Ownership of Oil & Gas Resources in Pakistan

The vital change that has been brought about in the Constitution through the 18th Amendment is amendment of Article 172(2) and insertion of new Article 172(3). The amended Article 172 is reproduced below:

“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] 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.”

 Preamble of the Constitution provides that; (i) sovereignty over the entire Universe belongs to Almighty Allah alone, and the authority to be exercised by the people of Pakistan within the limits prescribed by Him, is a sacred trust; (ii) it is the will of the people of Pakistan to establish an order and (iii) the State shall exercise its powers and authority through the chosen representatives of the people; and (iv) the principles of democracy, freedom, equality, tolerance and social justice, as enunciated by Islam, shall be fully observed.  

In the overall constitutional scheme of both India and Pakistan, all natural resources belong to the people and the public representatives have been vested in such resources to legislate, and through relevant governments, regulate and manage for the fair and equitable distribution and consumption of such resources for general good of the people of Pakistan. Hence the  Public Trust Doctrine applies in all such matters. The Supreme Court of India in M.C. Mehta v. Kamal Nath (1997) 1 SCC 388 held:

• “17.    The Public Trust Doctrine primarily rests on the principle that certain resources like air, sea, waters and the forests have such a great importance to the people as a whole that it would be wholly unjustified to make them a subject of private ownership. The said resources being a gift of nature, should be made freely available to everyone irrespective of the status in life. The doctrine enjoins upon the Government to protect the resources for the enjoyment of the general public rather than to permit then- use for private ownership or commercial purposes.
•  27.       Our legal system-based on English Common Law - includes the public trust doctrine as part of jurisprudence. The State is the trustee of all natural resources which are by nature meant for public use and enjoyment. Public at large is beneficiary of the seashore, running waters, airs, forests and ecologically fragile lands. The State as a trustee is under a legal duty to protect the natural resources. These resources meant for public use cannot be converted into private ownership.”

The Public Trust Doctrine is part of Pakistan law and finds application in case of mineral oil and natural gas as well. It is thus the duty of the State to provide complete protection to and fair distribution of the natural resources as a trustee of the people at large.

Under Article 172(3), the Federal and Provincial Governments are vested in mineral oil and natural gas resources. The word “vest” normally partake of at least a portion of the  rights associated with ownership. The phrase “shall vest” as used in Article 172(3) of the Constitution implies a deliberate, and not an incidental, act of the Parliament for and on behalf of the people of Islamic Republic of Pakistan. Under Public Trust Doctrine and the overall constitutional framework articulated in its preamble, the concept “vest” means exercise of the right of the people of Pakistan through their chosen representatives to ensure fair and equitable distribution and consumption of natural resources in the interest of  national development and the well-being of the people of Pakistan. This definition is in line with the U.N. General Assembly Resolution 1803 (XVII) of December 1962 resolution which states that the “right of the people and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and the well-being of the people of the State concerned.”

The change is addition of new Article 172(3) whereby, subject to the existing commitments and obligations, ownership of mineral oil and natural gas has been jointly and equally vested in the Federal as well as Provincial Government (of relevant Province). The effect of this change is that now all mineral oil and natural gas within a Province and the territorial waters adjacent thereto are jointly and equally vested in  the Federal Government and the relevant Province; and all mineral oil and natural gas situated beyond the territorial waters of Pakistan are vested in the Federal Government. Significantly, the operation of Clause (3) of Article 172 is subject to commitments and obligations that existed at the time of the enactment of the 18th Amendment i.e. April 19, 2010. Hence all licenses, permits, leases and agreements issued or entered into by the Federal Government either directly or through its agencies before April 19, 2010 are not affected by the operation of Article 172(3) of the Constitution.

The word “own” has different connotation than “vest”. The word “vest” has already been defined. Moving on to the word “own”, from a legal standpoint, it connotes  the consideration for exploitation of natural resources (petroleum) paid in the shape of royalty and other statutory/contractual payments, which is entitlement of the owners i.e. people of Pakistan. In different academic literature, the term “royalty” has been defined as under:

a)    Royalty is defined to be “an amount of money that is paid by a mining or oil company to the owner of the land the company is using”[1].

b)   Royalty is defined to be “a compensation or portion of the proceeds paid to the owner of a right, as a patent or oil or mineral right, for the use of it”.[2]

c)    Royalty is defined to be “A payment made by a producer of minerals, oil, or natural gas to the owner of the site or of the mineral rights over it.”[3]

When it comes to the underground natural resources, the important concept that needs to be understood lies in the “place” or “point” at which such ownership takes place. Article 8.1 of the Model Petroleum Concessions Agreement (“PCA”) may be appropriate to refer, which reads as under:

• “8.1 Without prejudice to the right of THE PRESIDENT to take and receive royalty in cash or in kind and subject to the right of the Operator to use Petroleum for Joint Operations, each Working Interest Owner shall own and have the right to take in kind and separately dispose of, its Working Interest share of Petroleum won and saved after payment of royalty, and shall own the Petroleum so taken.

As the above PCA provision and other applicable laws would make out, after payment of royalty, statutory and other contractual payments, whatever value of the mineral oil and natural gas is left, belongs to the lease holders, working interest owners or the petroleum right holders, as such terms are used interchangeably in different instruments, as a compensation for taking exploration risks and spending huge amounts of capital and operating costs in exploitation, production, processing and delivery of such of such resources at the agreed delivery point.

In commercial sense, irrespective of who owns petroleum ‘in situ’, carries no material substance as it does not bring any social, development and economic benefits to anyone unless the same is explored, produced and utilized. The vesting of resources lies in the place or location where the nature has placed them i.e. in situ. In economics, in situ is used when referring to the in-place storage of a product, usually a natural resource. More generally, it refers to any situation where there is no out-of-pocket cost to store the product so that the only storage cost is the opportunity cost of waiting longer to get your money when the product is eventually produced and sold. It need to be understood and acknowledged that substantial risk capital investment is required in exploration, seismic surveys, drilling, exploitation, development and production of mineral oil and natural gas, which is all invested by the petroleum right holders. In order to induce investment and exploitation of natural resources, concession type of contractual arrangement exists in Pakistan especially relating to the onshore operations. Under such a contractual arrangement, no share in production or revenue representing such share are payable to the Federal and Provincial Government against their ownership rights, except royalty, contractual and statutory payments.

Hence in real sense, worth of ownership equals the amount of consideration for exploitation of natural resources paid by the petroleum right holders, i.e. royalty, statutory and other contractual payments, to the State. Pursuant to the applicable regulatory framework, correct position about ownership is that after payment of royalty, remaining petroleum produced and saved belongs to the petroleum right holder(s) and not the Federal or Provincial Government.

The above concludes that the concept of vesting of mineral oil and natural gas resources refers to fair and equitable utilization of these resources for the good of people of Pakistan. In addition to the sharing of economic benefit associated with the utilization of these national resources, constitution and sub-constitutional legislation contains mechanism for sharing of ownership benefits (royalty, statutory and other contractual payments) emanating from the depletion of such scarce and non-renewable natural resources, by the people of Pakistan, through Federal and Provincial Governments.

[1] https://www.learnersdictionary.com/definition/royalty

[2] https://www.dictionary.com/browse/proper

[3] https://en.oxforddictionaries.com/definition/royalty