Huge potential, not enough investment
By SHABBIR H. KAZMI
Oct 11 - 17, 1999
Despite having vast energy resources, Pakistan has remained deficient
in indigenous supply of energy products. Efforts are being made to exploit the oil and gas
reserves with a view to build a strong indigenous production base. These efforts are aimed
at achieving cost effectiveness and reducing import dependence through accelerated
exploration of energy resources with minimum environment degradation.
Major sources of energy in the country consist of oil, gas, coal and
electricity. Pakistan is highly dependent on imported crude oil and energy products to
meet its requirements. The country spends huge amount of foreign exchange every year on
this account. Although, the per capita energy consumption in Pakistan is comparatively
lower than that in other developing countries, it has gradually increased over the last
one decade. Imports of crude oil and energy products now account for nearly 1/5 of total
imports of the country.
The commercial energy sources in the country, during July-March
1998-99, stood at 41.166 million barrels of crude oil, 551,392 million cubic feet (MCF) of
gas, 12.369 million tonnes of petroleum products, 2.939 million tonnes of coal and 43,468
GWh of electricity. Comparative figures for the same period of 1997-98 were, 38,849
million barrels of crude oil, 526,628 MCF of gas, 13.38 million tonnes of petroleum
products, 3.37 million tonnes of coal and 45,038 GWh of electricity. The per capita
availability of primary energy supplies showed a rising trend over the years which
indicates increasing demand for energy supplies to meet domestic, industrial, commercial
and power generation requirements.
The recoverable reserves of crude oil, as on March 31, 1999, were
estimated at 238 trillion barrels in the country. The average crude oil production at the
end of third quarter of 1998-99 was 55,703 barrels per day. During this period the daily
production was 20,770 barrels in the northern region and 34,934 barrels in the southern
region. This indicates that southern region has higher potential for further exploration
and development. Two large scale refineries also operate in the region which are the main
consumers of indigenous crude oil.
The recoverable reserves of gas, as on March 31, 1999, were estimated
at 21 trillion cubic feet in the country. The average daily production at the end of third
quarter of 1998-99 was 2.012 MCF against 1.922 MCF for the corresponding period of
At present nearly 25 companies are actively involved in oil and gas
exploration in the country. Most of them have come to Pakistan after the announcement of
Petroleum Policy in early nineties. Acquiring a concession and commencement of drilling
activity take two to three years. Therefore, the results of the activities will start
The major companies currently engaged in exploration and development
activities are Lasmo, Mari Gas, Oil and Gas Development Company (OGDC), Union Texas,
Pakistan Oilfields and Pakistan Petroleum. Pakistan Petroleum emerges to be the largest
producer of gas followed by OGDC and Mari Gas. Union Texas emerges to be the largest
producer of oil. It produces nearly half of total output of crude oil followed by OGDC.
The two companies, if put together, contribute nearly 85 per cent of crude oil produced in
PRODUCTION OF CRUDE OIL
(Barrels per day)
Northern 21,730 20,770
OGDC 12,347 10,719
OPL 1,503 2,035
POL 5,269 5,514
PPL 2,611 2,503
Southern 34,552 34,934
OGDC 9,175 11,566
UTP 25,295 23,290
PPL 82 78
Total 56,282 55,703
PRODUCTION OF GAS
(Million Cubic Feet per day
Lasmo 68 72
MGCL 374 380
OGDC 457 422
POI 11 11
POL 23 31
PPL 822 939
UTP 162 157
Total 1,917 2,012
The Oil and Gas Development Company Limited
(OGDC) was established in 1961. It was entrusted the responsibility to undertake
systematic exploration programme and to plan oil and gas projects. OGDC's concerted
efforts were successful as they resulted in a number of major oil and gas discoveries.
OGDC's major on-going projects, scheduled to be completed during the financial 1999-2000,
include Uch gas development project. (Gas from this field will be used for power
generation) Pirkoh compression project will add new supplies for Sui Southern Gas Company
and Sui Northern Pipeline. All these projects will result in additional gas supply for
power generation, crude oil and LPG production.
Oil Barrels 5,518,217 6,107,288
Gas MMcf 128,887 115,958
LPG Tonnes 52,904 56,183
Sulfur Tonnes 17,879 12,854
Pakistan Petroleum Limited (PPL) was incorporated in June
1950 with the main objective of conducting exploration, processing, development and
production of Pakistan's oil and gas resources. PPL inherited all the assets and
liabilities of Burmah Oil Company (Pakistan Concessions) Limited and commenced business in
July 1952. Effective from September 1997, the GoP purchased the entire shareholding of
Burmah Castrol in the Company representing 63.91 per cent of the Company's equity.
Consequently GoP's shareholding which was 29.41 per cent in the Company's equity has now
increased to 93.32 per cent. A total of 86 wells have been drilled and completed in the
Sui field. Commercial production from this field commenced in 1955. PPL's share of
production of gas etc. for the year 1997-98 in terms of energy was equivalent to about
135,000 barrels of crude oil per day. This results in a substantial saving of foreign
exchange for the country.
