Exploration activities have to be expedited to avoid any adverse impact on the economy

Aug 06 - 12, 2007

According to conservative estimates, Pakistan's energy demand is growing at more than 10% per annum. The primary sources of energy are oil, gas and electricity. However, the bulk of the electricity is also generated at thermal power plants using furnace oil and/or gas. Though, huge reserves of coal have been discovered in the country, these could not be used because mining has not started as yet.

Bulk of oil requirement (80%) of the country is being met through import, both as crude oil and finished products. Rising crude oil price has been impacting Pakistan's economy negatively and it is the main cause of cost pushed inflation. On the one hand it is putting huge pressure on Pakistan's foreign exchange reserves and on the other hand eroding competitiveness of local manufacturers.

Lately, crude prices have been hovering above US$ 75 per barrel in the global markets. The latest forecast is that prices could go as high as US$ 100 per barrel before end of the calendar year 2008. A similar forecast was made few years back but no body was ready to accept it. However, the price movement during one year substantiates that probability of touching this level is very high.

Pakistan has not been successful in increasing indigenous production of oil, despite having enviable success record. The current crude oil production is around 70,000 barrels per day. Though, gas production is on the rise the demand is growing at much faster pace. It is believed that despite new discoveries enhanced production is depleting the reserves and by 2010 country will be forced to import gas to meet the demand.

The average success rate in Pakistan is 1:4 as against the global average of 1:10. The successive governments have offered attractive incentive through various petroleum policies. However, it seems that Pakistan has not been able in sharing the success story with rest of the world. Though, more than two dozen foreign oil and gas exploration companies are operating in the country bulk of the production comes from less than half a dozen companies.


Oil & Gas Development Company (OGDC) is the largest exploration and production (E&P) company of Pakistan. It controls major share in the indigenous production of oil, gas and condensate. OGDC undertakes drilling at its own as well as in collaboration with other E&P companies, local as well as foreign.

OGDCL drilled 19 wells (14 exploratory /appraisal and 5 development) during July- March 2006-07, as against 18 wells (14 exploratory /appraisal and 4 development) during the same period a year ago. The Company is expected to achieve even higher production for the year ended 30th June 2007. As a result of new discoveries OGDC's turnover as well as profit is expected to improve considerably in the near future.

During this period Company's average daily production of oil and gas remained at 34,893 barrels of crude oil and 834 mmcfd of gas. This reflects an increase of 12% in oil and 7% in natural gas production as against the same period a year ago. Daily production of LPG and sulphur reached 310 tons and 65 tons showing an increase of 7.6% in LPG production and 16% in sulphur as against same period last year.

OGDC is a success story that should be shared with local and foreign investors. The company has the potential to gradually reduce country's dependence on imported crude oil and keeping the country self reliant on indigenous production of gas.

The risk to drilling targets emanates from 1) higher number of incomplete drilling from previous year, 2) limited number of rigs and 3) long delivery time for drilling rigs in the international market. Exploration drilling in two offshore areas would be a key highlight of next year's drilling program.

Going forward OGDC has the potential to become a perfect case of public-private investment. The GoP has divested part of its share holding in the company. The time is most ripe for the secondary offering to fulfill the growing appetite of the investors. Let the general public reap the benefit of 'Privatization for People' program.

Locally produced gas remains the major source of energy. It is being used by power plants, fertilizer manufacturers, industrial and commercial consumers and the largest number of domestic consumers. The two gas distribution companies, operating in the public sector but on the list of companies to be privatized, have constructed an elaborate transmission and distribution network.

These companies have been duly rewarded because their profit is directly linked with the operating assets. To compensate for reduction in the value of assets, due to depreciation, the companies have been following extensive capital expenditure plans. The policy has enabled gas distribution companies to extend their distribution to the nock and corner of the country.

Gas is still the cheapest and the cleanest fuel in the country. Though, the government has constantly increased the wellhead price a cap was also used to avoid sudden hike. The wellhead price has been going up because of its linkage with international crude oil price. During last one decade the price of crude oil has gone up from less than US$ 10 to more than US$ 70 per barrel.

Till recently gas used for power generation was substantial. The new and fast growing group of consumers is the users of compressed natural gas (CNG) in automobile. One can see long queues of cars at the CNG dispensing stations. The growing use of CNG may have helped in containing gasoline import bill but certainly depleting reserves fast.

Local automobile assemblers have played a major role in popularizing CNG use in the cars. They were able to understand the emerging scenario better than the government and started marketing cars with factory fitted CNG kits. Not only that the higher engine capacity cars have CNG kits but 800cc cars also have CNG kits.

Initially, people were using liquefied petroleum gas (LPG) in the cars and most of the old cars are still using it. However, the number of CNG users has grown exponentially. Initially, CNG filling stations were established but very shortly petrol pumps also started selling CNG. Lately, some of the petrol pumps have been converted into CNG filling stations.

