Oil & gas sector remains in limelight

Jan 22 - 28, 2007

Pakistan is grossly deficient in fossil oil but highly rich in gas reserves. While heavy dependence on gas may have helped the country contain its energy import bill, using gas in power plants and homes could not simply be justified. Rising global oil prices have always kept the government under pressure but the recent price hike demands a closer look at the energy policy, particularly in the area of development of alternate energy resources. The aim should be to come up with radical changes in policies to contain oil import bill and to make better use of fast depleting gas reserves.

Reportedly Pakistan's estimated oil and gas reserves are about 5.26 billion barrels of oil equivalent (boe). Natural gas constitutes about 93.8% of total reserves whereas only 6.2% comprises oil. This often provides an opportunity to the analysts to say that Pakistan's economy is run as well as highly dependent on gas. However, linking of gas wellhead price with crude oil price and persistent increase in crude oil has also led to increase in gas price.

Since independence, oil and gas exploration and production (E&P) sector had remained very subdued, mainly due to absence of adequate incentives and also due to the general perception that Pakistan did not have fossil reserves. Now the government is fully cognizant of the importance of local production of oil and gas and efforts have been made to improvise Energy Policy and also aiming foreign investment in this strategic sector.

At present about 40 companies are actively involved in exploration and production activities. According to sector analysts the top 10 entities hold nearly 90% of total reserves. And top 5 firms hold nearly 80% of the total proven oil and gas reserves. The state-owned giant Oil & Gas Development Company (OGDC) controls about 1.72 billion boe or 32.6% of total reserves followed by Pakistan Petroleum, another state-owned firm that has 1.26 billion boe of reserves. According to ownership, three state-owned entities OGDC, Pakistan Petroleum and Government Holding indirectly control over 62.4% of country's total oil and gas reserves.

OGDC enjoyed the lion's share with about 70 million boe production in 2006 followed by Pakistan Petroleum with production equivalent to 69 million boe. Both companies represent about 27% of oil and gas production each. However, the major difference is the growth-oriented production outlook of OGDC's major gas fields as compared to the overall stable outlook of Pakistan Petroleum's major fields. The GoP has indirect control over 59% of total oil and gas production of the country as against 62% ownership of reserves through three state-owned firms, indicating a slightly conservative production from the state-owned companies.

Gas constitutes more than 90% of cumulative oil and gas production. Natural gas production has grown at around 10% in past five years (from 2398 mmcf/d in 2001 to 3836 mmcf/d in 2006). Oil production, however, has grown at lower rate of about 2.5% from 57,669 bpd to 65,577 bpd during this period. OGDC, OMV and ENI Pakistan led the growth in natural gas production, whereas the OGDC also compensated for the reducing oil production from BP Pakistan's fields in the Lower Indus Basin.

Oil and gas reserves of Pakistan have an expected life of about 20 years at the current production rate. Mari Gas Company (with its major installations in upper Sindh) has the highest reserves life of nearly 30 years. However, its growth prospects are limited due to regulated nature of returns.

Pakistan Oilfields recently attained reserves life of slightly more than 28 years among firms operating in the fully deregulated regime due to revisions in reserves estimates of its backbone Pindori Field, and the Makori Field in the Tal block. The company is often classified as one of the aggressive producer in the E&P sector.

The giant OGDC is on the third place with the reserves life of around 25 years. Very few large firms (on regional level) have large reserves lives like OGDC, making it a firm with higher financial flexibility to finance its aggressive exploration program while maintaining the significant earnings growth rate. Foreign firms, relatively, have aggressive production history that has made their reserves lives low as compared to the state-owned firms. British Petroleum, ENI Pakistan and OMV Pakistan are among aggressive producers in the country.


In Pakistan oil pricing mechanism has remained rather simple under different petroleum policies announced in 1991, 1993, 1997 and 2001. Wellhead oil prices (onshore) are based on C&F price of the comparable Arabian/Persian crude oils plus or minus the quality differential. In the last two policies efforts have been made to remove all discounts and adjustments except for the quality differential of oil delivered at the refinery gate. The offshore pricing of oil is based on the similar mechanism but with the provision of production sharing with Government Holdings ranging from 5% to 80% depending on the size of discovery. However, no commercial discovery has yet been made in the offshore area of Pakistan.


The gas pricing mechanisms under various petroleum policies has been rather complex due to greater importance of gas in the economy. However, the basic concept of linking the wellhead gas price with oil has remained the same under all policies. The Petroleum Policy-2001 is the improvised version that specified dual discounts; one is the zonal discount (on risk and cost criteria) and the other on the basis of crude oil price slabs. These discounts are designed to give benefits to the economy in case of higher oil prices by maintaining profitability and offering cushion to encourage exploration activities of E&P firms.


