CHINA TO USE PAKISTAN'S EXPERTISE IN THE OVERSEAS OIL EXPLORATION

SYED FAZL-E-HAIDER (feedback@pgeconomist.com)
Feb 1 - 7, 2010

China plans to use the expertise, experience, and latest technology of Pakistan's Oil and Gas Development Company (OGDC) for its venture into the overseas exploration sites particularly in Africa.

Though the Beijing has adequate reserves to sustain risk for overseas ventures, yet the Chinese companies lack international exposure and modern expertise, which has prevented them to venture into the exploration sites abroad. An agreement is expected between the OGDC and China National Petrochemical Company and Sinopec to explore new overseas frontiers. Being the world's second largest oil-consumer, China's quest for overseas oil has intensified over the past five years. It has taken initiatives in developing oil in Africa in order to secure oil imports to meet increasing domestic demand for its booming economy.

Analysts see China's plan to venture with OGDC as part of its strategy of making inroads into Africa's oil reserves. They believe that joint ventures abroad would benefit the two nations, as overseas ventures include swap of assets for reserves acquisition with percentage of working interest in international market.

The state-owned OGDC has forwarded a summary for the proposed joint ventures with Chinese companies to the ministry of petroleum, according to the reports recently published in local media. The company has also prepared a list of lucrative spots that have not been ventured by the major international oil companies. These include Uganda, Sudan, Yemen, Morocco and countries of central Africa.

Pakistan and China plan joint ventures into the overseas oil and gas exploration sites including North Africa, Far East and other smaller Arab countries.

Chinese investors are looking toward Africa, which has significant oil and gas reserves, for exploration and production deals. Much of the continent's reserves are still unproven, underdeveloped, and underpriced.

OGDC is the country's largest oil and gas exploration and production company. During last calendar year 2009, the company operated 35 exploration blocks, including four offshore blocks. It owns 44 development and production leases. With an experience of around 46 years, the company is technically sound with a highly qualified pool of professionals to undertake and supervise oil and gas exploration activities abroad. The company is currently looking forward for ventures abroad, as the latest technology- remote mineral search and prospecting- has enabled the company to locate mineral deposits, including oil and gas.

China has been trying to make inroads into Africa's oil reserves. It has been pursuing a policy of offering poor African countries both aid and trade deals for its energy investments in the continent. It has particularly focused on Nigeria and Angola, the Africa's largest oil producers.

Last year, Chinese oil companies Cnooc Ltd. and Sinopec International Petroleum Exploration and Production Corp. struck a $1.3 billion deal with Houston oil and gas explorer Marathon Oil Corp. to purchase a 20 percent interest in an oilfield off the coast of Angola. In 2004, China offered a loan package worth $2 billion for securing a major stake in future oil production in Angola. Similarly, Beijing made $2 billion investment in an oil refinery in Nigeria. Some analysts believe that China's most successful African energy investment has been in Sudan, which now sends 60 percent of its oil output to China.

Chinese have so far been very aggressive in expanding their interests in Africa. Pakistan's OGDC has the technical capacity to help China implement its oil strategy in the continent. The sale of government's 8.8 per cent (376.79 million shares) stake in OGDC raised $712 million in November 2006. It was a welcome development that a Pakistani company had been able to raise such a large amount in the international capital markets indicating confidence of the international investment community about OGDC's future. It is the largest company in Pakistan in terms of market capitalization and is extremely profitable. It had revenues of Rs97.3 billion (or about $1.6 billion) in FY2006 with a net income of Rs45.8 billion (or $750 million).

Pakistan is currently facing an acute gas shortage. The official estimates indicate a serious gas shortage in the next few years which could lead to critical energy shortfalls unless the supply is augmented by two billion cubic feet per day (BCFD). The country's current gas production is about 4.2bcfd and the unmet constrained demand in excess of 1bcfd. It is ironical that OGDC is expected to give up its exploration rights in two prospective oil and gas areas of Sindh and Balochistan under unusual circumstances.

The company's recent estimates of revenues reflect lower income from sale of gas. For the three months ended 30 September 2009, OGDC's revenues decreased 23% to Rs31.83 billion. Net income decreased 36% to Rs 12.07 billion.

Presently, the gas shortfall reached its record high in the country, with a gas demand of around 4050 million cubic feet per day (MCFD) and the supply around 3110 MCFD. The domestic consumers are currently facing gas load shedding in the winter. The gas supply to many industrial units in country's commercial capital of Karachi including Karachi Electric Supply Company (KESC), has been suspended. Sui Southern and Northern Gas Companies have suspended supply to many units as the increase in demand pushed the shortfall to 940 MMCFD.

The shortfall of compressed natural gas (CNG) and its load curtailment has increased the petrol demand in the country. Import of petrol increased by 274 per cent in November and December compared to the same period last year. The country imported 96,001 tons of petrol or motor gasoline during the last two months compared to 25,668 tons imported in December 2008, while there were negligible imports in November 2008.

The acute energy crisis in the country has not only suffocated the industry but also made the lives of 170 million Pakistanis unbearable, as they face frequent power outage and hours long load-shedding of gas and electricity in cold winter weather.

The government should open up Balochistan for oil and gas exploration and the OGDC should use its expertise to overcome the energy shortages in the country. The government should restore peace in the province, as no exploration and production activity can take place in the worsening security situation.