Oil Firms Allegedly Default on Paying Rs. 1.13 Billion Royalty to Govt

Prominent oil firms have been found allegedly defaulting on paying royalties to the government amounting to around Rs. 1.13 billion on sales of fuel from exploratory oil and gas fields.

In a letter to Prime Minister Shehbaz Sharif, Transparency International Pakistan (TIP) said it has received a complaint against M/s SPUD Energy and M/s Frontier Holding for willfully defaulting on their obligations to pay outstanding royalty of 12.5 percent amounting to Rs. 1.13 billion on the sale of natural gas/crude oil from Reti Maru Field, Badin IV South Block and Zargun South Field.

According to the letter, exploration licenses were granted to SPUD Energy over Guddu and Bolan blocks, and to M/s Frontier Holding Companies over Badin IV South Block to undertake petroleum exploration activities. These licenses were given under the provision of Pakistan Petroleum (Exploration and Production) Rules, 1986.

On account of the commercial discovery in these blocks, the President granted development and production leases to the holders of licenses to undertake development activities and product petroleum. M/s Sui Southern Company (SSGCL) is the nominated buyer of the natural gas and crude oil/condensate from Bolan Block and Badin IV South Block, while M/s Engro Fertilizers is the nominated buyer of the natural gas from Guddu Block, the letter stated.

Under Rule 36 of the 1986 Rules read with Article 9.1 of the Petroleum Concession Agreement (PCA), the license holders SPUD Energy and Frontier Holding are under an obligation to pay a royalty to the Government at a rate of 12.5 percent of the petroleum produced and saved. The royalty on gas is collected by the federal government and paid to the province where the wellhead of gas is situated under Article 161 of the Constitution.

“M/s SPUD Energy has been found to be in continuing willfully defaulting of its obligation to pay the outstanding royalty of the total sum of Rs. 834,821,397, while NI/s Frontier Holding has been found to be in continuing willfully defaulting of its obligation to pay the outstanding royalty of the total sum of Rs. 303,195,732, a total of approximately Rs. 1.13 billion to National Exchequer”, observed the letter.

The office of the Directorate General Petroleum Concessions has issued various Show Cause Notices and Default Notices to SPUD Energy and Frontier Holding including certain Gas Buyers and Oil Buyers including M/s SSGCL, Pakistan Refinery, and others to start withholding payments against shares of M/s SPUD from invoices for the sale of Natural Gas and Crude Oil from fields in which M/s SPUD had working Interest.

“It can be clearly seen from their Financial Statement instead of paying government obligations these defaulters have paid shareholders loans worth millions of dollars using gas sales receipts which is totally not just illegal but also morally incorrect (Financial statements attached). They have also charged consultancy services with the help of their subsidiaries,” mentioned the letter.

Based on the submitted documents, particularly the 03 letters dated February 17, 2022, from the Ministry of Energy (Petroleum Division) to M/s Sui Southern Gas, M/s Pakistan Refinery, and M/s Engro Fertilizers, prima facie it appears that the complaint is correct. M/s SPUD Energy and M/s Frontier Holding have defaulted their obligation paying a royalty of Rs. 1.13 billion, combined with the loss of interest on the defaulted amount to the National Exchequer for many years.

TIP has requested the Prime Minister of Pakistan to kindly look into this matter, and if it is found to be correct, then direct the regulators to first recover the outstanding amount of approximately Rs. 1.13 billion from M/s SPUD Energy and M/s Frontier holding prior to proceeding further on these contracts.

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