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Oil and gas.

Oil and Gas

A shock in the near future is likely to be faced due to oil crisis. Pakistan entirely depended on Kuwait for its oil supplies. This source has been cut off. The search for alternative sources is on. The immediate dilemma of the caretaker government would be whether to transfer the impact of an oil price rise to the people, or to postpone it until elections are held. The government had declared that it would absorb a 10 to 12 per cent increase in oil prices on the international market. But the fact is that the impact of a price rise is already estimated to be around 40 per cent.

Now, the option for the new government is either to absorb the remaining 30 per cent price differential as well, or pass it on to the people, which would obviously push up the prices of all consumer products in the country, further fuelling the existing upward trend in prices. The government's cushion in the price structure of petroleum products is the development surcharge. In the case of HOBC and motor spirit, the development surcharge is more than 100 per cent of the ex-refinery cost, but in the case of HSD-which is essential to keep transport moving-the cushion is around 18 per cent. Even if the government decides to absorb the total impact of the price increase by giving away the entire development surcharge, the shortfall in revenue will have to be met by deficit financing. This is also inflationary, but its impact would be indirect and delayed. Another sector which would be affected by the rising oil prices in the international sector would be that of energy, which is a major consumer of furnace oil in the country. The government has already instructed WAPDA to switch over those thermal power stations to gas wherever possible. But the diversion of electricity production would either be at the cost of domestic consumers or the fertilizer industry. Where this switchover os not possible, as in the case of some KESC power stations, an increase in fuel adjustment charges is also expected to go up, which will hurt the already ailing industry of Karachi.

According to latest government statistics, about a quarter of Pakistan's foreign exchange earnings are spent on the import of crude and refined oil. While only ten per cent of the country's foreign exchange was spent on the import of 1981 it had increased to over 20 per cent in 1988-89. If we take the growth rates of energy demand and those of our foreign exchange earnings (9 per cent and 6.5 per cent respectively), in the next 5 years the country will be spending more than half of its foreign exchange earnings on importing oil alone-consequently reducing the foreign exchange component necessary for other vital development and infrastructural needs. Despite such a huge import bill for oil and oil-related products, the demand for energy far outstrips the per capita access to commercial energy in Pakistan, which remains abysmally low-a ninth of the world average, and half of that of other low income countries.

Oil Production

Oil Production in the country has increased to 68,233 barreld per day as compared to 53,102 barrels per day during the corresponding period of last year. Pakistan has accelerated efforts to increase oil production. A petroleum concession has recently been signed with the British Gas (Pakistan) S.A. Tullow Oil of Ireland, Pakistan Petroleum Limited and Oil and Gas Development Corporation for exploration of petroleum over an area covering 5600 sq.kms. in districts Zhob, Loralai, (Balochistan), Dera Ghazi Khan (Punjab), Dera Ismail Khan and South Waziristan (NWFP). Under this agreement, the companies will carry out seismic survey of 400 kms and spud one exploratory well with an expenditure of 6.8 million U.S. dollars in this block. At present the single refinery in the North has a capacity to process crude of upto 30,000 barrels per day. It is operating at full capacity. Various operations of oil concessions in the area, such as: Oil and Gas Development Corporation, Pakistan Petroleum Ltd., Occidental Petroleum and Pakistan Oilfields, have indicated to the Government increased availability of crude in the Northern Areas. Government which itself is a shareholder with Pharon Holdings in Attock Refinery is considering a proposal to increase the capacity of this refinery by 20,000 barrels per day to 50,000 barrels per day.

The two Karachi based refineries have been allowed to charge a processing fee for refining the imported crude. On the other hand the refinery in the North is still on a fixed return of 18 per cent on the equity and is completely dependent on local crude. It is believed that the Government is paying around Rs. 24 per barrel as processing fee for imported crude refined by the two Karachi based refineries. Pakistan Refinery Limited and National Refinery Limited, while the return on cost plus formula for refining indigenous crude in the North works around to Rs. 12 per barrel. The processing fee concept is also a better deal as it gives the refiners an incentive to reduce operational cost and thereby earn more. Compared to this under the fixed return formula the Government bears the cost of inefficiency in refining operation.

