Pakistan’s oil and gas exploration and production (E&P) sector has traversed a fascinating path since the first oil well was drilled during British colonial times in the late 19th century near Rawalpindi. From these modest beginnings, the sector has evolved into a cornerstone of the nation’s economic growth and energy security.
However, despite its historical successes, the E&P industry faces considerable challenges that necessitate immediate intervention from the government and regulatory bodies.
Historical milestones
The journey of Pakistan’s E&P sector began in the 1870s with the establishment of the first oil well in Khore, marking the dawn of an industry that would later play a pivotal role in the country’s economy. The watershed moment came in the early 1950s when the Sui gas field was discovered in Balochistan, ushering in a new era of energy exploration.
The sector’s progress gathered momentum, with both national and international petroleum companies contributing significantly to the country’s energy self-sufficiency and reducing its dependence on expensive oil imports.
Furthermore, these companies have not just economically benefited the nation but have also undertaken substantial Corporate Social Responsibility (CSR) initiatives, investing in the development of local communities.
Challenges faced
Despite these notable achievements, the E&P industry in Pakistan grapples with a series of challenges that have dampened its once vibrant growth trajectory. One of the primary obstacles is the regulatory framework, often marred by inefficiencies, misalignment, and inconsistency.
The Directorate General of Petroleum Concessions (DGPC), responsible for overseeing the sector, has faced criticism for creating an unpredictable environment for E&P companies.
A case in point is the imposition of the Windfall Levy on Oil, a unilateral decision that targeted companies availing incentives from the Petroleum Policy 2012 for additional drilling and production from blocks allocated to them under the 1997 policy. This, alongside other regulatory complexities, has deterred investment and stifled the sector’s potential.
Security and stability remain another concern. The volatile law and order situation in Baluchistan and Khyber Pakhtunkhwa, accentuated by recurring acts of terrorism, has cast a shadow over E&P activities in these high-risk yet promising areas.
Moreover, foreign exchange shortages have resulted in the disruption of operations due to the inability to import essential equipment and materials. State Bank’s constraints on repatriating foreign exchange, given the country’s fragile reserve position, have added to the challenges, preventing companies from transferring profits back to their home countries.
Prominent departures
In recent years, several international players like BP, BHP, Premier, OMV, Exxon and Eni have exited the Pakistani E&P sector due to the combined impact of regulatory hurdles, security concerns, and economic challenges. These departures underscore the urgent need for comprehensive reforms to rejuvenate investor confidence and ensure the sector’s viability.
Government’s privatization plans:
Adding to the complexity, the Pakistani government has intermittently announced plans to privatize profitable state-owned entities like the Oil and Gas Development Company Limited (OGDCL) and Pakistan Petroleum Limited (PPL).
While privatization aims to enhance efficiency, concerns about transparency and potential loss of state control have caused apprehension within the industry. This uncertainty further compounds the challenges faced by the E&P sector.
Creation of Pakistan Sovereign Wealth Fund under a recently passed Act of the Parliament must be carefully thought through and executed as the constituent companies of the Fund like OGDCL, PPL, GHPL and Mari Petroleum have an impeccable tradition of contributing hugely in the E&P sector in the country and in case of the first three, also providing a lifeline to the government for reviving the Reko Diq project saving billions of dollars’ worth of potential damages to the government in the wake of the adverse arbitration decision of 2018.
Solutions for a brighter future
In order to secure the future of Pakistan’s E&P sector and restore investor trust, several strategic steps are essential:
Regulatory reforms: The government should focus on an overhaul of DGPC’s operations, streamlining the regulatory framework, and ensuring predictability and consistency in decision-making. It is high time the government may either consider enhancing the capacity and outlook of the DGPC or delegate the responsibilities of DGPC to OGRA to offer a more proactive and responsive regulatory framework to the E&P sector as per the best industry practices.
Safeguarding operations: Improving security measures in high-risk areas like Baluchistan and KP is imperative. A secure environment will encourage companies to invest in exploration without fearing operational disruptions.
Policy stability: Maintaining stable and investor-friendly policies is crucial. Unilateral decisions like the Windfall Levy on Oil should be reconsidered to enhance investor confidence.
Tax rationalization: Revising the tax structure is essential to reducing the burden on E&P companies, thereby encouraging their continued investment and local community development initiatives.
Foreign exchange support: Ensuring the timely release of foreign exchange will enable companies to import crucial equipment, facilitating smoother operations.
Transparency and communication: Foster transparent communication between the government and industry stakeholders. Engage in open dialogue to address concerns and collaboratively formulate solutions.
The rise of renewable energy: In recent years, the global energy landscape has witnessed a transformation with the rapid growth of renewable energy technologies like solar and wind.
Pakistan, a country grappling with energy deficits, high inflation, and current account deficits, stands to benefit from integrating renewable energy into its mix. These technologies not only offer environmentally friendly solutions but also present the potential to reduce energy costs for consumers.
Learning from global giants: International state-owned entities (SOEs) like ARAMCO, Petronas, and ADNOC have set exemplary benchmarks in enhancing production volumes, adopting efficient practices, and diversifying their operations.
For instance, ARAMCO’s innovative technologies and strategic investments have propelled it as a global leader in the energy sector. Petronas and ADNOC have similarly leveraged their expertise to expand into petrochemicals, refining, and renewable energy.
Lessons for Pakistani companies: State-owned companies like OGDCL and PPL, along with private entities operating in Pakistan, can draw important lessons from these global giants. Firstly, diversification beyond traditional E&P activities can provide a buffer against industry volatility.
Both OGDCL and PPL have the potential to venture into downstream activities such as refining and petrochemicals in a JV arrangement with ARAMCO can give a much needed fillip to this vital segment of the industry.
Renewable energy integration: Moreover, following in the footsteps of these global SOEs, Pakistan’s E&P companies can strategically incorporate renewable energy projects into their portfolio.
OGDCL and PPL, with their expertise in energy, can invest in solar and wind projects to not only contribute to the country’s renewable energy goals but also secure a stable source of revenue. This transition aligns with the global trend of shifting towards sustainable energy sources.
Policy and regulatory framework: For this diversification and integration to succeed, a stable and investor-friendly policy framework is crucial. The government should introduce incentives and policies that promote renewable energy investments and provide a level playing field for both E&P and renewable energy sectors
Conclusion
The journey of Pakistan’s E&P sector, from its modest beginnings to its contemporary challenges, reflects a story of both resilience and opportunity. While the industry has witnessed the departure of prominent international players, the potential for rejuvenation and growth remains promising.
Addressing regulatory inefficiencies, enhancing security, and fostering a stable investment environment are critical steps that must be taken by the government. By honoring sovereign commitments, improving transparency, and prioritizing industry-friendly policies, Pakistan can reignite investor confidence, attract new investments, and ensure the continued growth of its E&P sector.
In a world where energy self-sufficiency is essential, nurturing this sector is not only vital for the economy but also crucial to preserving precious foreign exchange reserves.
Copyright Business Recorder, 2023
The writer is a civil servant with deep interest in the oil and gas sector
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