The Privatisation Commission, in July 2002, had offered 51 % shares of the company for privatisation with management control and had invited Expressions of Interest (EOIs), by 12th of August. The EOIs were invited from reputed and financially sound investors, acting solely or as part of consortium and having relevant upstream experience. The pre-qualified parties that satisfy the necessary financial and technical standards were to be invited to sign a confidentiality agreement, after which they would be provided with a copy of the information memorandum and allowed access to the data room to undertake a comprehensive assessment of the OGDCL. The government had intended to finalise the privatisation process at a relatively fast pace, but there appears some delay due to different reasons.

PRODUCING OIL AND GAS FIELDS PREFERRED: The investors from France, the United States, China, Russia, Australia and Middle East visiting Pakistan, had held meetings with the Privatisation Commission, and expressed interest for participation in case of the privatisation of The Oil and Gas Development Company Limited (OGDCL). According to press news, a number of overseas oil and gas exploration companies have now expressed their keen interest in buying stakes in OGDCL, if it was broken up into various entities instead of offering the company as a whole. They have reportedly said that specified fields of OGDCL, which were producing oil or gas or both and had sufficient reserves to last for years, were of interest to the foreign companies. If the fields were offered separately then the foreign companies would not have to indulge in the overall management of OGDCL, in which they foresee problems because of strong workers union of the company. They consider it would be difficult for an overseas manager to reduce a large number of the employees of the company, which was already over-staffed, and then run it efficiently. Therefore, it was feasible for them to buy stakes in the particular fields identified by them and operate in those fields. Similar press reports have emerged about PSO privatisation for which the European and American companies in oil business reportedly stayed away from the process of buying its shares. As a result it is said that now only two middle-eastern firms and a Pakistani company, are in the run for PSO.

RECENT DISCOVERIES BY OGDCL: According to an announcement dated 28th October 2002, OGDCL has discovered oil and gas from its exploratory well (Norai Jagir well No 1) in Sindh. Reportedly, the company has struck fifth consecutive discovery in a row in the Southern Indus Basin and sixth major discovery over last one year, each from distinctly different reservoir horizons. During the initial testing, the Norai Jagir well has flowed 410 barrels of condensate per day and about 10 million cubic feet per day of gas. Norai Jagir structure has been delineated in Nim Exploration license area, drilled and tested by OGDCL using its in-house expertise. Nim Exploration license is a joint venture of OGDCL and Government Holding Private Limited with working interests of 95 % and 5 %, respectively, OGDCL being the operator.

JUSTIFICATION FOR REVIEW OF PRIVATISATION STRUCTURE: In the light of desire of the oil / gas investors for purchase of producing fields separately from the company as a whole and the beneficial impact of a number of new discoveries by the OGDCL, perhaps there is justification to review the structure of the privatisation transaction as envisaged when the EOIs were invited. In view of the nature and importance of its assets and capabilities, it is considered essential that its privatization structure is handled with utmost care. It is submitted that, while reviewing the privatisation structure, the factors pertaining to OGDCL particularly the following might also be reconsidered:

(A)- VOLUME OF ECONOMIC CONTRIBUTION: This latest discovery Norai Jagir is estimated to help the country in import substitution of $14 million per annum. All the six discoveries together are estimated to produce 8,500 barrels of oil and 50 million cubic feet of gas per day, which are expected to contribute $130 million per annum towards import substitution. The company's present production level is 24,500 barrels of oil, 800 million cubic feet of gas, 210 metric tons of LPG and 60 metric tons of sulphur per day. In addition, OGDCL at present carries 7,000 barrels of oil, 160 million cubic feet of gas and 75 metric ton LPG per day from its 24 non-operated joint ventures. The cumulative foreign exchange savings from the current production are estimated at $ 1.52 billion per annum. Further, through its ongoing projects, OGDCL is looking forward to yield additional 6,500 barrels of oil, 180 million cubic feet of gas and around 150 metric ton of LPG per day by the end of June 2003. Undoubtedly, this is an important contribution to the country's economy. With respect to Pakistan's total production, OGDCL's share is 37% for oil and 30% for gas (FY 2001). It may be noted that with the privatisation of ODGCL to foreign companies, present import substitution scenario due to OGDCL production of oil / gas will be reversed.

