Upstream sector challenges

The upstream oil and gas sector has been in trouble for some time now. The weakness of the oil and gas sector can also be gauged from the foreign investment side. The sector’s attractiveness as an investment destination has depleted precariously over the last decade or so. Pakistan has been a constant contributor to the total foreign direct investment coming into the country. However, the share of the E&P sector in total FDI has been erratic and declining from an average of 34 percent between FY12-FY15 to 12 percent in FY20 and 8 percent in FY23.

The sector’s production of oil and gas has significantly come down over the years, primarily affected by depleting reserves, small discoveries, aging fields, and regulatory hurdles as well as policy inconsistencies for both local and foreign E&P companies. This has significantly affected FDI in the sector. Over the years, several MNCs have exited the country’s E&P sector including Eni, Exxon, BP, OMV, etc. due to the same challenges.

The crux of the weakness of the upstream sector lies in the circular debt build-up over the years. Stating that the upstream oil and gas sector has been facing a financial crisis won’t be wrong with mounting receivables. As a result, the sector’s ability to engage in exploration and prospecting activities has been compromised. While the operational performance of the sector has waned drastically over time, higher oil prices from time to time and PKR depreciation have kept the profitability of the oil and gas companies in better shape.

Besides, security and stability remain another concern for the investors where the volatile law and order situation in KP and Balochistan also hinders exploration and drilling activities in these high-potential areas.

The sector has seen some respite with two gas tariff hikes recently, which has given a lift to the drilling activity. However, the problem of circular debt continues to squeeze the sector’s potential. Moreover, policymakers need to revisit policy inconsistencies and regulatory hurdles, and the focus on the timely release of foreign exchange to the companies will help them come out of the financial crisis.