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OGDC's self-financing year.

OGDC's Self-Financing Year

History of oil exploration in the sub-continent is as old as the oil industry itself. The first oil well was drilled at Kundal (Mianwali district) just seven years after Colonel drilled the very first well ever in Pennsylvania, USA in 1859.

Soon after Pakistan's independence in 1947, oil exploration got a boost when a giant gas field was discovered at Sui, Balochistan in 1952. This attracted a number of exploration companies into Pakistan and the fifties saw an increased interest and activity in search of hydrocarbon resources. But there was no significant discovery after Sui, and the foreign oil companies left Pakistan en masse at the end of the decade considering it non-prospective. There was virtually no exploration activity in the country in 1960. A need was felt to create an indegenous exploration capability and the Oil and Gas Development Corporation (OGDC) was raised in 1961. It was created through an active cooperation of the Soviet Union and for the first few years, used Soviet technology and experts to start the search for oil.

Making its first discovery of gas in 1965 at Sari and oil in 1968 at Toot, OGDC maintained a level of exploration activity till mid seventies. The emerging geological information base and discoveries of oil and gas fields brought Pakistan back to the category of oil prospective countries. A number of petroleum concessions were granted to foreign companies in seventies. As a national corporation, OGDC had thus succeeded in re-attracting the interest of foreign exploration companies in Pakistan.

Discovery of oil by Union Texas of Pakistan (UTP) in 1981 at Khaskeli (District Badin) in Lower Indus Basin opened a new geological province for liquid hydrocarbons. Another important discovery of oil in the previously known prospective window of Potwar Basin at Dhurnal in 1984 by Occidental of Pakistan (Oxy) gave the search for oil a major boost. The eighties saw an increasing exploration activity leading to a number of oil and gas discoveries and a substantial increase in indigenous production of crude oil. A number of new exploration agreements were concluded, and at the start of the decade of the nineties, the outlook on search for oil and gas seems quite optimistic.

Challenging Decision

OGDC is wholly a Public Sector entity. It has throughout been dependent on Government budget for all its funding needs. Although the revenues generated by OGDC covered only a fraction of its budget, a far reaching decision was taken to make it self-financing with effect from 01 July 1989. This was a landmark development in the life of OGDC. It posed a challenge. OGDC could make an economic take-off if successful or otherwise go bankrupt and vanish. The first fiscal year of OGDC's self-financing ended on 30th June 1990. It would be interesting to analyse its first year's performance and make some projections.

For the fiscal year 189-90, OGDC had a debt repayment liability of over Rs. 750 million. Coming off the national budget, and with very meagre revenues, OGDC faced the following three options;

[Right Arrow] seek a write-off by the Goverment for
 Rs. 750 million to give the OGDC an
 initial start in self-financing, or

[Right Arrow] seek a carry forward of Rs. 750 million

debt, or [Right Arrow] borrow money from commercial banks
 at high rate of interest to pay the debt

Considering that any one of these obvious courses could only extract the OGDC temporarily from its present difficulty but would not lead to tis financial autarky, OGDC took a hard choice. It rejected the obvious courses and undertook to improve its revenues by increasing the production of oil and gas. A simple calculation revealed, that if OGDC could double its production of oil and gas during the financial year it could pay back the Rs. 750 million and maintain its exploration programmes.

The challenge was started by fixing a mission that defined a three-pronged strategy as follows:

While maintaning a balanced economic direction, the OGDC will achieve short term cash flow by concentrating in the southern district, maintain medium term production stability by exploring in the northern district and undertake an innovative search in new areas for a large reservoir of oil or gas, to give a boost to the economy of Pakistan.

Working simultaneously on all the three prongs of short term cash flow improvement, medium term production stability and long term innovative search for larger reservoirs of oil and gas, OGDC achieved four oil discoveries (Fimkassar, Pasahki, Pasahki North and Bhai Syedan) during the year. Two of these discoveries were in the southern oil window (Badin & Sanghar districts) and the other two in the northern oil window (Chakwal and Attock districts). By rapid development of three of the newly discovered oil fields and optimisation of production from the old fields, the OGDC successfully achieved the near doubling of the production of both oil and gas during the year and thus the revenues. Efforts toward reducing operating costs by checking losses, improving efficiency, and controlling inventories proved effective, which further improved the cash flow position. The OGDC was able to pay back not only the Rs. 750 million but an additional Rs. 250 million of the arrears out of its own revenue generation. In addition, it paid about Rs. 432 million in royalty and about a couple of hundred million in excise duty.

Envisioning self-reliance in oil as its goal, OGDC is endeavouring to give the national economy a major boost in about 5 years. It will need a degree of freedom, flexibility and initiative of a highly specialised professional corporation to play a vital role in changing the destiny of our people. Given the right environment, the OGDC is ready to deliver in this capital intensive, technologically selective and highly competitive search for oil and gas in the country.

Dr. Gulfaraz Ahmed Chairman, OGDC
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Title Annotation:Oil and Gas Development Corporation
Author:Ahmed, Gulfaraz
Publication:Economic Review
Date:Feb 1, 1991
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