(B)- OGDCL RELATIVE POSITION: The company has largest acreage position in Pakistan with considerable exploration upside and significant scope for appraisal and development. The company has the most extensive exploration and production database in Pakistan and has over four decades of successful track record to its credit. Through enormous efforts for improving capabilities of its seismic crew, the company has enhanced level of its exploration and other activities. OGDCL, the largest oil / gas company of Pakistan, has also acquired state of the art workstation facilities for interpretation and evaluation, which reportedly enabled delineation of 25 exploratory prospects in various OGDCL operated concessions during the current year with unprecedented speed. OGDCL has also been able to effect considerable reduction in the Rig Operations and Well Costs through big decrease in time for mobilisation, pre-spudding works and drilling. It is said that the economics of current Sinjhoro discoveries has set a good precedent. About eleven wells in different prospecting areas are being drilled; while capital works worth billions of rupees are in progress in different fields / production facilities. The company is said to have a very aggressive drilling programme and has plans to drill 21 wells, including 16 exploratory wells by June 2003.

(C)- WHOLE LOT VIS-A-VIS SELECTED PARTS SALE APPROACH: Under the strategic plan of OGDCL rationalisation, one of the options was not to relinquish the exploration leases portfolio and certain other assets to the private investors under the proposed privatisation plan. The financial advisers had their own views on this. Also, the question of sale of OGDCL in one go or in parts had first arisen on submission of the initial report of the financial advisors appointed by the Privatisation Commission for OGDCL privatisation. The Privatisation Commission in March 2001 referred to the initial report from the financial advisors, wherein it said that the sale of OGDCL in one go would maximize the sale proceeds. It was also said that the consolidated privatization (of OGDCL) was the most likely option because real value of the company was in consolidation. In the best interest of the country, this issue should have been further analysed objectively. Moreover, for privatisation of such critical assets as presently held and owned by the OGDCL, maximum proceeds by sale in one go might not be the only determinant of strategy / final decision.

(D)- OGDCL MANAGEMENT: At one time the OGDCL management had submitted its views on privatisation of the company to the government. Reportedly the management had brought to the attention of the authorities, the estimated annual loss to the government vis-a-vis the one time estimated inflows in case 51% or 26% shares of the company were sold to private investors. The government, however, decided on the privatisation of the company. It is felt that with the new oil and gas discoveries by OGDCL management and the employees, there is merit for reconsideration of the privatisation options and the structure of the privatisation transaction.

(E)- ACTUAL PROFITABILITY: OGDCL is one of the largest and most profitable companies in Pakistan and has maintained a strong growth record with a cumulative average growth rate of Profit After Tax in Pakistani Rupees at about 28% for 1997-2001. Net sales in the year ending June 30, 2001 were Rs 38.3 billion ($652 million), representing a 51% increase over the previous corresponding period in local currency terms. Increased sales were driven by a combination of increased production and higher average realised prices.

OGDCL in 18 months paid Rs 3.75 billion in shape of dividends to the government which the sole owner at present. OGDCL in 1999-2000 paid dividend of 20 per cent and also declared an interim pay out of 10 per cent for the six months ended December 31, 2000. With new discoveries, the retirement of borrowings and increase in prices of oil / gas, the profits of the company is expected to experience significant improvement over 2001 operating results.

CONCLUSION

OGDCL is a strategic asset for Pakistan. In case of OGDCL privatisation resulting in one time large inflow of foreign investors' funds, the country might experience large annual outflows of foreign exchange for many years to come. In view of the factors described above, it is submitted that options for its privatisation might be carefully reconsidered. It may be noted that the government has been able to raise substantial funds with the off-loading of small percentage of shares of the National Bank of Pakistan on the Stock Exchanges in Pakistan. It will be a good idea if similar route is considered for privatisation of this company as well. Further, detailed comparative studies might be carried out to the separate sale of presently producing oil / gas fields. OGDCL assets such as capability for seismic survey, exploration, appraisal, database on exploration, etc. as well as the prospecting rights to different potential areas licensed to OGDCL might not be privatized at all. The private investors might not be interested in most of these assets and therefore would not be paying much for their acquisition. The expertise developed over the last four decades might be saved to carry on the exploration and other activities in all the OGDCL fields that are not commercially producing at present. This will also save the technical teams from joining the ever-increasing unemployed in the country. Moreover, if all of OGDCL assets are sold in lumpsum, Pakistan's exploration and prospecting activities might be seriously disrupted. The government authorities are therefore urged to thoroughly examine all options for the privatisation of this jewel of a company.