'Khyber Pakhtunkhwa to seek local & international financing for energy projects'

Raziuddin Razi is the Chief Executive Officer of Khyber Pakhtunkhwa Oil and Gas Company Limited (KPOGCL). Among his previous engagements in the oil and gas sector include Managing Director, OGDCL and MD, Attock Refinery Limited. He also has experience of managing a few power-sector and petrochemical projects. Mr. Razi has BSc in Electrical Engineering from the UET Peshawar, Masters in Engineering from University of Detroit, Michigan, and MBA from Syracuse University, New York.
Following are edited excerpts from BR Research's latest sit-down with the energy development veteran in Islamabad:
BR Research: Please tell us about the mandate of KPOGCL?
Raziuddin Razi: Khyber Pakhtunkhwa (KP) is now the center of gravity for Pakistan's energy future. Right now, the province is producing about 50 percent of national oil output. There are fast developments in gas extraction as well happening in the province, due to enabling environment. Once dormant hydropower projects are now being fast-tracked to get rid of the menace of loadshedding. Recently, it was decided to give one oil/gas block to a Middle Eastern company, which will be investing $100 million. Similarly, MOL, a Hungarian firm, is aggressive and bringing hundreds of millions of dollars in investment to KP. OGDCL and PPL, both the public sector enterprises are diligently exploring KP to make Pakistan self-sufficient in the energy sector.
KPOGCL is a young organisation formed less than a year ago. It is working as a catalyst for oil and gas Exploration & Production (E&P) in Khyber Pakhtunkhwa. Its priority mandate is to co-ordinate the security and logistics of oil and gas companies moving in and out of KP. It's like the BOI for the KP's energy sector. We address investor problems and also work as a conduit to other departments. Second, we provide services that facilitate investors in seismic & drilling operations.
The third mandate is investment. We have already invested in petroleum blocks, with JV shares of 2.5 percent in each. The KP government has injected equity of Rs500 million into KPOGCL, besides underwriting another Rs7.5 billion. With our developing financial strength, we hope to soon buy an oil rig and develop a seismic crew, so that we bring our stakes into the system to assure national and foreign E&P and services companies. We plan to reinvest our earnings into further E&P to increase oil and gas production in Pakistan. We are going to have one rig on ownership basis and another eight to nine on dry leaseholds.
The fourth mandate is to do the seismic & drilling activities ourselves. KPOGCL will undertake drilling activities down the road; right now, we're not into it. We already have applied for a block in the Southern districts, namely LAKKI, which is an 1800 square kilometers block having a potential of 80-90 mmcfd of gas and 3000-4000 barrels of oil per day. We are inviting JV partners to join us in E&P. KP has a number of prolific petroleum concession blocks.
As we start providing more services, our revenue book will gradually develop. Our revenue is expected to be $1 million in FY16, which will increase to $100 million by FY20. But this money will be dwarfed by the royalties and other receipts the KP government will receive once E&P activities really grow in the province.
BRR: How is KPOGCL different from OGDCL?
RR: For us, OGDCL is a national oil company and we are a provincial holding company. OGDCL, for us, is not like MOL, POL or OPL, which are companies in the private sector. OGDCL is our client and we want to provide services to it. OGDCL has embarked on E&P operations in Khyber Pakhtunkhwa, which will bring much-needed development in KP and oil/gas/LPG for Pakistanis.
BRR: Law and order situation has been in the spotlight. How is the security situation like in KP now?
RR: The law and order situation in the province has much improved following the North Waziristan military operation. People are moving around and it's a different environment now. Families, who had once shifted to cities like Islamabad, are now shifting back to Peshawar. Confidence level has increased for international companies, too. The fear factor has reduced considerably, thus a number of E&P companies are now working in KP. A number of companies have opened offices in Peshawar and even a greater number are contemplating and will open offices soon.
BRR: What is the hydrocarbon potential of KP and adjoining areas?
RR: Millions of years ago, when the Indian plate travelled from Madagascar and collided with the Himalayas, so much energy was created in this region that it sped the underground cooking process. That's why the crude oil that is extracted from regions like Kohat and Karak is very refined. Some of this crude, or condensate, is even being exported now. PSO is working on installing a 50,000 barrel refinery. This will improve livelihood of the locals.
The prolific Pothohar region has been producing oil since 1867. By the time the 30-meter Pothohar source rock enters Attock, it widens to 300 meters. Then the rock series enters Afghanistan, takes an S curve, criss-crosses across Turkmenistan and reaches Ürümqi. You can imagine the untapped potential of this 300-meter kitchen in KP when a smaller, 30-meter rock has been producing oil for the past 147 years. As MD OGDC, I had written to then-PM Shaukat Aziz in February 2006 that tapping this potential, along with potential in Rajanpur and Eastern Crescent ie from Kasur to Bahawalpur, would lead to zero crude oil imports by 2010.
BRR: Is the zero-crude-import proposition still sound?
