THE DEVELOPMENT OF OIL AND GAS SECTOR
Ordinance finalized; new strategy for creating
competitive energy markets in Pakistan
By AMANULLAH BASHAR
Nov 06 - Nov 12, 2000
The Ministry of Petroleum and Natural Resources is
undertaking an extensive restructuring and reforming exercise aimed at
inviting massive private sector investment through deregulation and
liberalization of the oil and gas sector in Pakistan. According to
informed sources, the Ministry is disengaging itself from commercial
The government has also finalized a draft ordinance
for the setting up of a Petroleum Regulatory Authority (PRA) which will
be operating as the single agency to regulate the entire petroleum. The
Natural Gas Regulatory Authority (NGA) earlier formed by the government
would be merged in the forthcoming PRA, sources said.
All component of a strategy whose overall objectives
are to attract private investment and to develop competitive energy
markets and to establish credible institutions for the long-term
development of the petroleum industry in Pakistan.
Currently, the public sector oil and gas companies,
which have been given complete autonomy to operate on commercial lines
without government interference, are also high on the government's
agenda for privatization. But even before this takes place, this
autonomy should lead to improvements in efficiency and economy and
better corporate governance.
The government is also in the process of establishing
an independent regulatory framework that will protect consumers'
interest, allow a larger role for the private sector and respond to
social and environmental concerns. These steps are necessary to take out
the Ministry out of business where it should not have been in the first
place. The government's job is to concentrate its energies on policy
formulation and thus develop credible and sustainable policies and
systems that streamline the working of this sector and as a result make
it more attractive and friendly for investment.
The Ministry of Petroleum is divesting itself of its
regulatory functions and for this purpose a Natural Gas Regulatory
Authority has already been formed to oversee the downstream gas sector.
According to Raziuddin, Chief Executive Officer of
Attock Refinery Limited, oil accounts for about 44 per cent of the total
primary energy supplies in Pakistan. The usage of oil has increased by
an average of about 8 per cent per annum since 1991. However, the
domestic refining capacity has remained constant at 6.7 million tonnes
per annum over the same period. After commissioning of PARCO the
capacity would increase to 11.2 million tonnes per annum as against the
demand of 18-20 million tonnes per annum.
Pakistan spent an amount of about $1.4 billion for
import of crude and petroleum products in 1998-99. This was when the
petroleum prices were at rock bottom. This increased to $2.762 billion
in the 1999-2000. He expressed his apprehensions that with the
international crude prices touching its peaks, the petroleum import bill
of Pakistan might be touching around $5 billion. There is definitely a
tremendous flight of foreign exchange when buying petroleum products
from the international market as compared to refining within the
country. The gap in supply and demand indicates that expansion in
refining sector is essential to relieve the pressure on the strained
economy and promote economic and industrial activity in Pakistan.
M.M. Husain, Managing Director, National Refinery
regarding improvement in local refining capacity, feels that Pakistan
will remain deficit in petroleum products even after PARCO refinery
comes on stream. The deficit is estimated to be 12.5-mm tonnes a year in
2005. The huge amount paid on imported refined POL products can be
adjudged from the fact that there is a foreign exchange saving of $22
per tonne in local refining as against imported oil. Husain emphasized
that energy requirements of the country are being met from indigenous
sources as well as imports. The petroleum products cater for 43 per cent
of country's energy requirement followed by Natural gas 38 per cent
whereas hydel electricity and coal etc meet the remaining 19 per cent
requirement. The economic growth and increase in national population has
raised the domestic fuel demand. Under this scenario, additional
refining capacity is a must to overcome rising deficits and for saving
of foreign exchange.
As a result of policy initiatives undertaken by the
government, the Pak Arab Refining Company (PARCO) refinery near Multan,
completed at a cost of $886 million, has just gone into production. This
is the first new refinery in many decades and will increase the current
refining capacity from 6.5 million tonnes to 11 million tonnes per
annum. The contact for the white oil pipeline, from Karachi to Multan,
is also expected to be awarded by about the end of this year. This
project will cost close to $600 million and will greatly help to reduce
the pressure on the roads because of reduced movement of oil tankers.
