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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 activities.

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.

Refining capacity

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.

Foreign investment

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 station.

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.

Exploration

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.

Deregulation

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 time, deregulated.

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.

Pollution

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 new discoveries.

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 distribution.

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.

Strength

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.

Weaknesses

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 security concerns.