Global oil and gas tax guide

2013

Preface

The Global oil and gas tax guide summarizes the oil and gas corporate tax regimes in 74 countries and also provides a directory of EY oil and gas tax contacts. The content is based on information current to 1January2013, unless otherwise indicated in the text of the chapter.

Tax information
This publication should not be regarded as offering a complete explanation of the tax matters referred to and is subject to changes in the law and other applicable rules. Local publications of a more detailed nature are frequently available, and readers are advised to consult their local EY professionals for more information. EY produces guides on personal tax and immigration systems for executives and on value-added tax (VAT) and goods and services tax (GST) systems. EY also produces the annual Worldwide corporate tax guide.

Directory
Office addresses, telephone numbers and fax numbers, as well as names and email addresses of oil and gas tax contacts, are provided for the EY member firms in each country. The listing for each tax contact includes a direct-dial office telephone number, if available. The international telephone country code is listed in each country heading. Telephone and fax numbers are presented with the city or area code and without the domestic prefix (1, 9 or 0) sometimes used within a country.

Internet site
Further information concerning EYs oil and gas services may be found at www.ey.com/oilandgas. EY June 2013

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

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Pakistan

Pakistan
Country code 92

Karachi
EY 601, Progressive Plaza, Beaumont Road Karachi SD 75530 Pakistan Tel 21 3565 0007 Fax 21 3568 1965

GMT +5

Oil and gas contacts

Mustafa Khandwala Tel 21 3565 0016 mustafa.khandwala@pk.ey.com Khalil Waggan Tel 21 3565 0017 khalil.waggan@pk.ey.com

Tax regime applied to this country

Concession Royalties Profit-based special taxes Corporate income tax A. At a glance

Fiscal regime

Production sharing contracts Service contract

The fiscal regime that applies to the petroleum industry in Pakistan consists of a combination of corporate income tax (CIT), a windfall levy and royalty in respect of the exploration license. Royalties 12.5% Bonuses  Varied amounts, linked with the level of commercial production Production sharing contract (PSC)  Product sharing applies only to offshore operations, on a sliding scale basis Income tax rate  40% as envisaged under the Petroleum Exploration & Production Policy 2012 Capital allowances Accelerated depreciation

B. Fiscal regime
Petroleum exploration and production (E&P) activities in Pakistan may be undertaken in accordance with two different types of agreements: 1. For onshore operations, a system based upon a petroleum concession agreement (PCA) 2. For offshore operations, a system based upon a production sharing agreement (PSA)

Corporate tax
In accordance with the Petroleum Exploration & Production Policy 2012, the rate of corporate tax is 40% of the amount of profits or gains from all new PCAs and PSAs. The Income Tax Ordinance 2001 (the Ordinance) is the governing income tax legislation. Part I of the Fifth Schedule to the Ordinance deals with the computation of the profits and gains or income from petroleum E&P activities in Pakistan. The Fifth Schedule provides that all expenses incurred after commencement of commercial production, that are not capital or personal

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in nature, are deductible provided they are incurred wholly and exclusively for the purpose of petroleum E&P activities. However, certain expenses, such as royalty payments and depreciation, are deducted based on specific provisions of the Ordinance. In accordance with the provisions of the Fifth Schedule to the Ordinance, there is no concept of ring-fencing for corporate tax calculations.

Dry hole
Any expenditure for searching, exploring and inquiring that results in a dry hole is treated as a loss on its completion or a surrender of the area back to the Government. As may be opted for by the working interest owner in the PCA or PSA, this loss is adjusted in either of the following ways: The loss in any year is set off against the income of that year, chargeable under the head income from business or any income chargeable under any other head of income (other than income from dividends). Excess losses are carried forward for no more than six years from the year incurred. The loss in any year is offset against the income of such undertaking in the tax year in which commercial production commenced. Where the loss cannot be wholly offset against the income of such undertaking in that year, the excess is carried forward for no more than 10 years.

