A balanced Petroleum Policy is the key to attract sizable foreign investment, that in turn, facilitate in elevating social up-liftment

By DR. Salman Saif Ghouri
Apr 17 - 23, 2000

Pakistan literacy rate of 40% during 1998 is one of the lowest in the Southeast Asia. Efforts have continued to design proper policies and program to raise literacy level and to improve the quality of living for the common man. Apart from education facilities, health and safe drinking water also remained inadequate especially in rural areas where over 70% of the population reside. For example, in 1997, there was only one doctor for 1724 people; one dentist for 42823; one nurse for 5460 and one hospital bed for 1545 persons. Only 43% of the rural population had access to safe drinking water during 1997.

Inadequate social services and large unemployment in the rural areas forced masses to migrate towards cities. Immense influx of people added multiple problems to the already crowded cities and limited infrastructure. With the limited resources and high population growth, it is difficult to take care of all social dimensions by the government alone especially in the developing countries.

A balanced Petroleum Policy is the key to attract sizable foreign investment, that in turn, facilitate in elevating social up-liftment, generate employment, transfer of technology, and generate revenues through its various direct and indirect linkages. However, pre-requisite to attract sizable local/foreign petro dollars is to offer attractive incentives, provide conducive risk free environment (especially political risk). It is often observed that despite attractive incentives, country failed to attract foreign investment on account of slow or non implementation of laid down policies. The policy should be balanced to allow oil companies to derive normal profit, but at the same time host country must also reap appropriate economic rent and other direct and indirect benefits from its exhaustible natural resources. Petroleum industry has a variety of impacts on countryís development process. Some of these arise internally within the petroleum industry, while others consist of external economies. Following are some of the different ways through which growth in petroleum industry could contribute to the countryís development process.

Promotion of regional development in isolated or lagging regions of the economy

Expanded employment for labor and locals boosting their income through increased direct employment in petroleum sector

Expanded labor and capital income for local firms directly or indirectly linked to the petroleum sector as suppliers of input

Expanded access to technological knowledge, managerial know-how and markets

Saving of foreign exchange (in case discovery is made)

Increased fiscal revenues from local and foreign companies in the form of royalties, taxes, duties etc.

Direct Benefits

The direct contribution to development of petroleum sector consists of value generated by the petroleum ventures, earnings from which could be spent to compensate labor, capital and the entrepreneurial effect or to satisfy fiscal agents. A major contribution that petroleum could make in the improvement of domestic economic welfare is that of fiscal revenues to the government in the form of economic rent and saving of foreign exchange. Increase in the production of oil and gas in the country would raise government revenues in the form of royalties, taxes, duties etc. Such increased production will also reduce oil import dependency (reduced oil import bill), that in turn improve balance of payments, thereby improving upon other macroeconomic variables.

Forward Linkages

The forward linkages facilitate the setting up of forward processing of crude oil. The crude oil has to pass a number of transformation before final consumption in the form of gasoline, diesel, kerosene, and other by-products. Hence, the forward linkages can have a very large impact on development as they give rise to the establishment of downstream industrial activities. For example, increase in indigenous oil production will result in the establishment of new/expansion of existing refineries that in turn give rise to the development of petrochemicals industries. Further down the chain, the petrochemical industry produces (plastics, synthetic fibers and rubber), detergents, fertilizers and fine chemicals, as well as alternate fuels. This enormous range of products and the degree of domestic comfort that they offer could never have been achieved with natural products alone. The investment in petrochemicals is significantly higher than in the refining industry, yet it creates more jobs.

From the refineries to the end-users, petroleum products pass through distributor circuits that differ considerably according to product type and use. Mass distribution products, for which unit consumption is small, are distributed by retailers supplied by the refining companies or wholesalers buying direct from the refineries. However, specialties and products delivered by mass means are generally sold directly by the refining companies or major independent distributors/importers.

The distribution sector employs more manpower than other sectors of the oil industry. In addition to the employees of the oil companies, of whom about 20 to 50% work in this sector, transportation, retailers, service station operations and their personnel also make a living from the industry without being oil employees. Thus the forward linkage is very important as it give rise to transfer of technology, generation of employment, saving of foreign exchange, etc and development of other associated industries that is so essential for the sustainable economic development of any economy.

Backward Linkages

In addition to direct and forward linkage benefits, petroleum venture will also give rise to various backward linkages through its requirement of inputs. The prospects for establishment of industries producing goods and services will be enhanced through the ventureís demand for such inputs. The expanded demand for food, local raw material and the need for new housing requirement (arising out of additional employment and enhanced wage bill) will constitute an incentive to increased economic activity (agriculture, industry, construction, services etc.).

Infrastructure Linkages

Yet a third type of linkage, which is neither backward nor forward, is related to the infrastructural facilities which form part of petroleum venture. Unless the project site is situated in an economically and industrially well-established area, a large part of overall investments has to be expended on indispensable infrastructural installations. Only seldom can these facilities be reserved for the exclusive use of petroleum enterprises. Companies other than petroleum industry as well as common man could benefit from such infrastructure. Thus industrial or agricultural activities although quite unrelated to the petroleum industry, can become economically viable as a result of the infrastructural development.