Shell and Caltex, two major multinational companies have agreed to
participate in the equity of the project to the extent, depending on the
final cost of the project, of about $35 million (26 per cent) and $15
million (11 per cent) respectively. The government of Abu Dhabi, a 40
per cent partner in PARCO will contribute $28 million towards the equity
of the project.
Caltex will invest another $10 million in the LPG
business it is acquiring from SSGC; this includes the acquisition price.
PARCO has also gone into business alliance with TOTAL of France which
will invest $20 million in the marketing of PARCO's fuel products while
SHV of Holland will invest $25 million in development of the
infrastructure for the marketing of LPG through PARCO's Pearl Gas
Company. Thus, the total forthcoming investment is $30 million. In
addition, about $600 million have been committed by foreign companies in
the upstream oil and gas sector taking the total commitments since
October 1999 to over $700 million. Investment commitments in the
downstream sector are in excess of $130
The Ministry of Petroleum has also come to an
agreement with the multinational companies on the gas pricing structure
for the newly discovered gas fields. These fields are expected to add
almost one billion cubic feet of gas per day to the existing production
of about 2.2 billion cubic feet per day.
Gas sales agreement have been signed with all the
operators except one or two, which are expected to be signed shortly.
The first new field Zamzama will come into production in February 2001
in a record time of only 30 months from the date of discovery. The new
gas finds will enable the power sector to convert some of the power
stations from imported fuel oil to indigenous natural gas. The plans
have already been chalked out to start with the supply of about 120
million cubic feet per day from the Zamzama field to Guddu power
The existing gas infrastructure needs to be augmented
and expanded to take the gas from the new discoveries in the South to
the consumption centers in the North. For this a development plan of
about $400 million has been prepared which will be implemented by SNGPL
and SSGCL over next three years. The government has also invited the
private sector to invest in this development activity.
To give a boost to the exploration efforts, the
Ministry of Petroleum is preparing additional incentives for the more
difficult frontier areas of Pakistan and the Potohar region. A special
package has been prepared for the even more difficult offshore areas
where very little exploration have been done despite having good
potentials. The package includes an attractive production sharing
mechanism and other fiscal benefits. Since all the above incentives and
packages have been prepared in close consultation with the industry, the
package is expected to get a good response.
Balochistan, which is one of the most prospective and
rich areas of the country, has been beset by force majeure problems. The
force majeure problems have greatly hindered the exploration efforts in
this potential area. The government has constituted a committee to
resolve this problem by working closely with the provincial government
and others to enable the exploration companies to proceed with their
activities as early as possible.
Pakistan has also embarked on an aggressive programme
for deregulation of the petroleum sector. The objective is to deregulate
the entire petroleum sector in shortest possible time. The import of
fuel oil and LPG has already been deregulated recently whereas the
government intended to deregulate the import of diesel oil very soon.
The freight pool system, which has been extensively abused, will be
abolished. Refinery prices are being rationalized and over a period of
In this context, a Holding Company has been
incorporated which will manage the government's commercial interest in
the oil and gas companies. The boards of governors of the public sector
petroleum companies such as OGDC, PSO, SNGPL, SSGC and Pakistan
Petroleum Limited have been given complete autonomy and made responsible
for their commercial decisions.
To reduce pollution, the government has decided to
promote the use of compressed natural gas (CNG) in vehicles using motor
gasoline. A programme is also being developed to encourage the
conversion of diesel engines to CNG. This, being a little more difficult
technically and economically, will take some time. Another major problem
is that of high lead content in motor gasoline. With the introduction of
87 RON, mono grade gasoline the maximum lead content will be
substantially reduced. This has been possible because of the upgradation
by the existing refineries. To deal with the problem of sulphur
contamination, the government plans to convert power plants running on
fuel oil to natural gas where possible using some of the gas from the
Pakistan has a unique geographic and strategic
location in Asia. It is situated at the crossroads of West, Central and
South Asia and provides access to the warm waters of the Arabian Sea.
With the fast growing markets South Asia and East Asia, the availability
and security of energy supplies to these countries is critical for their
economic development. Due to its strategic location and the strength of
its well-developed energy sector, Pakistan has the potential to emerge
as a leading transit country in international energy trade in Asia. In
this context, three transmission pipeline projects are under
consideration of the government. These projects are including
Iran-Pakistan-India pipeline and the Turkmenistan and Qatar projects. In
addition, a storage and export terminal combined with export oriented
refineries on Pakistan's Arabian Sea coast at Gwadar can provide a
convenient outlet that would be vital for the Central Asian countries if
their oil was to find international markets.