Offshore operations
In respect of offshore operations, the cost limit is 85%, including the royalty of 12.5%. The contractor can recover 100% of the cost from up to a maximum of 85% of the gross revenues. A sliding scale PSA is used for offshore operations instead of direct government participation. The agreement is generally executed by the contractor with a government-owned entity, which is also granted the exploration license and the development and production lease. The contractor, therefore, initially receives the oil and gas profit shares and is responsible for managing the PSAs. The profit split is established on the basis of a sliding scale for shallow, deep and ultra-deep grids. The sliding scale is based on the cumulative production, permitting a rapid recovery of investments and a higher net present value. The profit split is set out below: 1. Profit oil and gas share for wells in shallow grid areas of less than 200 meters water depth, with a depth to reservoir shallower than 4,000 meters: Cumulative available oil or available gas from contract area Million barrels of oil equivalent MMBOE 0100 > 100200 > 200400 > 400800 > 8001,200 > 1,200 Government holdings share of profit oil or profit gas in contract area Crude oil, LPG or condensate 20% 25% 40% 60% 70% 80% Natural gas 10% 15% 35% 50% 70% 80% Contractor share of profit oil or profit gas in contract area Crude oil, LPG or condensate 80% 75% 60% 40% 30% 20% Natural gas 90% 85% 65% 50% 30% 20%

2. Profit oil and gas share for wells in deep grid areas of more than or equal to 200 meters and less than 1,000 meters water depth, or deeper than 4,000 meters to the reservoir in the shallow grid area:

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Pakistan
Government holdings share of profit oil or profit gas in contract area Crude oil, LPG or condensate 5% 10% 25% 35% 50% 70% Natural gas 5% 10% 25% 35% 50% 70%

Cumulative available oil or available gas from contract area

Contractor share of profit oil or profit gas in contract area Crude oil, LPG or condensate 95% 90% 75% 65% 50% 30% Natural gas 95% 90% 75% 65% 50% 30%

MMBOE 0200 > 200400 > 400800 > 8001,200 > 1,2002,400 > 2,400

3. Profit oil and gas share for wells in ultra-deep grid areas of more than or equal to 1,000 meters water depth: Cumulative available oil or available gas from contract area Government holdings share of profit oil or profit gas in contract area Crude oil, LPG or condensate 5% 10% 25% 35% 45% 60% Natural gas 5% 10% 25% 35% 45% 60% Contractor share of profit oil or profit gas in contract area Crude oil, LPG or condensate 95% 90% 75% 65% 55% 40% Natural gas 95% 90% 75% 65% 55% 40%

MMBOE 0300 > 300600 > 6001,200 > 1,2002,400 > 2,4003,600 > 3,600

Windfall levy
A windfall levy also applies to onshore concessions. The windfall levy on oil (WLO) applies to crude oil and condensate from an onshore concession using the following formula: WLO = 0.4 x (M R) x (P B) WLO = windfall levy on crude oil and condensate M = net production R = royalty P = market price of crude oil and condensate B = base price: The base price for crude oil and condensate is US$40 per barrel This base price increases each calendar year by US$0.50 per barrel starting from the date of first commercial production in the contract area WLO applies to crude oil and condensate from an offshore PSA, using the following formula: WLO = 0.4 x (P R) x SCO WLO = windfall levy on share of crude oil and condensate P = market price of crude oil and condensate SCO = share of crude oil and condensate allocated to a contractor

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R = base price:

385

The base price for crude oil and condensate is US$40 per barrel This base price increases each calendar year by US$0.50 per barrel starting from the date of first commercial production in the contract area For the sale of natural gas to parties other than the Government, a windfall levy on gas (WLG) applies to the difference between the applicable zone price and the third party sale price using the following formula: WLG = 0.4 x (PG BR) x V WLG = windfall levy on share of natural gas PG = third party sale price of natural gas BR = base price V = volume of gas sold to third party excluding royalty The base price is the applicable zone price for sale to the Government. If the third party sale price of gas is less than or equal to the base price, the WLG is zero. The windfall levy does not apply to sales of natural gas made to the Government.

