Pakistan in focus

Yawyar Mian reports from Lahore that dwindling reserves are pushing a search for new oil in Pakistan.
Pakistan in focus
By Yawyar Mian
Tue 25 Nov 2008 04:00 AM

Yawyar Mian reports from Lahore that dwindling reserves are pushing a search for new oil in Pakistan.

Pakistan's recoverable oil reserves stood at 339 million barrels in early 2008, and if no new reserves are found, the country will run out of oil in 13 years at the current production rate.

Local production currently hovers around 71 000 barrels per day (bpd) and makes up for only 26% of total consumption. Imports mainly come from the Persian Gulf, with about 110 000 bpd imported from the Kingdom of Saudi Arabia.

The transport sector is the largest consumer of petroleum products in Pakistan and accounts for 51.10% of total consumption, followed by power generation 39.40%, industry 6.50%, agriculture 0.7% and household 0.6%. Demand for petroleum products in Pakistan, the world's sixth most populous country, is rising by 6% - 7% each year and outstrips the 4% annual average increase in local production.

Decline in global crude oil prices augurs well for Pakistan and has enabled the government to stop paying subsidies that had increased the oil import bill to US $11 billion at the end of 2007, from just over US $3 billion three years ago.

Oil prices have come down by 50% since July from their highest level of US $147 per barrel, when the government was paying a record subsidy of PKR 37.07 ($0.46) per litre on diesel, which made up for PKR 30 billion (US $375 million) per month, and was forecast to reach up to PKR 300 billion (US $3.75 billion), against a target of PKR 140 billion (US $1.75 billion) for the 2008-2009 fiscal year.

"In 2007-2008 fiscal year the government incurred an oil subsidy of PKR 175 billion (US $2.19 billion) which was 1.7% of GDP [gross domestic product] against a target of PKR 15 billion. The budget deficit surged to 8.30% of GDP and the government had to borrow PKR 689 billion (US $8.61 billion) from the State Bank of Pakistan (SBP)," says Farhan Mahmood, an energy analyst at the Karachi-based JS Global Capital.

Pakistan relies heavily on diesel to meet more than 70% of its fuel requirements for the transport sector. In 2007-2008, total imports of diesel stood at 4.60 million tonnes and made up for 35% of total oil imports. Petrol accounts for 7% - 8% of total demand for oil products.

The declining oil prices will also bring down power generation costs. In mid-October, prices of locally produced furnace oil were down 8% to Rs 48,460 (US $585.75) per tonne and those for imported furnace oil had decreased by 10% to Rs 50 590 (US $632.75) per tonne.

Production push

To reduce reliance on expensive oil imports, the government is aiming at increasing local production to 100 000 bpd in phases by the end of 2012, and the scheme calls for digging 100 new wells each year. The Ministry of Petroleum and Natural Resources has so far awarded 17 onshore blocks for oil and gas exploration.

More than US $850 million were spent on drilling activities from June 2007-March 2008, but progress has been slow in recent months due to security concerns in some parts of the North West Frontier Province (NWFP) and Balochistan.

Expansion of refining capacity also ranks high on Pakistan's oil development agenda. The government contends that due to its close proximity with the oil-rich GCC states Pakistan could play the role of a refining hub and a conduit for Gulf oil flowing into China. The country could also provide access to oil from the landlocked Central Asian states to the international market through its deep sea port at Gwadar in Balochistan.

Pakistan currently has five refineries - the 100 000 bpd Pak-Arab Refinery (PARCO), the 67 000 bpd National Refinery Limited (NRL), the 50 000 bpd Pakistan Refinery Limited (PRL), the 40 000 bpd Attock Refinery Limited (ARL), and the second-hand Bosicor refinery with nameplate capacity of 30 000 bpd. Of the 287 000 bpd combined nameplate refining capacity, only about 80% is operational due to the old age of some refining units.

Major upgrade projects are being carried out by ARL, which is spending a total of US $450 million to increase the gasoline RON and reduce benzene and aromatics. ARL is also building a 470 km cross-country product pipeline line to meet the needs of Peshawar and nearby areas.