Because of the spiralling crude prices, which have
risen to over $30 per barrel, Pakistan has been grappling with the issue
of domestic product prices. These prices have to relate to international
prices and as a result they have been periodically increased. However,
when there is a decline in international prices, the government is
morally bound to pass on this benefit to the consumers. Gas prices have
also been increased recently and these have been necessitated by higher
wellhead prices for the newly discovered gas resulting from additional
development expenses by the producers and the increased cost of
The Minister for Petroleum and Natural Resources
however maintains that the government does not intend to shy away from
taking hard economic decisions regarding product pricing and other
matters. The government has already demonstrated this in the case of the
recent adjustments in the prices of petroleum products and also of
natural gas. These decisions may seem unpalatable but are essential for
economic survival in the longer term.
The key strength is the large-scale pipeline network
that Pakistan has, where training can be provided to the employees of
the Gas Company to whom services are being exported.
According to Mohammad Kalim, the gas industry in
Pakistan had a very sound foundation and can be instrumental in carving
a respectable place by exporting its professional expertise to the
countries intended to develop their natural gas industry. This may help
improving foreign exchange situation from external resources.
Saudi Arabia is also seeking to increase domestic gas
use and has undertaken a $4 billion programme to develop its
infrastructure and non-associated gas reserves from the Khuff reservoir.
The gas reserves of Saudi Arabia are stated to be 204 TCF.
The employees of the Gas Company from Nigeria have
already received training in SSGC facilities. The cost of living in
Pakistan is much lower than the developed world and it would be much
more economical for the countries of Africa, Middle East, and CAS to
send their staff for training in Pakistan.
Some of the countries, which have, gas resources or
can import gas from neighbouring states.
Nigeria: Nigeria is flaring 2000 million cubic
feet of gas per day. The same amount that Pakistan is using presently.
It took Pakistan 45 years to develop their system. Nigeria gas reserves
are reported at 394 TCF. Nigeria does not have a gas pipeline network.
SSGC of Pakistan is presently carrying out design and supervision of one
project in Nigeria. A Pakistani contractor has the EPC contract. This is
a good beginning. The scope in Nigeria for the service is huge.
Ghana: Gas has been discovered in Ghana.
Opportunity exists in that country for services. SSGCL have already
visited Ghana to look at this prospect.
Oman: Oman requires services for operation and
maintenance of its gas pipeline network. SNGPL and SSGCL have submitted
documents showing their interest.
Along with the strength Pakistan has to acknowledge
the weak areas.
The main area of weakness is that the gas industry in
Pakistan does not have formalized training programme. The training of
engineers and technicians has been mostly on the job. This area will be
a serious constraint in expansion of export of oil and gas services. The
on-the-job training concept has an inherent weakness that it is slow. It
cannot be evaluated in real terms and it is dependent on individual
initiatives. Another adverse effect is that upgrading of expertise is
not possible. This area requires immediate attention at the top most
level of the gas industry management. Formalized training center for
engineers, technicians and other non-technical staff is an absolute
must. The cost of such training will be recovered in no time, in better
productivity, reduced gas losses and availability of trained manpower
for taking over assignments outside Pakistan.
Currently, the government is taking aggressive policy
initiatives for achieving its objectives of deregulation, liberalization
and privatization in both the upstream and downstream sectors.
Consequently, the revitalized oil and gas industry of Pakistan would
need sizable private investment of around $5 billion or more. With the
arrival of private investment at such a large scale the energy sector is
bound to produce better results and provide relief to the economy.
Pakistan is a country of rich lands both in oil and gas. The most
attractive area for exploration of the natural resources is Balochistan.
Unfortunately, over 80 per cent potential area in the province of
Balochistan is under force majeure mainly due to Tribal and Sardari
system. Achieving self sufficiency in POL products should be the targets
of the energy policies being chalked out by the government. There is a
need to develop a consensus among all tribes in Balochistan so that oil
and gas exploring companies could carry out their operations without any