Royalty regimes
A royalty is payable in respect of onshore operations at the rate of 12.5% of the value of the petroleum at the field gate. At the option of the Government, the royalty must be paid in cash or in kind on liquid and gaseous hydrocarbons (such as LPG, NGL, solvent oil, gasoline and others), as well as on all substances, including sulfur, produced in association with such hydrocarbons. The lease rent paid during the year is not deductible from the royalty payment. A royalty is treated as an expense for the purpose of determining the income tax liability. 10% of the royalty will be utilized in the district where oil and gas is produced for infrastructure development. The following royalty schedule applies to offshore operations: The first 48 calendar months after commencement of commercial production no royalty Months 49 to 60 inclusive 5% of field gate price Calendar months 61 to 72 inclusive 10% of field gate price Calendar months 73 onward 12.5% of field gate price Similar to onshore operations, at the option of the Government, the royalty is payable either in cash or in kind on liquid and gaseous hydrocarbons (such as LPG, NGL, solvent oil, gasoline and others), as well as for all substances, including sulfur, produced in association with such hydrocarbons. The lease rent paid during the year is not deductible from the royalty payment. Royalties are treated as an expense for the purpose of determining the income tax liability. For the purpose of calculating the amount due by way of royalty, the value of the petroleum produced and saved must be determined by using the actual selling price in the following manner: 1. If the petroleum is sold in the national market, the actual selling price means the price determined in accordance with the relevant sale and purchase agreement between the petroleum right holder and the Government or its designee, less allowed transportation costs beyond the delivery point 2. In all other cases, the actual selling price means the greater of: a. The price at which the petroleum is sold or otherwise disposed of, less allowable transportation costs b. The fair market price received through arms length sales of the petroleum less the allowed transportation costs c. The price applicable to the sales made under sub-rule 2. (a) above

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Pakistan

C. Capital allowances
The following depreciation rates apply for onshore operations: On successful exploration and development wells 10% on a straight-line basis On dry holes (exploratory wells) expensed immediately upon commencement of commercial production or relinquishment, whichever is earlier Below-ground installation 100% upon commencement of commercial production or relinquishment, whichever is earlier Initial allowance in respect of eligible depreciable assets in the year of use or commencement of commercial production, whichever is later 50% of cost for plant and machinery and 25% of cost for building First-year allowance in respect of eligible plant, machinery and equipment installed in a specified rural and underdeveloped area 90% of cost Normal depreciation rate on plant and machinery 15% using the diminishing-balance method Carry forward of unabsorbed depreciation for a maximum period of six years. If a depreciable asset is completely used and not physically available at the time of commencement of commercial production and it relates to a dry hole, it becomes a lost expenditure and it can be amortized on a straight-line basis over a period of 10 years after the commencement of commercial production (see the treatment of a lost expenditure for dry hole above). In these circumstances, the entire cost of the asset is amortized as part of the lost expenditure and not as depreciation. The following depreciation rates apply to offshore operations: On successful exploration and development wells 33% on a straight-line basis On dry holes (exploratory wells) expensed immediately upon commencement of commercial production or relinquishment, whichever is earlier Noncommercial well (exploration wells) expensed upon relinquishment of license On facilities and offshore platforms 25% using the declining-balance method Below-ground installation 100% upon commencement of commercial production or relinquishment, whichever is earlier Initial allowance in respect of eligible depreciable assets in the year of use or commencement of commercial production, whichever is later 50% of cost Normal depreciation rate on plant and machinery 15% using the diminishing-balance basis Carryforward of any unabsorbed depreciation in respect of plant and machinery is permitted until the depreciation is fully absorbed A depletion allowance, after commencement of commercial production, is allowed at the lesser of: 15% of the gross receipts representing wellhead value of the production 50% of profits of such undertaking before depletion allowance From tax year 2010 onward, decommissioning cost is allowed on the following basis, subject to a certification by a chartered accountant or a cost accountant: Where commercial production has not commenced with effect from tax year 2010, decommissioning cost is allowed over the lower of the following term: a. 10 years Or b. The remaining life of the development and production or mining lease Such cost is permitted to be claimed starting from the year of commencement of commercial production.

