Sugar Report

Salman Saif Ghouri Oil and Gas Development Corporation, Head Office, Masood Mansion, Markaz F-8, Islamabad, Pakistan Pakistan has to import 78% of its domestic oil demand, despite an increase in indigenous production. Reducing the growing gap will require enhanced exploration efforts. The paper evaluates petroleum policy to 1994 against the backdrop of adverse factors and the manner in which these have been addressed. The investment climate could not be more ideal, as the offered package is both fair and handsome - making it an irresistible proposition to foreign investors. It is concluded that the package would prove to be an effective catalyst in enhancing exploration activities. Copyright © 1996 Elsevier Science Ltd.

 

The importance of the hydrocarbon sector of Pakistan's economy continues to be highlighted by the growing de[1]mand for petroleum products and declining domestic crude oil production. Imports of crude oil and its derivatives continue to show an upswing. During 1992-93 they constituted about 25% of the country's invaluable export earnings. Although the history of oil exploration in Pakistan dates back to 1866 when the first well was drilled at Kundal (District Mianwali, Punjab), it was about 50 years before the first oil discovery (Khaur) was recorded in 1916. Since 1947 only 315 exploratory wells have been drilled resulting in 100 oil and gas discoveries. Apart from Sui, a giant gas field discovered in 1952, all other discoveries have been small. Historically, oil production was the result of the first oil window discovered in Pothowar at the beginning of this century. Until 1980, the country's oil production remained below 10 000 barrels per day (bi/d), which only marginally met domestic requirement. After 60 odd years a second oil window was discovered in 1981 at Badin (both these windows are located in the Indus basin). Oil production then increased significantly from a mere 10 000 bl/d in 1980 to over 65 000 bl/d in 1991 before observing a declining trend. Despite significant increase in oil production, only 22% of the country's consumption demand has been met by domestic production. But this meagre share will tend to decline further as the existing fields are exhausted and consumption grows, creating an increasing inevitable gap between domestic production and consumption. In order to reduce the gap or at least maintain the existing level of production, a massive exploration effort will have to be mounted in the quest of new fields. It is evident that Pakistan cannot achieve self-sufficiency owing to the financial and technological constraints on horizontal and offshore drilling. Moreover, oil exploration is a risky and capital intensive process. The task of eliminating or reducing import dependency is both daunting and formidable and one which the Oil and Gas Development Corporation (OGDC), the national oil company, can hardly accomplish alone. Huge frontier areas, the high cost of seimic survey, exploration cost and the complexity of the sub[1]surface geology call for a private investment and even greater participation by foreign oil companies. But so far the country has not been able to attract a sizeable foreign investment in oil and gas exploration, despite a good success rate and large sedimentary basin. The purpose of this paper is first, to identify common factors militating against exploration efforts, particularly in developing countries; second, to offer a detailed discussion on such factors in relation to Pakistan and to correlate them with current petroleum policy; and finally to determine the role of OGDC in order to step up exploration activities. The discussions are, however, restricted to upstream operations only. The government of Pakistan is very much aware that fail[1]ure to increase indigenous energy supply, particularly that of oil and gas (which constitute over 79%), will defeat its prime objective of rapid industrialization as well as bring misery to the masses in the form of high inflation, unemployment and cuts in current social welfare programmes. In an effort to develop indigenous petroleum resources to meet the ever increasing domestic demand for energy, the Government of Pakistan (GOP) has amended/revised its petroleum policy four times since 1991. Each time it has provided better and better incentives. The latest petroleum policy (announced in March 1994) was the result of broad objectives set by the current govemment before the Task Force on Energy. Prime Minister Motharima Benazir Bhutto has given top priority to the energy sector knowing that failure to increase domestic production will defeat the process of industrialization- a highly energy intensive process. This in turn would hamper the economic growth, cause high inflation and unemployment. The prime minister set broad clearly defined objectives for the Task Force on Energy: framing a new energy policy, evolving a strategy for the elimination of load shedding, mobilization of resources, promoting private sector investment both domestic and foreign and enhancing indigenous oil and gas production. Common factors Generally a few common factors that militate against ex[1]ploration activities are a slim geologic promise, inadequate infrastructure, inadequate contractual arrangements, inequitable sharing of risks, long processing time and unattractive prices. Another inhibiting factor in the way of foreign investment is the acreage monopoly of promising tracts by the host country. In the following pages we will discuss these factors and highlight the positive steps taken in the new petroleum policy to remove some of the negative factors as also to provide the necessary incentives to the investors. Geologic promise In evaluating a prospect, the investor first considers what he knows or suspects about the underlying geology, including analysis of past success rate. Thus success rate is one indicator of geologic promise. Pakistan holds enough geologic promise, as evidenced from the success rate of over 31% as compared to world average of 14%. In addition, Pakistan is geologically composed of two main sedimentary basins, the Indus and Baloehistan