It is generally expected that investments in petroleum, whether by state-owned or foreign companies, can play a major role in promoting the development of lagging or backward regions of the country. Investment in infrastructure by the petroleum companies could possibly play a pivotal role in providing the basis for sustainable regional development. Such infrastructure investment would interalia lead to construction of schools, roads, hospitals, electric power, water and other community services. In case a commercial discovery of oil/gas, a lagging region could turn into a small town where small scale industries might flourished along with increased agriculture produce. The share of royalty and other surcharge to the provincial government will further facilitates regional development and welfare of local population. For example, to transport heavy equipment to the location of drilling sites, oil companies construct roads that are linked to major road network. The road network would facilitate communication, promote trade and exchange of culture between depressed and develop areas. With the road network, the agriculture sector can also be encouraged as the farmers would have access to bring their agriculture produce to the market, especially perishable produce which otherwise could not reached the market in time.

The success of petroleum venture will improve the quality of life and help in elevating regional development through its various linkages. Once the commercial discovery is made and production commence, the remote area subsequently turned into small town where small scale industry and agriculture sector is flourished through its various linkages.

The Pakistanís petroleum policy 1997, on the one hand, provides adequate incentives to local and foreign oil companies to increase exploration activities, on the other, it also includes certain pre-requisites to ensure regional development on a large scale and provides basic social facilities to the locals in their operating areas. For example, companies will contribute towards the:

Development of roads, water supply, health and education facilities in the areas of operation,

Eradication of illiteracy in the country,

Rehabilitation of mentally retarded and handicapped children,

Promotion of sports and

Fight against drugs and narcotics.

The road network in remote areas of Pakistan as a result of petroleum industry operation has greatly improved the quality of life in Baden, Hyderabad, Tando Alam, Sanghar, Gohtki, Dadu, etc (Sindh), Bawalpur, Bawalnagar, Chakwal, Fateh Jang, Kohat etc (Punjab), and Kalat, Kachhi, Sibi, Quetta, Dera Murad Jamali, Dadhar, Pasni etc (Balochistan).

In many developing countries thousands of people die in remote areas for want of medical facilities. Establishment of petroleum operation in remote or lagging areas has taken care of these important issues. To meet any accidental or other related emergencies, a dispensary is usually established in all of operating fields and drilling sites. People of surrounding areas have free access to these facilities. In case of emergency, a free ambulance service is used to bring the patient to the city hospitals. Most of the oil companies, Like Union Texas Pakistan, LASMO Oil Pakistan Limited, Pakistan Petroleum Ltd (PPL), Pakistan Oilfield Ltd (POL), Oil and Gas development Company Ltd. (OGDCL) and other operating companies have established dispensaries at their producing fields and drilling sites. These companies provide free medical treatment and medicines to the local population. In an effort to eradicate Tuberculosis (TB), OGDCL has established a TB Center at its Tando Alam Complex. So far a large number of patient sof the surrounding areas as well as far-flung areas have been treated to this disease.

The companies operating in remote areas require plenty of water for its operational need as well as for drinking, washing and cooking. For this purpose they usually drill tube wells or lay water pipeline if the source is nearby or even transport water through bousers. The people of adjoining area have also free access to this water.

On the educational front, oil companies operating in Pakistan have devised laudable schemes that will benefit the people of the areas for a long time to come. To promote the level of education in the less developed areas of their operations and for higher education, each foreign and local exploration and production company require to keep a minimum budget of US $ 10,000 per license/lease per year at the pre-commercial production stage and US $25,000 during post commercial production stage. Similarly, all local and foreign oil companies are required to place social welfare funds in their respective agreements that must be utilized to give lasting benefits to the communities. Social welfare projects must be agreed with the local community and Government. In this head, each company is required to place US $ 10,000 per Licence per year for Zone-1 and 20,000 for Zone-2&3 during pre-commercial production. This amount will vary progressively with the production level during post-commercial production.

Like other oil companies, OGDCL has constructed primary schools in remote areas of its operations (e.g., Pirkoh, Loti, and Kali Talu), provide furniture and award scholarships to the outstanding students. It has also established Oil and Gas Training Institute (OGTI) with the Canadian assistance and offer two months internship to 30 outstanding students from various universities throughout the country to impart training in all disciplines of petroleum industry. By this scheme, OGDCL is delivering various technical courses and also providing on jobs technical training at its fields. In this way, OGDCL is serving and preparing our young generation to meet the challenges of next millenium.

In summary, Pakistanís balanced, attractive and integrated petroleum policy had successfully able to attract sizable foreign and local investment. Such investment in oil and gas exploration and production has generated a large number of direct and indirect benefits to the masses through its various integrated linkages and handsome revenues to the government in the form of royalties, taxes, surcharge and other levies. In an effort to continue to attract more foreign investment in oil and gas sector, the government should earn foreign investorís confidence, provide conducive environment and positive signal towards implementation of its policies.

The views express in this paper are those of the author and not necessarily those of his organization.