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Where commercial production commenced prior to 1July2010 deduction for decommissioning cost shall be allowed from the tax year 2010 over the lower period of: a. 10 years Or b. The remaining life of the development and production or mining lease

D. Incentives
In accordance with the Petroleum Exploration & Production Policy 2012, prequalified E&P companies incorporated in Pakistan that pay dividends and receive payments for petroleum sold in Pakistan rupees (PKR) are entitled to the following incentives: E&P companies are encouraged to operate exploration blocks with 100% ownership. In case of joint ventures with foreign E&P companies, local E&P companies shall have a working interest of 15% in Zone I, 20% in Zone II and 25% in Zone III on a full-participation basis (required minimum Pakistani working interest). Local E&P companies must contribute their share of exploration expenditures (denominated in PKR) up to the required minimum Pakistani working interest. On a case-by-case basis, during the exploration phase, local E&P companies are entitled to receive foreign exchange against payment in Pakistani currency to meet their day-to-day obligations under permits, licenses and PCAs or PSAs. After commercial discovery, local E&P companies are paid up to 30% of their sale proceeds in foreign currency to meet their day-to-day operational requirements. For project financing after commercial discovery, local E&P companies are required to make their own foreign exchange arrangements, except for companies in which the Government holds a majority shareholding. Further, the Schedule to the Regulation of Mines and Oilfields and Mineral Development (Government Control) (Amendment) Act 1976 (the Act) provides the following concessions to an undertaking engaged in exploration or extraction of mineral deposits. Please note that the concessions noted below are applicable to petroleum operations: There is the concept of freezing of law in respect of mining operations. The effect is that any provisions of the mining rules or amendment in the tax laws, made after the effective date of an agreement for the grant of a license or a lease to explore, prospect or mine petroleum, that are inconsistent with the terms of the agreement, do not apply to a company that is a party to the agreement, to the extent that they are incompatible with the agreement. Before commencement of commercial production of petroleum, any expenditure on searching for, or on discovering and testing a petroleum deposit, or on winning access to the deposit that is allowable to a surrendered area and to the drilling of a dry hole, is deemed to be lost at the time of the surrender of the area or the completion of the dry hole. A lost expenditure is allowable in one of the two ways mentioned in Section B under the heading dry hole. The income derived by the licensee or lessee from the use of, and surplus capacity of, its pipeline by any other licensee or lessee, is assessed on the same basis as income from petroleum it produced from its concession area. A licensee or lessee company incorporated outside Pakistan, or its assignee, is allowed to export its share of petroleum after meeting the agreed portion of the internal requirement for Pakistan. Sale proceeds of the share of petroleum exported by a licensee or lessee incorporated outside Pakistan, or its assignee, may be retained abroad and may be used freely by it, subject to the condition that it shall bring back the portion of the proceeds that is required to meet its obligation under the lease.

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Pakistan

No customs duty or sales tax is levied on the import of machinery and equipment specified in the PCA or PSA for purposes of exploration and drilling prior to commercial discovery. A concessionary, ad valorem customs duty rate of 5% or 10% applies on import of specific plant, machinery and equipment by E&P companies, and their contractors and subcontractors, on fulfillment of specified conditions. Such plant, machinery and equipment are exempt from sales tax and Federal Excise duty. Foreign nationals employed by a licensee, a lessee or their contractor may import commissary goods free of customs duty and sales tax to the extent of US$550 per annum, subject to the condition that the goods are not sold or otherwise disposed of in Pakistan. Foreign nationals employed by a licensee, a lessee or their contractor may import used and bona fide personal and household effects, excluding motor vehicles, free of customs duty and sales tax, subject to the condition that the goods are not sold or otherwise disposed of in Pakistan. All data in respect of areas surrendered by a previous licensee or lessee must be made available for inspection to a prospective licensee free of charge. Initial participation by the Federal Government in exploration is to the extent as may be agreed upon between the Federal Government and the licensee.