Union Texas Pakistan Limited (UTP) does not have such a
long history of operation in Pakistan, but, it is the largest oil producing company for
the time being. It contributes nearly 50 per cent towards total crude oil produced in
Pakistan. Recently it undertook a seismic survey of Karachi Concession for oil and gas
exploration. The UTP, Edson International and Unocal made joint venture to undertake this
survey. The three-year licence is now held by this group and the GoP. The hydrocarbon
exploration in Karachi was not new. Two exploration wells have already been drilled in
late eighties and the renewed interest was driven by the rapidly changing technology in
the oil industry.
Pakistan Oilfields Limited
(POL) is still
producing oil from its well number one at Khaur discovered in 1915. The average daily
production from its 100 per cent owned fields was 1,464 barrels of crude oil and 10
million cubic feet of gas besides solvent oil and LPG. The major share of production is
from Meyal field. In order to increase its asset base value and increase its reserves the
Company continues to investigate possibilities in international producing and/or
exploration joint ventures. The Company has already entered into various joint ventures.
During the last financial year, upto March 31, 1999, total number of
wells drilled was 22 including 3 wells of OGDC. Three gas fields were discovered by the
private sector companies and no discovery was reported by the OGDC. However, by March 31,
1999 the OGDC had made 47 discoveries which included 28 oil, 12 gas and 7 condensate
discoveries. The OGDC now produces approximately 38 per cent of crude oil and 24 per cent
of gas produced indigenously.
Power sector emerged as the largest consumer of gas during July-Mach
1998-99 accounting for 29 per cent of total energy consumption. It was followed by
fertilizer industry (26%), household (21.4%) industries (20.25%) and commercial consumers
For the present situation heavy dependence on imports
only the policy planners of the country can be held responsible. For nearly 40 years, the
policies which could have attracted foreign investment in oil and gas exploration, were
missing. This kept the exploration and development activities at a disappointing low
level. The first exploratory well was drilled as back as 1867 in the region but only 420
wells were drilled upto June 1996. Out of these, 123 wells were drilled during July 1990
to June 1996. There were 50 oil and 62 gas discoveries. The overall success rate comes to
approximately 1:4 which is remarkably high.
Though Pakistan has always remained deficient in local production of
crude oil and energy products, it has never felt any serious problem in getting the
supplies even during many wars in the Middle East. Pakistan has been importing
nearly 75 per cent of its crude oil and energy products from the Middle Eastern countries
mainly from Kuwait. The other sources include Saudi Arabia, Iran, Abu Dhabi and
Oman. For almost last 30 years total import of energy products has remained in the public
sector. The GoP has allowed Pakistan State Oil (PSO) and Kuwait Petroleum Company to
handle country's entire import of these products. PSO also enjoys the first right to lift
products from local refineries. This has enabled the Company to achieve over 70 per cent
share of the total market.
The year 1998 witnessed numerous development some having positive
implications and some having negative repercussions. But fall in crude oil prices to a
level unprecedented in over two decades was the most significant negative development.
Many attempts to halt the slide and restore stability to oil markets failed. These
included lack of compliance by some producers with agreed production quotas, decline in
oil demand and successive economic crises in several countries.
The industrial nations and non oil developing countries were not immune
to negative effects of the price slide. Some of them experienced downturn in their growth
rates and international oil companies were obliged to merge in an effort to cut costs,
optimize reserves and rationalize their distribution networks.
Demand for oil was extremely weak in 1998, increasing by only 0.3
million barrels per day. The year marked a change in the trend that had prevailed for five
years when annual increases ranged between 1.2 per cent to 2.8 per cent while that of 1998
was less than 0.4 per cent. The close relationship between falling demand and the slowdown
in world economic growth asserted itself in 1998. The global growth was half what it had
been for the preceding four years.
The developing countries' share of world oil demand continued to rise
in 1998. It accounted for 36 per cent as compared to 33 per cent in 1994. Nevertheless,
the developing countries accounted for about 88 per cent of the increase in world oil
consumption. The total consumption amounted to 26.4 million barrels per day. The economic
crisis in the 'Asian Tigers' altered the course of oil demand. It also dashed the hopes
that had been pinned on the growth of this market. Oil consumption in Latin America
accounted for 88 per cent of the overall global increase in demand. Oil consumption in
Africa and Middle East, which represents nearly 26 per cent of total consumption in the
developing countries was higher than previous year. Africa's economic growth rate was
higher than other regions. In the Middle East the economic growth rate fell. This decline
was due to the impact of oil price slump on the oil producing countries. The slump also
affected oil producers in Africa. Oil consumption in countries in transition declined.
This followed only one year of recovery. This group's share in world oil demand dropped
considerably from over 15 per cent in 1988 to 7.4 per cent in 1998.
The slowdown in world oil demand growth prompted a similar downturn in
oil supplies. OPEC raised production ceiling to 27.5 million barrels per day but the
supplies from outside OPEC continued to flow at the maximum rates causing stocks to rise
to their highest level since 1992. As oil supplies rose faster than demand, stocks of
crude oil and products almost reached their maximum level. The situation came to a head at
the beginning of 1998 when inventory levels exceeded their maximum limit.