basins covering about 80% of its total area. These basins include 611 300 km 2 onshore and 216 058 km 2 offshore. Of these, only some of the areas of Indus basin have been intensively explored while Balochistan and offshore areas have remained marginally or totally unexplored. It is generally believed that large discoveries in unexplored areas are made in the early period of exploration. The probability of finding gigantic discoveries in these areas is therefore handsome. Under previous policies a uniform incentive was offered (only some extra incentive for offshore) irrespective of geo[1]logic promise, terrain and extent of available infrastructure. As a result, no real efforts were diverted towards high risk areas and exploration was mainly concentrated around an intensive margin ie areas in the Indus Basin (see Figure 1). The current policy prudently divided the country's large sedimentary basin into three zones based on the prospectivity and risk involved in it (see Figure 2). Zone 1 is the area consisting of Balochistan basin including offshore and some areas of the Indus basin where prospectivity has yet to be established. The Balochistan basin is totally unexplored, whereas only I 1 exploratory wells have been drilled offshore. This area is structurally complex where igneous and metamorphic rocks and older sediments are exposed. Some large prospective structures (unexplored) are also present. However, these areas are considered a high risk-high cost, because of lack of information/data and the fact that a discovery has yet to be made. Zone 2 consists of Potwar, Sulaman and Kirthar mountainous areas. Oil and gas have been discovered in several structures. It is also structurally highly complex but here prospective rocks are present and some structural prospects are to be identified. Some of the large structures present in this zone require in-depth structural modelling. The area is termed as medium risk and high cost. Zone 3 lies in the Indus basin where most of the exploration activities are taking place (see Figure 3). This area is further divided into Middle Indus, Upper Indus (Potwar, Punjab) and Lower Indus (Badin, Sindh) basins (see Figures 4 and 5). Most of the oil discoveries are located in the lower and upper Indus Basins. This zone is termed as medium risk to low cost area whereas gas discoveries are concentrated in the centre basin. Infrastructure One important factor in the expected costs that affect profit is the infrastructure necessary to deliver oil or gas to places where it can be transported, refined, consumed or exported, once it is produced. Insufficient infrastructure can raise costs and hence lower profits. It is believed that even if a country is geologically attractive, lack of infrastructure can scare away investors, who generally prefer easy access to ports, roads, railways, and local labour force. Countries lacking the necessary infrastructure are clearly at a disadvantage in developing their resources, regardless of whether the agent is the state, local or foreign oil companies. Pakistan has a country-wide extensive network of natural gas transmission and distribution systems with an ever growing demand for gas. In addition, current policy also provides a package of incentives for exploration of gas. It is hoped that oil companies will hardly let the last opportunity go. In addition to the gas network Pakistan has oil pipelines that stretch form Karachi to central part of the country (see Figures 5, 6 and 7). Besides, most of the crude is transported by oil tankers. To encourage investment in new oil pipelines (including common carriers, storage and distribution/handling facilities) a number of incentives are allowed for the initial period of 10 years. The objective is to substitute the present mode of crude transport by road with more efficient and cost effective transport by pipeline. Two sea ports are presently located in Karachi. These are capable of handling all kinds of cargo, dry and liquid. In addition, the country has three refineries with a total refining capacity of 130 000 barrels a day. Two of the refineries are located in Karachi, where most of the imported crude and southern oil is refined. The third refinery is located at Rawalpindi; it refines crude from the northern region. Crude is transported both by pipelines and oil tankers (by road). Similarly, the country has a widespread road and railway network. In short, Pakistan has an adequate infrastructure to meet the requirements of oil and gas exploration companies. The government is constantly monitoring to improve upon the existing infrastructure, and looking at new refineries, new oil pipelines, storage, distribution, new sea ports, more highways and other improvements in the existing infrastructure. Acreage monopoly and inequitable sharing of risk/rewards Private oil companies also complain that the Pakistan government, like other developing countries, usually keeps prime acreage for OGDC (a national oil company) and offers less promising tracts to foreign companies. The government shares marginally at the exploration stage, and increases its share at the development stage once the oil or gas is struck. There has never been an acreage monopoly in Pakistan. Even then these issues have been very clearly dealt with in the current policy. In the new petroleum policy creation of a new 100% GOP holding company will ensure that government participation in joint ventures will be handled through the holding company and not through OGDC. Further, OGDC will be restructured on commercial lines and its board of directors strengthened, to allow it complete autonomy and authority in all administrative, operational and financial matters. As a first step OGDC will convert into a joint stock company by 30 June 1995. In addition to the above measures, a new block award process through competitive bidding for work programmes ith regard to the sharing of risk during pre- and postdiscovery, the situation has been taken care of. All concession agreements will provide a 5% carry for the government during exploration phase. The expenditure incurred will be reimbursed by the GOP aRer commercial