The refinery is building a 150MW power plant to supply power to the Water & Power Development Authority (WAPDA), and a 150 km pipeline to receive crude oil from the Makori oilfield.

The 67 000 bpd PRL is undertaking a PKR 11 billion (US $1137.5 million) project to reduce the sulphur content in its diesel to 0.05% from 1%, and reduce furnace oil production from 40% of the total current production, to about 25% by December 2009. PRL, which receives crude oil from Abu Dhabi's Murban field, Iranian Oil Company and Saudi Aramco, sells its petroleum products in the local market and exports about 5 000 bpd of naptha in the form of spot cargoes.PARCO, which currently operates a 100 000 bpd joint venture refinery with Abu Dhabi's International Petroleum Investment Company (IPIC), plans to build a 200 000-300 000 bpd refinery at Gadani, in the Lasbela district of Balochistan province. The project, Khalifa Coastal Refinery (KCR), is estimated to cost more than US $5 billion and will be a 74:24 joint venture between IPIC and PARCO.

Work on KCR's site preparation and construction of a boundary wall is expected to start in the coming weeks, while the refinery is expected to start operations in late 2011 or early 2012. It will supply middle distillates, mostly HSB, in the local market and export other products to regional and global markets.

An MoU was also signed with Kuwait's Al Noor Investment Company for the construction of a 100 000 bpd refinery at Port Qasim in Karachi. However, the estimated US $1.5 billion - US $2 billion refinery project has not made progress and is not likely to move forward in the near future. Progress on new oil development plans could remain subdued until the law, order and security situation improves in Pakistan.

The war in bordering Afghanistan undermines stability in major commercial and urban centres, and the conflict has resulted in a series of suicide bombings in Pakistan has kept away investors who are waiting for things to get better.

Saudi or Iran?

In the meantime, to overcome the current economic crisis, reduce some of the trade deficit and save the much-need foreign exchange the government is seeking oil on deferred payments from Saudi Arabia. A request made in July has not come to fruition and the government of President Asif Ali Zardari is now hoping to get such a facility from Iran for a period of up to one year.

During a visit to Pakistan in October, Iranian Foreign Minister Manouchehr Mottaki expressed his country's willingness to help Pakistan overcome its current economic crisis and provide crude oil on deferred payments.

The two countries also agreed to expedite the formalisation of details on the planned Iran-Pakistan-India (IPI) gas pipeline to meet Pakistan's rising energy deficit. Iran will also supply 1 000 MW of electricity to ease Pakistan's rising power deficit which exceeds 4 000 MW in the peak summer months.

Iran and Pakistan have now agreed to go ahead with the gas pipeline project even if India is not able to participate in the initial stages, and there is a possibility of China joining the extensive gas supply scheme. Iran's support could also see a positive response and support from Saudi Arabia and the GCC states. The GCC and the US may not want Pakistan's close alliance with Iran to overtake their good relations with the country. LNG delays

To meet rising domestic demand for natural gas and to plug the massive deficit that now exceeds one billion ft3 a day, three Liquified Natural Gas (LNG) projects have been planned at Port Qasim in Karachi. Progress on all three has been slow but the most advanced is the 3.5 million tonnes a year (mt/y) Mashal LNG project planned by the Sui Southern Gas Company (SSGC).

A developer for the project was scheduled to be selected in early 2007 and SSGC is now saying that it is likely to make a decision by the end of 2008.

Another 3.5mt/y LNG project planned by the Lahore-based Associated Group at Port Qasim has failed to get off the ground after its ground breaking ceremony was performed by Pakistan's former president, Pervaiz Musharraf in May 2007.

The contract for the construction of the project was awarded to the Mussafah-based Adyard Abu Dhabi, while the geophysical and technical studies of the site were been completed by China Harbour Company.

The estimated US $180 million - US $200 million project entails the construction of an LNG plant with capacity to discharge up to 400 million ft3 a day of natural gas.

The developers contend that the slow pace of development of LNG projects in Pakistan is due to a lack of awareness among government officials about how to make them happen on a fast-track basis. The UAE's Dana Gas had also announced a 3.5 mt/y LNG project at Port Qasim, but the company has made no further announcements since unveiling the plan about two years ago.

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