According to a report Pakistan is likely to catch up with Brazil and Argentina in population of CNG vehicles and may emerge world's number two in August this year by surpassing Argentina in number of CNG vehicles. At present Pakistani has estimated 1.210 million CNG vehicles while Argentina has 1.243 million vehicles on roads. Brazil has 1.315 million CNG converted vehicles.

According to Malik Khuda of CNG Station Owners Association, "We will leave Argentina behind next month in view of the rising demand of CNG-fitted cars and other vehicles. Pakistan has already emerged as the CNG leader in Asia".

Currently, over 1,400 stations are operating in 85 towns and cities of the country. An investment of Rs 46 billion has so far been made and more than 60,000 new jobs have been created.

Some 400 new stations will be added in current fiscal year and number of vehicles will touch 1.4 million. Roughly, about 7,000 vehicles are being converted to CNG use every month while some 3,000 new factory fitted CNG cars are finding their way to the roads.

Despite phenomenal growth in the CNG sector, consumers continue to face inordinate delays due to long queues at the filling stations. Less 10% CNG stations in Karachi get gas at required pressure of 15 psi (per square inch), where as remaining get gas at 8 psi. As a result, consumers have to wait for long at the CNG pumps. During the peak hours the pressure reduces to 4-6 psi, thus taking 15-20 minutes to get the gas cylinder of a car filled.

The next group in waiting is the public transport, currently using diesel. This sector should have been on the top of priority list for three reasons 1) the largest percentage being used in public transport (buses and trucks), 2) being the second largest contributor to the POL import bill and 3) major source of pollution.

Only government could be blamed for this haphazard policy. While it was more than generous in allowing establishment of CNG stations, it completely ignored the public transport entirely dependent on diesel. The CNG stations have to be equipped with larger and high-pressure storage vessels and bigger nozzles. Besides, no attention was paid towards import of CNG kits to be fitted in vehicle running on diesel.

Use of gas in industries, power plants and vehicles has helped in containing import of furnace oil and gasoline. However, the indiscriminate use of gas is depleting gas reserves faster than anticipated and import of gas is unavoidable.

Various options are available for import of gas that includes import of gas through pipeline and as liquefied natural gas (LNG). Each option has its own plus and minus points. However, geopolitical conditions of the region will play the decisive role in the selection of final option. The prudent approach is to develop Pakistan as energy corridor and benefit from both the options.

Pakistan has the potential to become energy corridor because one side of the country gas rich Middle Eastern countries are located and on the other side are energy-starved economies like China and India. Pakistan also has two oil pipelines linking Karachi with the northern parts of the country, one for the black oil and other for white oil products. These pipelines could be further extended to other areas.

Iran-Pakistan-India gas pipe line seems to be the best choice for the three countries. But it is being opposed vehemently by the US. India has been promised supply of nuclear technology for civilian use as a bribe to abandon the project. However, now efforts are being made to include China in the project keeping in view the fact that the US is a major foreign investor in China.

Turkmenistan-Afghanistan-Pakistan gas pipe line project is being pushed by the US to get control over gas available in Central Asian Republics, previously part of USSR. However, the probability of completing the project is low due to persistent war like situation in Afghanistan.

Huge investment is required to build infrastructure for handling imported gas, its storage, transmission and distribution. However, the country does not have any other option. The project has to be completed in next couple of years to avoid shortage of gas.

The country has succeeded in increasing indigenous production of LPG four times in the last five years. However, the growing use of LPG in the transport sector as well as by the domestic users is expected to surpass domestic production.

Incidentally, Pakistan has LPG handling and storage facility at Bin Qasim. However, its usage has remained low due to inconsistent government policy governing LPG import. It is waste of national resources.

According to estimates for the current fiscal year finalized by the government, oil imports would be about 12% higher compared to previous year's revised estimate of US$ 7.88 billion. International crude prices are hovering around US$ 70 per barrel mark compared to last year's average of US$ 60 per barrel.

It is necessary to reiterate that Pakistan's oil import bill has gone up due to rise in crude oil prices as well as substantial increase in furnace oil, mostly being used by the thermal power plants. It is on record that use of gasoline is on the decline due to increasing number of CNG fitted cars. Similarly, rickshaws are switching over to LPG and motorcyclists are using bulk of gasoline.

Reportedly, consumption of diesel has been projected to come down to 3.4 million tons costing US$ 2.13 billion compared to a consumption of about 4 million tons costing US$ 2.3 billion last year. On the other hand, the import of 4 million tons of furnace oil would cost US$ 1.36 billion next year.


