Oil And Gas Exploration Is Declining

Oil And Gas Exploration Is Declining
Pakistan’s Oil and Gas sector is suffering from heavy losses to the tune of Rs.51 billion in recent times, following a slump in energy demand. The Oil & Gas exploration sector has generated negative returns in recent times and this is discouraging foreign investment in the sector.

In the recent past, due to a variety of reasons, many foreign companies have discontinued their operation from Pakistan selling their assets and resources to other firms in the industry. For example, OMV, an Exploration, and Production has sold its assets to UEPL and closed its business in Pakistan. Weather Ford, a drilling company, has recently sold its 3 drilling rigs to Mari Petroleum, due to a decline in profit margins. Similarly, Byco Petroleum has halted crude processing at its 155,000 barrel per day refinery due to reduced demand during pandemic and lockdown. ENI is planning to wind up from Pakistan due to a decline in profit margins. Similarly, Sprint, an Oil and Gas exploration company, had to move to seek legal remedies against one of its clients over indirect taxation issues. National Refinery Limited (NRL) is facing a slowdown due to COVID-19. Attock Refinery has closed its largest plant in Pakistan due to reduced demand. The refinery can refine a minimum of 26,000 barrels of crude oil per day, due to lesser demand in the country.

Clearly, the interest of foreign Oil and Gas exploration companies is waning. Recent reporting in the media suggests that a new Oil & Gas exploration policy is in offing to address the declining interest in Pakistan’s Oil & Gas exploration and production sector.

It appears that low-profit margins and security of staff are the key issues of the exploration companies.  Reports suggest that the new Oil and Gas exploration policy proposes to launch a CPEC style security force for the staff of Oil and Gas companies. This will help encourage exploration activities in the troubled areas.

The dynamics of exploration are such that once the reserves have been explored to a certain level it becomes less profitable to draw upon further. Accounting for this fact the proposed policy also envisages offering special incentives to exploration companies for production beyond a certain threshold.

Recognizing that some areas are more difficult than others for exploration the proposed policy seeks to categorize areas based on investment risk and opportunities – greater well-head prices are proposed to be offered in riskier areas, this includes hitherto untapped areas of FATA and Balochistan.

Many small companies engaged with multiple oil and gas services in Pakistan have been facing litigation proceedings against their clients over several disputed matters such as interpretation of contract terms and taxes payable. It is well known that the legal framework is not geared enough to dispose of cases quickly and this is true of the cases faced by the exploration sector as well - the cumbersome and time-consuming process of litigation deter firms to invest in exploration.

Finally, the COVID pandemic is also playing its role in influencing returns. The profitability of the firms engaged in exploration has declined due to low demand and higher costs being incurred due to COVID related issues.

The Chinese companies are also gradually entering Pakistan’s exploration scene. Those who have a presence till now include; CNPC Chuanqing Drilling Engineering Company Limited (CCDC), Hilong Oil Services and Engineering, and SINOPEC. As is the case in several other areas, the Chinese have a cost advantage and this gives them a competitive edge. The presence of Chinese firms in the exploration arena could herald a new era – how this would turn out for Pakistan? Prediction on this count seems difficult, one would have to wait for the outcomes but in any case, having more bidders to choose among is good for the country.

In the constraining environment that the exploration sector faces, to hear that policy circles are seized of the matter and that new exploration policy is being framed is good news. One hopes that the in-country academia would chip in with hardcore research to inform policy on the subject and that policymakers would stand ready to benefit from the relevant research available.

The author is Senior Research Economist at PIDE. She can be reached at uzma@pide.org.pk