Global catalysts reignite oil and gas industry

Pakistan’s oil and gas sector had struggled to establish itself on the global stage but the country is now emerging as a key international player following the recent collapse in global oil prices.

Figures from the International Monetary Fund (IMF) suggest that the Asian nation already stands to save around $18.5 billion over the next three years thanks to the fall in the price of oil but the benefits to Pakistan go far beyond what might seem like straightforward economics. The country is now enticing international investments from around the world, with China recently committing more than $46 billion for transport and energy projects in the country – highlighting the vast potential that Pakistan is offering to global investors.

Few sectors of the country’s economy offer the potential returns that its oil and gas industries can provide. Arguably one of the biggest developments to Pakistan’s fortunes over the recent couple of decades has been the historic nuclear deal between Iran and the US, which is set to transform the way the country’s oil and gas sector can operate. Indeed, this pact looks set to ignite the O&G sector in Pakistan and finally enable the country to address its chronic energy shortage.

“The oil and gas sector of Pakistan is on the rise and working hard to fulfill the national demand,” says Shahid Khaqan Abbasi, Minister of Petroleum and Natural Resources of Pakistan.

“We have had a very positive two years with this government despite the fact that there was a political domestic upheaval. Inflation has gone down and the investment levels are unprecedented, as Pakistan has signed for over $50 billion investments from Chinese companies in infrastructure. Plus, the lower price of oil has also helped.” he continues. “The biggest challenge for the government has been the power shortage, and we are very hopeful that within the next five years Pakistan will overcome its energy shortage and can have surplus in power production.”

Such a situation would be a considerable achievement and a major benefit for Pakistani businesses that have had to regularly deal with power outages and inconsistent supplies for decades. When the U.S. finally lifts the sanctions, Iran is expected to add roughly a million barrels of oil a day to global production – lowering oil prices by $10 per barrel next year, according to the World Bank. For a net importer of fossil fuels, the consequences for Pakistan could be great.

 “Pakistan is a country that today relies on imported liquid fuels and domestic natural gas; over the last two decades the domestic natural gas production has stagnated and the dependence on imported liquid fuels has grown substantially,” Mr. Abbasi says.

“Taking into account that the cheapest way of transporting gas is through pipelines and that we have a neighbor and a near neighbor who have the largest gas reserves in the world, this represents a great advantage to Pakistan. Iran has the second largest reserve in the world and Turkmenistan the fourth.”

Indeed Pakistan’s government is hopeful that the U.S. and Iranian deal will mean the country can at last start to construct planned pipelines that will link the two countries like never before. The so-called ‘Peace Pipeline’ was first proposed by a young Pakistani civil engineer in the 1950s and it is hoped that its completion will provide not just O&G benefits but also help to curb cross border terrorism and maintain stability within the region.

“Pakistan imports over 6 million barrels of crude and 10 million tons of petroleum products a year, the possibility of imports of Iran can mean lower prices for Pakistan due to a more competitive environment and lower transportation cost. We need to increase trade with our neighbors and we are hopeful that the new geo-political situation will mean new opportunities for Pakistan,” explains Mr. Abbasi.

Indeed, the Iranian and Pakistani pipeline will impact countries across the region. India is also keen on developing a link with Iran and Mr. Abbasi adds that there are plans for an extensive network that will enable countries such as Turkmenistan to benefit as well. The potential of a North to South gas pipeline is also being discussed with countries including Russia, Qatar and China, but the potential of all these plans will likely provide benefits far beyond the oil and gas sector. It is hoped they will contribute to better growth prospects for Pakistan and its neighbors, and engender a more cohesive relationship between countries in the region and more cohesive thinking between partner countries.

“We are very hopeful that before the end of 2017 gas pipelines will be built and gas will flow into Pakistan,” adds Mr. Abbasi. “Furthermore, the pipelines will not only connect Iran with Pakistan, but India is also interested in building a pipeline from Iran. Iran-Pakistan ground-breaking should be in October and the Turkmenistan ground-breaking will be in December, which is a $10 billion project.”

Clearly such developments come at great cost but Pakistan has already been successful in attracting international investors that are aware of the potential windfalls. The country has received an unprecedented $2 billion of Chinese investment in 2015, with deals such as Poly-GCL Petroleum Group of China agreeing to invest $500 million with Ocean Pakistan Limited (OPL) to power further exploration into oil and gas reserves within Pakistan. With a sedimentary base of around 800,000 square kilometers, the country of nearly 200 million has a huge potential that remains relatively unexplored and opportunities across the upstream, midstream and downstream sectors are all available to be exploited. The government is also going to great lengths to boost oil and gas production within the country, drilling 81 new wells in 2015. It also aims to refine an extra six million tons of petroleum products next year, while reducing its import of refined products to 90% of total consumption.