Rising oil prices since 2003 had triggered the interest of both local and foreign entities on exploration in fresh areas and development of already discovered fields in Pakistan. The reference oil prices (OPEC's basket for oil) have showed a consistent upward trend, going up from around US$ 25 per barrel to US$65 per barrel in June 2006. The Petroleum Policy-2001 also contributed towards attracting foreign investment. The policy also offers fresh incentives, i.e. competitive bidding systems for acquiring exploration blocks within the time limit of maximum 120 days, reduction in the corporate tax rate to 40% on new fields from the previous 52-55%, the offer of production sharing agreements in the case of an offshore discovery and allowing E&Ps to build their own pipelines for delivery rather than depending on gas marketing companies.


Reportedly total active exploration leases increased to 105 till September 2006 from 55 in June 2003. Similarly, the area under exploration licenses also increased by 55% to 226,000 sq-km till September 2006 from 146,000 sq-km in June 2003. The province of Sindh has the largest area (28.2%) under exploration followed by Balochistan (27.4%), Indus Offshore (21.0%), Punjab (18.4%) and NWFP (5.1%) up to September 2006.


The Shell brand enjoys about 100-year history in this part of the world, dating back to 1899 when Asiatic Petroleum, the Far Eastern marketing arm of two companies, Shell Transport Company and Royal Dutch Petroleum Company, began importing kerosene oil from Azerbaijan into the Subcontinent. Even today, the legacy of the past is visible at a storage tank carrying the 1898 date. The documented history of Royal Dutch Shell in Indo-Pakistan Subcontinent dates back to 1903 when Shell Transport & Trading Company and Royal Dutch Petroleum Company entered into an agreement to supply petroleum products to Asia.

In 1928, to enhance their distribution capabilities, the marketing interest of Royal Dutch Shell and the Burmah Oil Company Limited in India were merged and Burmah Shell Oil Storage & Distribution Company of India emerged. After independence from colonial system in 1947, the name was changed to the Burmah Shell Oil Distribution Company of Pakistan. In 1970, when 51% of the shareholding was transferred to Pakistani investors, the name was changed to Pakistan Burmah Shell (PBS). The Shell and the Burmah groups retained the remaining 49% in equal propositions. In February 1993, as economic liberalization began to take root and the Burmah divested from PBS, Shell Petroleum stepped in and raised its stake to 51%. Over the years Shell Petroleum Company has successively increased its share, the group now has 76% stake in Shell Pakistan.


It may be right to say that Pakistan State Oil (PSO) is the largest oil marketing company of the Pakistan. By this time it has completed three decades of its existence. Addressing the employees on the occasion Managing Director of the company Jalees Ahmed Siddiqi, acknowledging the efforts of employees, said: "It has had its rewarding highs as well as discouraging lows, but on the whole it has proved that the men and women who have constituted PSO are a tough breed braving the odds and emerging victorious." He added, "All the names linger on in our memories, from unskilled workers in depots to our erstwhile managing director Shaukat Raza Mirza who lost his life while leading the company towards turnaround. Everybody has chipped in to help us attain the position at which we are today."

PSO was created on 30th December 1976 through a reorganization plan merging Pakistan National Oils, Premier Oil Company and State Oil Company. Today, PSO is a Rs 370 billion progressive dynamic company, the largest in Pakistan and one of the topmost in Asia. Building upon its solid foundation, the company is uniquely positioned to grow in the future.

PSO's comprehensive corporate restructuring plan has yielded dramatic result that has been widely appreciated at various national and international forums, by world's leading consulting and financial advisory firms and by leading educational institutions. This program covers the revamping of the organizational architecture, rationalization of staff, employee empowerment and development, and efficiency and transparency in decision-making through Cross-Functional Teams.

PSO's corporate structure has evolved into a matrix, which has divided the company's major operations into independent activities supported by the financial, legal, information and other services. This structural change has been reinforced and related checks and balances have been established by putting in place several corporate monitoring and control systems. One of the top priority areas of PSO's corporate reform is human resource development. The company has undertaken several initiatives to facilitate induction and training of professionals with the objective of ensuring high level of professionalism and productivity at all levels of its employees.

Effective implementation of corporate reform and business development strategies in line with best international practices has enabled PSO to maintain its market leadership position in a highly competitive business environment.


In one of its recently released reports JS Research identified oil and gas exploration sector as a potential out-performer for 2007. Against a gain of 3.6% of KSE-100 Index the market capitalization of the sector has increased by 3.2% in 2007 to date despite falling oil prices. JS Research has also termed the sector "Over-weight" owing to its unmatched growth potential and lucrative valuations. Keeping in view its 26% weightage in the index and a very significant share in overall corporate earnings exposure in the sector is good for any equity portfolio manager. Reserve announcements, oil and gas discoveries, hydrocarbon prices, valuation and earnings of companies belonging to the sector are the major drivers of the performance.

Pakistan's listed oil and gas exploration and production companies have registered significant increase in earnings during last 3 years. Besides rising prices, increase in production has contributed towards this increase. For the next three years sector analysts expect earnings to grow at a CAGR of 13%. It may be pertinent for the stock market investors to note that during 2006 the sector has yielded 9% return (including dividend).