RR: We can still achieve the zero-crude-import milestone within next five years, provided there is a massive drive that starts today. To do that, you will need about 100 oil wells in first year followed by 200 in rest of the years. One well costs about $10-25 million, depending on strata. That's $1.5-2.5 billion in required investment, which is not a lot of money and will save valuable forex for decades. My original plan at OGDCL was to reach 100 wells in 2006, 200 wells in 2007, and 250 wells in 2008. The idea was to install the capacity in one year what OGDCL would normally bring online in ten years.
But you need passion for that kind of project to go through. You've got to have leadership from the top and to have right people for the right job. Pakistan is sitting on an energy goldmine. Our success ratio is one-is-to-three, which is fantastic compared to world's success ratio of one-is-to-ten. We haven't even properly peeled the apple yet. Untapped areas such as Kohlu, Kalchas, Paharpur, Darra Pezu, and the eastern crescent (Qasur to Bahawalpur) offer huge amounts of hydrocarbons. Had Punjab dug the eastern crescent, it would have been exporting gas today.
BRR: Oil price has taken a beating lately. What is your view on future movements?
RR: Oil price will plateau after it hits sixty dollars a barrel. Then it will start going up. The North American shale has been hurting OPEC for a while. Now these low prices are hurting US shale producers, which are starting to close down, especially the small-level producers. Those mom-and-pop shale producers are going bust and will be bought out by the likes of Seven Sisters (which include Exxon Mobil, Total, Chevron and BP). But it will be a while before shale production, which has recently gone down due to price pressures, to become normal.
BRR: You mentioned shale. How do you see the shale potential in Pakistan?
RR: Pakistan has wasted a lot of time in this area. There is not even basic research available on the issue. Now the USAID has been awarded a project by federal government but that will take time. Whereas Pakistan needs solutions today! Shale extraction is not that complex as it is made out to be; even the price of equipment and technology is going to come down. I recommend the OGDCL to take the lead on shale - they have the financial cushion and the basic infrastructure to start working on this.
BRR: Coming to the government policy on coal-fired power plants, can Pakistan afford those plants?
RR: We need to install these power plants on fast-track basis. It is better to make policies to ease installation of standard plant, equipment and machinery. I've visited sites in Germany, US, South Korea, China and Japan to study power plants, where 42 percent efficiency plants are available for $1.45 million per megawatt for a 660MW format.
Government's assertion that they raised the tariffs to attract investors is incorrect because investors also came in droves last year when the projects were first announced - some 24 bids were received for 12 projects. The federal government needs to engage with experts in super-critical technology to bring these plants online on a fast-track basis to get rid of the menace of loadshedding.
BRR: So what's your proposal?
RR: As member of Nepra, the KP government is having a technical discussion with them to rationalise the tariff so that the process can move forward without any risks of future litigation. We have suggested to Nepra to have two-tier tariff, one for Western and the other for Chinese technologies. Chinese plants have lower efficiency, so they must cost less. Nepra must calculate Chinese equipment's upfront tariff at $1 million per megawatt and that of Western technology at $1.45 million per megawatt.
We do not have time or money to waste, so we should get top-of-the-line turbines from the likes of Siemens, Toshiba and General Electric. We need to bring in investment at a fair and reasonable price. I know that investors will come at the price suggested by us. We appreciate Nepra on accepting our assertion to keep the plant factor at 60%, which it previously had increased to 85%. This will help the policymakers and analyst in making better policies.
BRR: Since you're the KP government's energy man, please help us understand why is the KP government opposing OGDCL secondary-share offering?
RR: Our position is that OGDCL is a national oil company and not an ordinary E&P company like PPL, POL, OPL or MPCL. The nation has been pumping taxpayers' money, hundreds of billions into OGDCL since the 1960s to open up new geological frontiers, such as off-shore, deeper horizons and not to give it to the private individuals in a platter. The taxpayers' money given to OGDCL since 1960 cannot be given to the private, selected individuals in 2014.
It is not only KP that is opposing but also 99.99% of OGDCL employees, who know about the 'carried interest' mechanisms, are opposing the sale. Furthermore, the 18th Amendment makes provinces stakeholders in OGDCL; therefore, their point of view is important as well.
BRR: But OGDCL is not being sold to the private sector - it's not an institutional sale. Management control will still be with the government, unlike, say, what happened in the case of PTCL.
RR: Our argument is different. Yes, the asset is not changing hands but ownership is, slowly. The private sector cannot risk into the new geological zones thus killing the fundamental reason of creating a national oil company. I am against trading of more than 15 percent of OGDCL shares.
BRR: Apart from oil and gas, what is the province doing on the hydro front?
RR: We have a whole list of hydro-power projects worth thousands of megawatts, for which there is a financing need for about $25 billion. We're soon going to the market to get Rs80 billion to construct 270MW hydel capacity. The KSE will be our first stop. Next will be the alternative investment market, or AIM. But our requirements are so huge that we will have to go to the London Stock Exchange in two years, through Pakhtunkhwa Energy Development Organisation (PEDO).
PEDO has been converted into a corporate body this year. Later on, financing will be project-specific as SPVs will be created for each of those projects. KP has developed a plan to bring cheaper power online at the soonest time. A number of Pakistani banks are interested in lending and two international companies have bid in response to a RFP to raise debt and equity from national and international funds, which in fact means that investors are putting tremendous confidence in the systems of KP.