The West has also been keen to explore opportunities in Pakistan and the Asian country is actively looking to attract short and medium-term investments from entrepreneurs. Mr. Abbasi adds that the country’s historical records of providing returns to international investors is helping to bolster confidence but he admits that foreign expertise is also meaning that the country’s O&G industry can grow quicker and more efficiently.

“An American company has already become the biggest player in the LNG field supplying ships and furthermore, the US is also present in the oil and gas sector supplying expertise and technology.

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“Pakistan has been receiving foreign investments for more than 60 years and I have not heard of a single company that has defaulted here. So the legal framework and contracts are not problematc issues when it comes to foreign investment. U.S. investors can participate on the pipeline projects which are all open for investment, especially the Turkmenistan pipeline project,” he explains.

Ambassador of Pakistan to the United States, Jalil Abbas Jilani, says, “Pakistan has vast oil and gas resources and is looking for American investors interested in joint ventures. The Pakistani government looks forward to productive foreign investments and offers high rates of return in the LNG sector for example. US investors could participate in the pipeline projects, which are all open for investment, especially the Turkmenistan pipeline project.”

Pakistan currently imports around six million tons of petrol a year, mainly from Oman and Dubai, but Mr. Abbasi hopes the new deal with Iran could help the country lower its import costs even further.

“Instead of shipping long distances, Iran would ship short distances when it comes to Pakistan,” he says. “I think that trading with neighbors is the easiest way of trading – consequently we are very positive about this situation, and we are certain that it will open a lot of investment opportunities.”

As the Iran-Pakistan pipeline will not be ready before 2017, the government intends to raise its liquefied natural gas (LNG) capacity in the short term. Pakistan already operates the biggest LNG plant in the world, enabling the government to import and store natural gasses for both the domestic and industrial sectors. This technology allows substances like methane to be transported and stored incredibly efficiently, as they take up just 1/600 the volume of natural gas in its gaseous state.

The terminal was built in just 11 months – a record-breaking achievement made all the more impressive by the country’s relative lack of experience in the sector. “This is even more remarkable considering that Pakistan had 5 separate failures at importing LNG over the last 8 years since 2006,” says Mr. Abbasi. “Our unbundled approach using a competitive bid process, with LNG off-take commitment by the public sector and construction by the private, is now a model for the industry in Pakistan.”

“Both LNG and pipelines have their own advantages,” adds Mr. Abbasi. “So expect Pakistan to be roughly a 15 million tons annual market within the next five years, and one of the top five markets in the world. A very positive result of all this will be the decrease of liquid fuels, both directly and indirectly.”

Pakistan already has one of the lowest carbon footprints per capita in the world, but it is determined to achieve even lower levels. The government has built one of the largest solar parks in the world in Bahawalpur, and is keen to encourage clean energy consumption where possible.

“Pakistan is a very responsible country when it comes to environment,” says Mr. Abbasi. “We are doing a lot of oil replacement with gas, so it is very clean in that sense. Also, a lot of vehicles have been converted into gas vehicles, which also contributes to the environment by decreasing petrol consumption. Gas has many qualities that contribute to a better environment. Pakistan has over a 100,000 MW hydel potential; this source of power is now being pursued with several large dam and run of the river projects under construction in addition to smaller hydel projects.”

He adds, “I think every source of energy has its limitation – the solution being to integrate them all, especially the integration of gas. More gas availability will contribute to the growth of other energy sources also.”

Pakistan’s government has also played a key role in propelling the country’s oil and gas sector forwards, with considerable restructuring taking place across its energy sector. The industry had traditionally been dominated by two utilities companies but these have been privatized and unbundled leading to greater competition. It has also led to investment and the private sector energy generation capacity has increased markedly by around 30% since 2009.

Regulatory reforms have also taken place, with policies being streamlined, tariff subsidies being phased out and business red tape being slashed - and this has partly helped to drive the rapid increase of foreign direct investment inflows, which is up around 26% this year alone.

Such a figure clearly demonstrates the surge of interest for investors looking at Pakistan and there are few sectors that are generating such optimism. Domestic demand is only set to grow as lower oil costs help the country’s economy to expand faster, while the improved political environment is providing a stable footing for those looking to Pakistan as a place to invest. Chinese and U.S. companies are already making their mark in the country by improving infrastructure across the O&G sectors but there remain considerable opportunities for further exploration, requiring investment but also expertise. And with the potential boost coming from Iran’s recent settlement with the US, Pakistan is fast finding that it has become an integral player on the global O&G stage, a position that it is now well placed to capitalize upon.