Private sector has thus far been shy of investing in the refining field because of Government's refusal to allow them to charge on import parity basis for refining crude oil; a practice in vogue in most of the oil importing countries around the globe. The Government's refusal to agree to give a return on import parity basis is perplexing as it has already conceded this to oil exploration activity and is evident from the record umber of drilling being undertaken since then. Inordinate delays in expanding the refining capacity in the country and the dilly dallying over the location of a new refinery in Sindh has left Pakistan inadequately short of refining capacity in the wake of Gulf crisis. The country is still importing around 45 per cent of its furnace oil, Kerosene oil and high-speed diesel oil from abroad. The loss in crude oil production from Iraq and Kuwait is being met from boost in oil production from Saudi Arabia, UAE, Venezuela and other oil exporting countries. The removal of the combined refining capacity of Iraq and Kuwait from the world market, due to the embargo, however, has caused an acute shortage for refined products the world over, which cannot be replaced in matter of days or months.

Among the reasons for delaying the establishment of a refinery at Multan or in upper Sindh was the continuous fall in crude oil prices during the last couple of years and the cheap availability of POL products from the Middle East. Warnings by knowledgeable quarters that the market scenario would not remain the same for ever was continuously ignored by Islamabad, as a result the country is now paying a heavy price. Increasing the capacity of ARL by 20,000 barrels per day is expected to cost 25 million dollars. The foreign investor is reportedly seeking a guarantee from the Government that in case the committed extra crude oil does not become available, the Government would foot the bill for interest payments on the capital investment made in the expansion project. The present Middle Eastern owners took over the ARL, over ten years ago, from the British owners. They have been receiving dwindling return on their investment on account of the continued weakness of the Pak rupee, since 1983, coupled with the cost plus formula of fixed 18 per cent return on equity.

Three Phased Plan

A three phased programme has been chalked out to meet the requirements of oil in the country till next June. The country is consuming 130 lakh tonnes of petroleum and petroleum product annually. The daily requirement is almost 175,000 barrels per day out of which more than 60,000 barrels per day are from domestic oil wells which amount to 35 per cent of the total needs. Thus more than 65 per cent of oil and oil products is being imported on which 80 million dollars are being spent. Kuwait was the single largest exporter of oil from which 60 per cent of the total oil imports were coming.

According to Petroleum Ministry sources the country is fully equipped to handle any emergency. Presently more than 10 lakh tonnes of oil is in safe storage out of which 7 lakh tonnes is in the storage tanks of oil companies while 3 lakh tonnes is with big organisations, which can suffice 30 days need of the country. However considering the explosive situation in the Gulf the government has taken two alternate arrangements and in this connection deals have been concluded with countries of Far East. Arrangements of 500,000 tonnes of diesel and petrol imports in September has been finalised while import of crude oil has also been arranged.

Liquid Petroleum Gas

At present there are reportedly 24 blending units operating in the country. Four of these were sanctioned under the previous government of General Zia-ul-Haq. They are:

a) Gizri Lube headed by Waheed Qadir, related to the then federal minister, now operating in collaboration with P.S.O.

b) Middle East Lube in Hub headed by Syed mohammad Rafi reportedly related to the then Governor also operating in collaboration with P.S.O.

c) International Lube Faisalabad, headed by Irfan Marwat, related to the then federal minister, in collaboration with PBS; and

d) Arnif Lubricants headed by Arshad Khan in NWFP related to the then Governor.

The PPP Government also sanctioned two licenses to Omar Daraz Khan of Lahore Lubricant and to ghulam Mustafa Memon owner of the new super highway pump station and 50 other pump sites. Lahore Lubricant has not finalized its deal but is reported to be negotiating with PBS. Ghulam Mustafa Memon has signed up with PSO. Putting up a lube blending plant is not a big investment. It requires just over Rs. 10 million in investment on an equity of Rs. 2.5 million.

Against an equity share of Rs. 1.0 to Rs. 1.2 million the private sector partner is getting anywhere from Rs. 30 to Rs. 70,000 a month plus a company car. The operational cost and marketing expenses is being borne by the marketing companies and the profit is equally distributed at the end of the year. Left in the cold the third oil marketing company M/s. Caltex Oil has reportedly rented an old plant on a rental of Rs. 37 lkh a year. This amount is a possible guide of the profitability potential of blending unit.
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Title Annotation:oil and gas production in Pakistan
Publication:Economic Review
Date:Oct 1, 1990
Previous Article:Conservation of electrical energy.
Next Article:Attock Refinery Limited -- past, present and future.

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