levied at
well-head and collected by the Federal Government, shall not
form part of the Federal Consolidated Fund and shall be paid to
the Province in which the well-head of oil is situated.

Article 78 reads as under:

78. Federal Consolidated Fund and Public Account._

3
 (1) All revenues received by the Federal Government, all loans raised
by that Government, and all moneys received by it in repayment
of any loan, shall form part of a consolidated fund, to be known
as the Federal Consolidated Fund.

(2) All other moneys

a. Received by or on behalf of the Federal Government; or

b. Received by or deposited with the Supreme Court or any other
court established under the authority of the Federation;
shall be credited to the Public Account of the Federation.

In my view the new revised Article 161 is contradictory to the revised Article 172.
Whereas the revised Article 161 provides for the payment of 100% of the royalty
on natural gas to the Provinces, under the revised Article 172 ownership of the
said resources vests in and is to be shared equally between the Federal
Government and the Provinces. In order to understand the contradiction, one
needs to understand the concept of royalty. The term royalty has been variously
defined but the general meaning of the term is a payment made for use of
property. As the property in question is to be equally shared, payment of 100%
royalty and Federal Excise Duty on natural gas to the Provinces is contradictory
to the provisions of Article 172(3). Given that 50% of the other government
receipts are to be shared by the Federal Government equally with the relevant
Provinces, it only makes patent sense that royalty and Federal Excise Duty
should also be shared equally between the Federal Government and the
Provinces. Now a question may arise as to why 100% of the Royalty was
previously paid to the Provinces under Article 161 when 100% ownership of oil
and gas resources was with the Federal Government. The simple answer may
be that it was an economic arrangement for giving a boost to the uplift and
economic development of the relevant Provinces from where oil and gas
resources were discovered and produced, which rationale is no longer valid in
view of the new Article 172(3). It may be noted here that Article 161 is silent as to
the treatment of royalty on crude oil, which would hence be dealt with in keeping
with the provisions of the revised Article 172(3) and be shared equally between
the Federal Government and the Provinces. In my opinion, the case of natural
gas should also be the same and Article 161 should be appropriately amended.

3. How should Article 172(3) be implemented within the ambit of

constitutional provisions?

As the jurisdiction over the legislative, regulatory, institutional framework clearly

vests under the Constitution with the Federal Government, implementation of
Article 172(3) read in conjunction with the Federal Legislative List and Article
161, can be effectively, efficiently and appropriately done without any significant
restructuring of the regulatory and institutional regime.

4
Accordingly, legislative, regulatory, institutional and policy control should remain
with the Federal Government as per the existing institutional framework and all
institutions, public sector entities and regulatory authorities should continue to
operate as before. However, to give effect to the spirit of the revised Article 172,
adjustment may be made to the composition of boards of institutions having
impact on major decisions relating to the oil and gas industry with a view to
providing an increased role to the Provinces in decision making.

To give effect to the above suggestion, it may be appropriate to upgrade the

status of the office of Director General Petroleum Concession to that of
Petroleum Regulatory Board with appropriate representation to the Provinces on
such Board, which would report directly to the Federal Ministry of Petroleum and
Natural Resources. The entire administrative costs of this Board could be met
from the total State take prior to disbursement of the share of the relevant
Provinces in the State take, which could even be made to the Provinces on
monthly basis to enable them to maintain cash flow and pace of economic
development.

The suggestion for maintaining existing institutional framework through the office
of DGPC or its enhanced status as Petroleum Regulatory Board is supported by
the following:

1. The constitutional amendment does not require creation of independent

regulatory framework by the Provinces for management of same small
size industry which is being efficiently and effectively managed through
the office of DGPC.

2. Creation of any parallel institutional framework would result in duplication

of efforts at the Federal and Provincial levels.

3. Since the Governments carried interest has been eliminated effective

2001, and there is no possibility of reinforcing such carried interest
provision in future, and protection has been provided under Article 172(3)
to the existing commitments and obligations, there is no economic
justification for creation of any other additional institution by the Provinces
which would eat into the already limited revenue resources.

In so far as companies established by the Federal Government are concerned,

these are independent entities and the revised Article 172 does not impact on
such companies. Government Holdings (Pvt) Limited which is controlled by the
Federal Government will continue to look after existing commitments and
obligations accrued prior to 19th April 2010 both in the offshore as well as the
previously admissible government carried interest in onshore concessions. As
GHPLs capacity has been enhanced to effectively manage mandatory local
company participation, it should continue to assume increasing role.