discovery in instalments through production over a five-year period. Level of government buyback respectively will be 15%, 20%, 25% for zones 1, 2 and 3. Political risk The foreign oil companies' profits for exploration and development are earned gradually over the production life of a field. It is not surprising that oil companies are reluctant to invest in places where political stability over time is es[1]pecially questionable. Political instability is a common feature of many less developed countries. This instability flows from traditional ethnic and religious rivalries, ideological disputes over eco-nomic and political issues, and an adverse law and order situation resulting in rapid changes of government either through coups d'ktat or public uprisings which may sometimes lead to nationalization of foreign investment. In Pakistan, however, concession agreements/contracts, once signed between the government of Pakistan and the private companies have stood intact no matter how often the government changed hands. Nevertheless, the problem of security, especially in Baiochistan, is being taken care of by a high level committee in consultation with the provincial government. The law and order situation in and around the producing fields in Balochistan has improved for sustaining optimum production. Jandran Block of OGDC, which has been under force majeure since 1991, has been opened up and as a result OGDC has since completed the seismic survey with the help of Balochistan government. In addition, oil and gas installations in Balochistan and the tribal areas are being exempted from the application of the Industrial Relation Ordinance 1969. Producer's incentive One important factor that discourages the potential explorer is low wellhead prices ie what explorers get once production starts. This is an important factor as unattractive prices could turn a viable project into an uneconomic one. Since the prime objective of private oil companies is to maximize profit, they will always look for better prices for their risk capital apart from other incentives. Since 1866, only 34 exploration wells in a large Balochistan Basin of 294 224 km 2 and I1 offshore exploratory wells covering 216 058 km 2 (both Mekran and Indus Delta) show the paucity of exploration efforts in these areas. Due to very limited work and the lack of commercial discoveries, these areas in the current petroleum policy are regarded as a high risk cost (Zone 1). The government is aware that one gigantic discovery in an offshore basin could bring the country closer to self-sufficiency. Bombay High (an offshore oil field) of India is one example that is presently producing about 60% of domestic oil production and has also attracted a number of foreign oil companies. In order to induce foreign companies to undertake exploration very attractive oil and gas prices have been offered under the new policy. Better gas prices and lower tax rates (as shown in Table 1) were offered. The price for crude oil delivered at the refinery gate is to be based on the c&f price of a comparable crude oil or a basket of Arabian/Persian Gulf crude oils plus or minus a quality differential between the basket and the local crude. No other adjustment or discount will be applied. The price for condensate will be the fob price of internationally quoted comparable condensate. No other adjustments or discount will be applied. As far as non-associated gas is concerned, the price has been indexed to the c&f price of a basket of imported Arabian/Persian Gulf crude oils on the basis indicated in Table 1. The same price will apply to associated gas for acceptable gas specifications. The current liquefied petroleum gas (LPG) producers have been given incentives on incremental production over currently committed levels, which come on stream after the announcement of this policy, through a higher price (fob) subject to a maximum of US$175 per tonne. For new pro[1]jects, c&f parity prices, based on proper port off-loading facilities, will be allowed. Table I Important features/incentives provided in different zones Government Zone buy back. Market outlet in the past, there being no market outlet, oil companies became discouraged when they discovered gas fields because they failed to obtain a gas outlet immediately. Bearing in mind the country's energy deficiency and high dependence on imported oil, the petroleum policy has eliminated this hindering factor. Now in the case of a commercial gas discovery in Zone 3, the government will decide within three months of commercial declaration and allocate gas to a specified buyer. Thereafter, the two parties might enter into an agreement within six months specifying the time frame for the sale/purchase of gas on 'take or pay' basis. If the allocation of gas is not given by the government within six months of the declaration of commercial discovery the producer would be free to dispose of the gas as it wishes. As far as Zones 1 and 2 are concerned, producers are free to dispose of the gas as they wish. Processing time In general, there was a big time lag between the date of application and final grant of concession agreement; this sometimes stretched to over a year. Decisions on applications for exploration licenses are now being taken within 60 days and contested applications are finalized within 120 days. Green area map The introduction of what is called a green area map was urgently needed. Under the previous system companies had to spend a good deal of time, effort and money and in the end became frustrated because the concessions they had applied for could not be granted for security reasons. The negative response after months of waiting not only discouraged the concerned companies but also transmitted a negative signal to other potential explorers. In the currently adopted policy 'green areas' are marked, so that applicants know beforehand where to exert their efforts and where not to. Flexibility Another important feature of this policy is the flexibility. Economic conditions change over time and so does the viability of the projects. The terms and conditions agreed, might be of mutual benefit