E. Withholding taxes
Dividends
The general rate of withholding tax (WHT) on payment of a dividend is 10% of the gross amount of the payment. The tax withheld constitutes a full and final discharge of the tax liability of the recipient shareholder if the shareholder is an individual or an association of persons. For corporate taxpayers, the tax deducted constitutes an advance tax and is adjustable against the eventual tax liability for the relevant tax year, which is 10% of the gross dividend.

Interest
The general rate of WHT on interest is 10% of the gross amount of interest if the recipient is a resident of Pakistan. The tax withheld constitutes the full and final discharge of the tax liability of the recipient if the recipient is a resident individual or an association of persons. For corporate tax payers, such tax withheld constitutes an advance tax and is adjustable against the eventual tax liability of the company for the year. If interest is paid to nonresidents not having a permanent establishment in Pakistan, the rate of withholding is 10% of the gross amount. The tax withheld constitutes an advance tax for the recipient lender and is adjustable against the eventual tax liability of the nonresident recipient. However, in respect of nonresidents not having a permanent establishment in Pakistan, the tax withheld constitutes final discharge of tax liability in respect of interest on debt instruments, Government securities including treasury bills and Pakistan Investment Bonds, provided that the investments are exclusively made through a Special Rupee Convertible Account maintained with a bank in Pakistan.

Royalties and technical services

Receipts in respect of royalties and technical services that are not attributable to the permanent establishment in Pakistan of a nonresident person are subject to WHT at the rate of 15% of the gross amount of the payment. The tax withheld constitutes the full and final discharge of the tax liability of the recipient.

Nonresident contractors
Payments made to nonresident contractors for construction, assembly or installation projects in Pakistan undertaken by the contractor, including services rendered in relation to such projects, are subject to WHT at the rate of 6% of the gross amount of the payment. The tax withheld constitutes the full and final discharge of the tax liability of the nonresident contractor, provided it

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opts for this treatment by filing a written declaration to that effect with the taxation authorities in Pakistan within three months of the commencement of the contract. If the option is not exercised, the net profit is taxable at the 35% corporate rate of tax.

F. Financing considerations
Thin capitalization rules
The income tax law has a thin capitalization rule, whereby if a foreign-controlled resident company or a branch of a foreign company operating in Pakistan, other than a financial institution, has a foreign debt-to-foreign-equity ratio in excess of 3:1 at any time during a tax year, the deductibility of interest as a business expense is capped. Interest on debt paid by a company in that year is not a permissible deduction to the extent it exceeds the 3:1 ratio. In other words, only the interest expense arising from the loans that meet the debt to equity ratio requirement may be deducted. For purposes of the thin capitalization rule, foreign debt includes any amount owed to a foreign controller or nonresident associate of the foreign controller for which profit on the debt is payable and deductible for the foreign-controlled resident company and is not taxed under this Ordinance, or is taxable at a rate less than the corporate rate of tax applicable on the assessment to the foreign controller or associate.

Interest guaranteeing
Interest guaranteeing is not applicable in Pakistan.

PSC expenditure recovery exclusions for financing costs

Whereas cost push-down is not permitted by the head office to the local branch, all expenses, including head office expenses, incurred wholly and exclusively to earn the income, are allowable for tax purposes.

G. Transactions
The working interest owner is not permitted to sell, assign, transfer, convey or otherwise dispose of all or any part of its rights and obligations under a license, lease or an agreement with a third party or any of its affiliates, without the prior written consent of the regulatory authorities. This permission, however, is generally not withheld. The transfer of any interest or right to explore or exploit natural resources in Pakistan constitutes a disposal for tax purposes. The amount of gain arising on the disposal of a right is computed as the difference between the consideration received for the transfer and the cost related to the rights. Consideration is explicitly provided to be the higher of the amount received or the fair market value. The amount of the gain is taxable at the rate of the tax applicable for the relevant tax year. The Ordinance explicitly provides that the amount of gain arising from alienation of any share in a company, the assets of which consist wholly or mainly, directly or indirectly of property or a right to explore or exploit natural resources in Pakistan, constitutes Pakistan-sourced income of the transferor. The amount of the gain is computed as the difference between the consideration received and the cost of the asset. If the consideration received is less than the fair market value, the fair market value is deemed to be the consideration for tax purposes. If the shares have been held for a period of more than one year, only 75% of the gain is taxable at the rate of the tax applicable for the relevant tax year. If the shares represent shares of a listed company in Pakistan, the amount of gain is taxable at the following rates depending upon the period of holding of such shares:

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Tax Year ending 30 June 2013 2014 2015

S. no. 1

Holding Period Where holding period of the security is less than six months

Rates 10% 10% 17.5% 8% 8% 9.5% 10% 0%

Where holding period of the security is more than six months but less than twelve months

2013 2014 2015 2016

Where holding period of the security is twelve months or more

H. Indirect taxes
Sales tax
VAT is called sales tax in Pakistan and is governed under the Sales Tax Act 1990 (the Sales Tax Act). All supplies made in the course of any taxable activity and all goods imported into Pakistan are subject to sales tax (except those listed in Schedule 6 of the Sales Tax Act). Certain services have also been brought within the ambit of sales tax effective from 1July2000, including services supplied by hotels, clubs and caterers; customs agents, ship chandlers and stevedores; courier services; and advertisements on television and radio (excluding advertisements sponsored by the Government, its agencies and non-government organizations with certain prescribed social causes). In addition, the Federal Excise duty is levied and collected through sales tax on certain excisable goods and services, including edible oil, vegetable ghee and cooking oil; advertisements on closed circuit and cable television networks; carriage of goods by air, services provided or rendered in respect of air travel by passengers within the territorial limits of Pakistan; services rendered by shipping agents; and services rendered by persons engaged in telecommunications work in respect of telephone, telegraph, telex, telefax and similar services (exclusions apply). The general rate of sales tax is 16% of the value of the supplies made or the goods imported. However, for goods specified in Schedule 3 of the Sales Tax Act, sales tax is charged on supplies at the rate of 16% of the retail price. Goods exported from Pakistan, goods specified in Schedule 5 of the Sales Tax Act and some specified goods are subject to a zero rate of GST. Supply and import of plant, machinery and equipment are zero-rated, with certain exceptions. Goods specified in Schedule 6 of the Sales Tax Act (and any other goods the Federal Government may specify by a notification in the Official Gazette) are exempt from sales tax. E&P companies are required to be registered under the Sales Tax Act because the supply of E&P products attracts sales tax. A registered entity may recover input tax paid on imports and the purchase of taxable goods or services acquired in respect of making taxable supplies. Input tax is generally recovered by being offset against the sales tax payable on the taxable supplies.

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Import duties

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The Customs Act 1969 (the Customs Act) governs the taxes that apply on the import or export of dutiable goods. Section 18 of the Customs Act provides that customs duties are levied at such rates as prescribed in Schedules 1 and 2 (or under any other law in force at the time) on: Goods imported into or exported from Pakistan Goods brought from any foreign country to any customs station and, without payment of duty there, shipped or transported, or then carried to, and imported at, any other customs station Goods brought in bond from one customs station to another Generally, the rate of customs duty applied to the customs value of imported goods ranges from 5% to 35%; the rate depends on several factors, including the type of commodity, the constituent material and the country of origin. Customs duty on the import of plant, machinery, equipment and other accessories made by E&P companies, their contractors, subcontractors and service companies is governed by SRO.678(1)/2004 dated 7August2004 (SRO) and issued under Section 19 of the Customs Act. The SRO provides two exemptions from customs duty: All machinery, equipment, materials, specialized vehicles or vessels, pickups (four-wheel drive), helicopters, aircraft, accessories, spares, chemicals and consumables not manufactured locally that are imported by E&P companies, their contractors, subcontractors or service companies, in excess of 5% by value The goods mentioned above that are manufactured locally and imported by E&P companies, their contractors, subcontractors or service companies and other petroleum and public sector companies in excess of 10% by value These customs duty concessions are available exclusively for E&P companies that hold permits, licenses, leases, PSCs or PSAs and that enter into supplemental agreements with the Government. Moreover, the exemption under the SRO is available in respect of the specified goods subject to satisfying conditions specified in the notification. Items imported at concessionary rates of duty that become surplus, scrap, junk, obsolete or are otherwise disposed of or transferred to another E&P company are also exempt (upon notification of the sales tax department). However, if these items are sold through a public tender, duties are recovered at the rate of 10% on the value of the sale proceeds.