5
 Likewise, no change in upstream E&P Companies such as OGDCL, PPL or Mari
Gas is necessitated pursuant to the revised Article 172. It may be noted that
there is no bar on the Provincial Governments from establishing independent
Provincial Exploration and Production Companies on the pattern of OGDCL to
acquire exploration acreage through competitive bidding and acquire mandatory
participation of such local companies on full cost sharing basis as provided for
under the 2001, 2007 and 2009 Petroleum Policies. Such companies could also
be named as co-licensees along with Government Holdings Private Limited, in
the Production Sharing Agreements concerning offshore areas within territorial
waters. However, GHPL would continue to be the exclusive licensee for offshore
areas falling beyond territorial waters.

For the comfort of foreign investors exploration and production licenses and
execution of Petroleum Concession Agreements and issuance of sovereign
guarantees should continue in the name of the President notwithstanding the
division of ownership of natural resources between the Federal Government and
the Provincial Governments. For the sake of state sovereignty and national
integrity and securing foreign investment, it is imperative that the role of
President in the existing petroleum licensing regime is maintained without any
dilution.

After removal of anomaly between Articles 158, 161 and 172, there will be a
need for extensive and comprehensive review of all mechanisms and procedures
for development of a viable system for equitable and fair division and distribution
of profits or income earned between the Federal Government and the Provinces
on the basis of equality in keeping with the provisions of the revised Article 172.

4. Will the perception of investment risk in Pakistan increase if foreign

investors are required to deal with the Provinces as well as Federal
Government?

Countrys existing regulatory framework is considered to be one of the best

among Asian countries and owing to the stability of commercial terms backed by
Presidential guarantees the present regime is considered to be the only positive
under the currently prevailing law and order situation, terrorism and transparency
and governance issues. Any shift in the existing framework and any requirement
for investors to deal with the Provincial as well as Federal Governments will
undoubtedly be viewed by investors as an increased investment risk. The
complexity of dealing with different Provinces will be further heightened in the
case of exploratory blocks falling in more than one Province and in numerous
districts. Any dilution in sovereign guarantees and stability of fiscal terms already
executed with the foreign and local investors under binding instruments could
bring future investment to a grinding halt. It is therefore imperative that the status

6
 quo is maintained and no step is taken which will, instead of improving the
present perception about the investment climate enhance the risk perception.

Conclusions:

The revised constitutional provision will have no immediate impact on the industry but
the manner in which effect is given to the provision and reforms are undertaken to
develop an equitable mechanism for sharing of statutory receipts emanating from the
local exploration and production of oil and gas resources could have a serious impact,
which needs to be carefully formulated with a view to achieving harmony and efficiency
keeping in mind foreign investor risk factor. This can be best achieved by retaining the
existing regulatory framework with the legislative, policy and administrative control in the
hand of the Federal Government, subject to participation by the Provinces in the
decision making process through representation on Federal oil and gas regulatory
bodies. Preferably, The management of petroleum resources should continue to be
exercised by the Federal Government through the Director General Petroleum
Concessions and after adjustment of administrative costs, fifty percent of the net
revenue earned in the shape of rentals, fees, royalties, taxes, etc., should be paid to the
relevant Provinces. Government controlled companies i.e. GHPL and OGDCL should
continue to function without any change or interruption and the role of President should
be retained and all sovereign guarantees should be issued in the name of the President.

*** Mr. Muhammad Arif is working as Manager (Legal & Commercial) in Ocean Pakistan Limited formerly
Orient Petroleum International Inc. over last five years. Prior to that he has worked with Oil and Gas
Development Company Limited for about 20 years with diversified experience in marketing, commercial,
corporate affairs, legal and joint ventures. He is an MBA from the University of Strathclyde, LLM
(Petroleum Law and Policy) from the University of Dundee and also holds Post Graduate Diploma in
Petroleum Exploration and Production Economics from the University of Oxford, UK. He has written
numerous articles on petroleum policies and regulatory reforms. His most valuable contribution to the
industry is his co-authored (with Dr. Sohaib Qadar) book Energy Law Encyclopedia published by Kluwer
Law International, Netherlands in 1996 which he is currently updating. The views expressed here does
not represent the views of his past or present employer in any way and have been expressed in his
personal capacity as a professional.