The weakness of world oil demand, the non-compliance of OPEC members,
the rise in non-OPEC supplies and the UN agreement to double Iraq's oil exports
contributed to a sharp decline in oil prices in 1998. Compared with previous years, prices
reached a record low, which raised alarms in global markets. Prices were lower than they
had been for twenty years even exceeding the 1986 fall. When calculating oil prices
in real terms, after discounting inflation, the oil prices in 1998 were the lowest since
the 1973 price adjustment.
The Slump in oil prices lowered economic growth in oil exporting
countries. It also affected their imports from oil consuming countries and those
countries' investment in the oil states. Reports about the North Sea indicate that about
40 oil and gas fields have recently been discovered in the area, but it would only be
profitable to develop them if the price of oil were US$ 18 per barrel. If the price
dropped to US$ 12 per barrel, it would only be economic to develop half of the new fields.
The new technologies, whose successful marketing and use in recent
years have cut costs, boosted production and supplies and consequently brought down
prices. All the major companies have achieved exploration costs averaging US$ 2, an
average development cost of US$ 4, and an operating cost of US$ 4 per barrel. The
exploration and development costs are paid only once and are recovered relatively quickly
once the field comes on stream the major cost factor is the operation.
In response to the drop in oil prices many major companies have
resorted to merger. The biggest mergers in the petroleum industry in 1998 occured between
British Petroleum and Amoco, Exxon and Mobil, and the French company Total with the
Belgian company Fina. The reasons for merger are said to be: cutting cost, covering
capital and operating costs, eliminating duplication, enhancing their competitive edge,
spreading risks and losses and boosting the value of their shares. This trend is expected
World oil demand in 1999 will continue to be determined, by the
economic crisis in Asia and Russia. It appears from the intervention of various
governments and international organizations that the situation was not too gloomy and that
the economic growth could be restored and confidence returned to financial markets. It is
hoped that world oil demand would rise at slightly higher rate than that in 1998.
Forecasts indicate that oil demand in 1999 will rise. Demand for oil from oil producing
countries will continue to depend on the difference between the rise in world oil demand
and the rise in non-OPEC oil supplies
The incentives offered in the Petroleum Policy invoked interest in oil
and gas exploration activity in the country. The higher pace of activity has resulted in
some large scale discoveries. However, the slower pace of oil and gas exploration activity
in the country, during the last three years, was due to a number of reasons. Low prices of
crude oil was the most important reason. With the increase in global prices of crude oil,
it is expected that exploration and development activities in Pakistan would be more
profitable for the companies. With the greater activities fresh investment in the sector
is also expected.
With the discoveries of huge reserves of gas, it is expected that some
of the sectors which were getting lower gas quota would be allocated higher volumes and
the sectors which were not allowed to use gas as fuel may once again be allowed to switch
over to gas consumption. The objective behind the proposed policy is to restrict import of
furnace oil which has lower calorific value and creates more pollution. Besides, handling
of gas is much easy and costs less.
Therefore, the two gas distribution companies are expected to undertake
massive expansion in their transmission and distribution networks. FFC-Jordan, a urea and
DAP manufacturing company, has been added to SSGC network in late 1998. Bin Qasim thermal
power plant of KESC, till recently mostly using furnace oil, is being gradually shifted to
The other two large scale power plants namely KAPCO and HUBCO can also
be converted to gas instead of furnace oil. KAPCO has a dual firing system and it only
needs allocation of gas quota. Since the supply has to come from SNGPL, already deficient
in gas supply, there is a need to expand and upgrade transmission and distribution network
in SNGPL franchised area. Switching over of power plants, from furnace oil to gas, will
help in reducing Pakistan's dependence on imported furnace oil, improving efficiency of
thermal power plants, reducing repair and maintenance cost, and conserving environmental
It is suggested that GoP should consider allowing cement plants to
switch over from furnace oil to gas. This will not only help in reducing cost of
production but will also improve economic viability of the industry. Fuel is a major cost
component in cement plants. Lower capacity utilization, inability to increase price of
cement and lower off-take had rendered the industry uneconomical. Any effort to cut cost
of production will have a positive impact on cement industry as well as construction
industry in the country.
It appears that IPPs controversy would be resolved with the help of
multilateral institutions shortly. It is said that the tussle between GoP and IPPs has
been the main hurdle in the inflow of foreign direct investment in Pakistan. With the
ending of this bizarre episode the industrial activities are expected to accelerate and
will have a direct bearing on oil and gas sector.
In addition to this, the increase in crude oil prices is expected to
improve earnings of oil exporting countries and their investment in other countries.
Similarly, exploration and development will be more profitable. Therefore, it is expected
that Pakistan would once again become attractive for oil and gas exploring companies. But
there is a need that the irritants responsible for lower inflow of foreign investment must
be removed as soon as possible.