The government has lifted the cap of US$36 per barrel on wellhead gas price and has offered 100% international crude price to domestic production of crude oil, natural gas, condensate and liquefied petroleum gas. These incentives have been provided to attract quality investors in oil and gas exploration and production activities. However, the reference gas production price has been fixed at US$45 per barrel.

Unveiling the salient features of the new Petroleum Policy 2007, Ahmad Waqar, Secretary Petroleum and Natural Resources disclosed that with the removal of cap on wellhead prices, gas production prices would increase by 6-8 percent but after 4-5 years. However, the petroleum industry experts strongly believe that the increase in gas production price after 4-5 years does not have any attraction for the new entrants. They feared that the government would again fail to attract investment in exploration and production activities.

According to Waqar, oil production in the country now stands at 70,000 barrel per day, which only fulfills 20 per cent of energy needs of the country, which was why the government had to import POL products. Of the 70,000 barrel per day, Sindh produces 50% oil and Punjab 40% and remaining 10% oil is being produced in the NWFP and Balochistan.

At present the country produces 4 billion cubic feet gas per day which was 2.1 billion cubic feet per day in 2001. He said Sindh was producing 70%, Balochistan 20% and Punjab and the NWFP remaining 10%.

He said the government also wanted to import gas from Iran and Tajikistan. In addition, the government was working on the import of LNG to meet the increasing energy demand in the country in the wake of 7% economic growth rate which the country was experiencing.

The existing gas production price in Pakistan ranges from US$ 2.51 to $2.61 per mmbtu. This goes up to US$ 2.84-3.30 per mmbtu if the crude oil price goes up to US$ 60 per barrel. The government has introduced Gas Price Gradient formula, which will protect interest of the investors as well the consumer.

However, the government would not pass on the massive impact to gas consumers in case oil prices surged up to unaffordable level in the global market.

In case oil prices in international market surges to the maximum level, then consumers would be protected under the GPG concept, and likewise, if price of POL products went down in the international market, and it kept declining and crossed certain limit, then investors would be protected.

Under the new petroleum policy, every bid for any block for oil and gas exploration and production activities would comprise of work program that the bidder intends to follow for quick development of the block in terms of total work units carrying 80% weightage. Gas Price Gradient (GPG) allows the bidder to balance its risk, when the reference crude price is above US$ 45 barrel, which would have 20% weightage.

The bidder quoting higher GPG would get lower score in bid evaluation and as such the bidder would need to give higher work program to make his bid competitive. The bidding system is designed to allow companies, which offer the most competitive work plan to balance it out with the higher GPG to be received if they discover commercial quantities of gas and oil prices stay above US$ 45 per barrel. The rationale for giving high weightage to the work plan is to enhance exploration activity to locally produce much needed energy at comparatively lower prices compared to imports.

As per the new petroleum policy, price of gas is linked with the basket of imported crude oils into Pakistan based on a mathematical formula providing more incentives as compared with the 2001 Policy for all zones especially frontier areas of Zone 1 and Zone-O. The purpose is to encourage both E&P activity and also to develop the infrastructure.

The government would equally share in the windfall profits of the companies in case crude oil and condensate prices exceed the base of US$ 30 per barrel. This provision already exists in Petroleum policy 2001. The base price for onshore is US$ 30 per barrel and US$ 24 per barrel for offshore. In 2007 policy, it is proposed to increase the base price of offshore to the level of onshore to provide same incentive to offshore operators.

The government needs to constantly review the Petroleum Policy. The policies announced in the past have failed in boosting production of oil and gas. The result is import bill is touching new highs and causing the worst trade deficit. Thanks to the hard earned workers remittance and foreign direct investment, largely realized from privatization, that the foreign exchange reserves are still above US$ 15 billion.

Analysts are also of the view that LNG import would be economically viable from the Middle East. However, the geopolitical conditions of the region are highly vulnerable. While the Arabian Peninsula may be the best source of supply gas it can only be procured from a few sources. Conditions in Iraq are still far from satisfactory and no one knows when it would become normal. Instability in Iraq also cast shadows on other neighboring countries. Iran has also become a flash point. Therefore, in case of any turmoil the movement of ships, carrying LNG, may be disrupted or restricted. Similarly freight charges would also be affected by the geopolitical conditions of the region.

Some of the critics are also of the view that opting for LNG import is another attempt to shift focus away from gas pipeline projects, particularly Iran-Pakistan-India gas pipeline project. At present the general perception is that this is the only economically viable project because the other two projects suffer from some inherent weaknesses. However, it is also a fact that the US administration is the biggest opponent of the project. Both India and Pakistan consider this pipeline most crucial for their sustained economic growth. Both the countries also say that they would not bow down before the US pressure but the delay shows the contrary. While India has been expressing its reservations about the pipelines it was very prompt in signing LNG import agreement with Iran. The analysts believe that terminating LNG import contract is much easier than refusing to buy gas being delivered by the pipeline.