Federal Excise duty

Excise duty is a single-stage duty levied at varied rates on specified goods produced or manufactured in Pakistan, imported into Pakistan, produced or manufactured in non-tariff areas and brought to tariff areas for sale or consumption, and specified services provided or rendered in Pakistan. Table I of Schedule 1 of the Federal Excise Act 2005 identifies goods subject to excise duty, including cement, LPG and other liquefied petroleum gases. The current rates of excise duty on gas-related products are listed on the following page. However, certain goods and classes of persons have been excluded from duty under Table I of Schedule 3 of the Federal Excise Act 2005.

Stamp duty
Under the Stamp Act 1899, stamp duty is paid on instruments. It is a provincial or state levy and its application varies from province to province. The rates of stamp duty also vary from instrument to instrument. The term instrument means a written deed, will or other formal legal document for transfer of property.

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I. Other
Rental payment

Pakistan

In respect of an onshore concession, all holders of exploration licenses are required to pay an advance rental charge at the following rates: PKR3,500 per square kilometer or part thereof in respect of the five years of the initial term of the license PKR800 per square kilometer or part thereof in respect of each year of the initial term of the license PKR5,000 per square kilometer or part thereof in respect of each renewal of the license PKR2,750 per square kilometer or part thereof in respect of each year of the renewal of the license For onshore operations, during the lease period, the following annual advance rental charges apply: PKR7,500 per square kilometer or part thereof covering the lease area during the initial lease period PKR10,000 per square kilometer or part thereof covering the lease area during the renewal period of a lease and further lease term extension Contractors engaged in offshore operations are required to pay an advance annual acreage rental for the area covered under the PSA of US$50,000, plus a further rate of US$10 per square kilometer or part thereof every year. Rental expenses are allowable deductions for payers.

Production bonuses
A production bonus is payable for onshore operations on a contract area basis as follows: Cumulative production (MMBOE) At start of commercial production 30 60 80 100 Amount (US$) 0.6 million 1.2 million 2 million 5 million 7 million

In respect of offshore operations, a production bonus is payable as follows: Cumulative production (MMBOE) At start of commercial production 60 120 160 200 Amount (US$) 0.6 million 1.2 million 2 million 5 million 7 million

Domestic supply obligation

Subject to the considerations of internal requirements and national emergencies, E&P companies are allowed to export their share of crude oil and condensate as well as their share of gas based on export licenses granted by the regulator. For the purpose of obtaining an export license for gas, the export volume is determined in accordance with the L15 concept, provided a fair market value is realized for the gas at the export point. Under the L15 concept,

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gas reserves that exceed the net proven gas reserves in Pakistan (including firm import commitments vis--vis projected gas demand for the next 15 years) can be considered for export. Once gas has been dedicated for export, any export licenses for agreed volumes cannot be subsequently revoked. The following is the appendix to Schedule 1 of the Federal Excise Act 2005 (extract) Table I (excisable goods): Description of goods Liquefied natural gas Liquefied propane Liquefied butanes Liquefied ethylene, propylene, butylenes and butadiene Other liquefied petroleum gases and gaseous hydrocarbons Natural gas in gaseous state Other petroleum gases in gaseous state Heading or subheading number 2711.1100 2711.1200 2711.1300 2711.1400

S. no. 31 32 33 34

Rate of duty PKR17.18 per 100 cubic meters PKR17.18 per 100 cubic meters PKR17.18 per 100 cubic meters PKR17.18 per 100 cubic meters

35

2711.1900

PKR17.18 per 100 cubic meters

36

2711.2100

PKR 10 per million British Thermal Unit (MMBTu) PKR10 per MMBTu

37

2711.2900