at one time and yet might assume a different complexion later on. It is in this light that an economic package will be reviewed from time to time on the basis of new information and would thus be kept inter[1]nationally competitive. The current practice of accepting a commercial discovery on the basis of the first exploration well followed by two appraisal wells to determine the extent of the reservoir has been changed, and the declaration of commerciality even on the basis of one well subject to justification, is yet another indication of flexibility. Import duties It was a common experience with almost all the oil companies that payment of import duties was not pinching them. On the contrary, a lengthy procedure set for clearance of goods caused delays in their routine operations. To overcome these problems it was decided that, in all the zones, no import or export duties including custom duty, sales tax, lqra surcharge or any other surcharges be levied or charged on machinery, equipment, materials, specialized vehicles, accessories, spares, chemicals, consumable imported or exported in accordance with the approved list as applicable to permits, licenses, leases, petroleum concession agreements (PCAs) and other agreements. However, after a commercial discovery has been made, the respective operators will be charged on an annual deferred basis a lump sum fee equal to 3% of the total invoice of the items imported by it or its contractors or subcontractors free of duty during that year in respect of that commercial discovery and exploration activities in that particular concession. Similarly, no duties for equipment, materials etc imported by the service companies to provide services covering seismic, drilling, cementation, logging, snubbing, testing or similar types of services to only exploration and production (e&p) Companies. In case items are sold to other than e&p or services provided to non r&p companies, import duties and all other charges shall be payable by the service company. No license/authorization fees will be charged on items imported or exported free of import or export duties under this policy. Other incentives In addition to the above incentives of the Petroleum Regulatory Board, incentives for local exploration and production companies and incentives for deeper drilling show the intention of the Pakistan government to iron out a way to self-sufficiency in energy. Improvement of prospectively It may happen that terms offered by a country are very attractive compared to other countries, but inadequate geological information might discourage them. In this policy, specific budgetary allocations are made for basin studies, geological/geochemical studies, seismic surveys etc in order to achieve a breakthrough success in prospectivity and improve the databank. The government would institute the aforementioned programmes directly, on a multiclient basis, through OGDC or through service contractors. OGDC's role To attract foreign oil companies to explore in new frontier areas not only requires a package of incentives but also needs some ground work. Collecting geological/geophys[1]ical data would be a first step; second, developing a sound data base which could be sold to different potential companies on request. They may also be allowed to analyse the core samples etc. However, the most encouraging factor would be a major oil discovery in these areas. We have witnessed that in the 1950s a wave of foreign investment followed the discovery of giant gas field at Sui. A similar trend was also observed in the 1980s when UTP made an oil discovery in the Lower Indus Basin (Sindh) and contradicted the old concept of Sindh being a gas prone area. Today, more than 50% of domestic oil produce is drawn from this area. Who will gather all this information by conducting different and very expensive surveys in remote areas? Eyes turn to OGDC as being the only corporation that could play a significant role in this area as well. In fact, OGDC has already taken a lead in operating/working in the most difficult and politically inaccessible areas of the frontier. The Government of Pakistan's efforts to establish a sound data[1]bank, as discussed earlier, would certainly improve the country's geological outlook. Over the years OGDC has been carrying out an innovative search looking for larger hydrocarbon deposits. As a part of this campaign OGDC also included Kakar Khurasan, Kharan, Gumbaz, Jandran and Turbat in the Balochistan basin and Khushalgarh in NWFP. In Kakar Khurasan OGDC has completed geological work and has also acquired 410 km of geological survey and 301 km of seismic survey data. Presently, processing and interpretation of the data are in progress. In Kharan area OGDC has completed preliminary seismic work which is being processed using the most sophisticated seismic technology which OGDC has recently acquired from the world leaders IBM and Western Geophysical, USA. Meanwhile geological and other data is under review. In Khushalgarh area OGDC uses new state of the art technology to delineate a drillable prospect. It is hoped that OGDC shall, inshah Allah, be able to discover a new hydrocarbon window in Balochistan basin. Once a discovery is made, it will change the whole thinking of foreign oil companies favourably. With a greater participation of foreign oil companies and an untiring and ceaseless endeavour on the part of OGDC we look forward to epoch making discoveries. OGDC has always viewed difficulties not as a handicap but as a challenge. It has risen to occasions in the past and shall prove equal to any task, howsoever stupendous in the future as well. The idea of heralding an era of prosperity for the country would go on inspiring OGDC as ever before. The new petroleum policy prudently provides a package of incentives that will pave the way for a healthy investment climate and will certainly go a long way in attracting foreign investment in the petroleum sector. It is hoped that with these positive measures foreign oil companies will take the advantage and divert their sizeable investment to Pakistan for exploring new frontier areas including off[1]shore.