Pakistan’s upstream oil and gas sector grapples with severe financial crisis

ISLAMABAD: Pakistan’s upstream oil and gas sector is currently grappling with a severe financial crisis as the outstanding receivables from Exploration and Production (E&P) companies owed by state-owned gas utilities have soared to Rs 1,500 billion, with over $600 million payable to foreign companies.

This revelation was made in a letter written to the petroleum minister Musadik Masood Malik by Pakistan Petroleum Exploration and Production Companies Association (PPEPCA).

According to PPEPCA, our industry is confronting a complex array of challenges that require urgent action. Foremost among these challenges is the alarming amount of outstanding receivables from Sui Southern Gas Company Limited (SSGCL) and Sui Northern Gas Pipelines Limited (SNGPL), which currently stands at a staggering Rs 1,500 billion of which over $600 million is payable to foreign companies. 

These delayed payments are becoming a significant barrier to the upstream companies’ ability to invest in their assets. Consequently, we are witnessing a marked decline in indigenous oil and gas production, with the shortfall being balanced by costly energy imports, especially LNG, or otherwise, resulting in growing energy shortages.

This critical issue of mounting receivables is not only affecting the financial health of companies within the industry but is also jeopardising the broader energy security and foreign investments into Pakistan.

The issue is also undermining the confidence of investors and creditors, hindering the necessary capital flow and technology for essential exploration and developmental activities. 

This is evidenced by the fact that no new international upstream company has invested in any block or opportunity on offer over the past few years, while a number of international E&P companies have exited the country.

PPEPCA, in its letter, also highlighted that the severe cash flow crisis is pushing companies to drastically cut exploration and development activities. Till February 2024, out of the planned 23 exploration wells for the year, only nine were spud. Currently, only 19 out of the available 42 rigs are operational in the country and there is substantial reduction in seismic activities. Even development wells are being put on hold as companies are reluctant to bring additional gas volumes to market.

“This loss of activity has already curtailed / reduced around 300 MMscfd of gas production,” reads PPEPCA letter.

However, in order to manage the crisis, the PPEPCA also suggested the petroleum minister to take steps without further delay, otherwise PPEPCA member companies may be forced to reduce/suspend production operation operations leading to a massive shortage of gas, which the country may not be able to cover by importing expansive LNG.

As per PPEPCA’s suggestion, the government should provide budgetary grant/Tariff Differential Subsidy (TDS) of at least Rs 75 billion to SSGC and SNGPL for partially adjusting the accumulated revenue shortfall, instruct State Bank of Pakistan (SBP) for allocation of foreign exchange for making payments to foreign E&P companies in an equitable manner and work towards underground gas storage facilities to avoid any curtailment of indigenous gas.

 It is relevant to note that E&P sector currently produces 3,200 MMscfd of natural gas along with 70,000 bbls of indigenous oil. 

This output represents 35% of the country’s primary energy supply. However, it is alarming to see that a sector of such vital importance has been crippled due to a massive and ongoing default by the state-owned gas utility companies (SSGCL and SNGPL).

Responding to questions sent by this scribe, the Petroleum Division said that financial strain faced by E&P companies is a inherited issue, and the government is fully committed to finding solutions for these outstanding payments. 

“We have been actively engaging with E&P companies to address these issues, and are optimistic that a resolution will be reached in the coming weeks. And, it is the duty of the Petroleum Minister to review all policies pertaining to the sector/ministry, said petroleum division,” said petroleum division officials in their response. 

Furthermore, the Petroleum Division has addressed inquiries regarding Musadik Malik’s publicly expressed intentions to scrutinise policies sanctioned by the Council of Common Interests (CCI) and potentially reverse reforms implemented during the caretaker government’s tenure. 

This includes the proposed review of the amendment to the Exploration and Production (E&P) Policy 2012, which currently permits E&P companies to sell up to 35 percent of gas to third parties.

While confirming that a handful of policies have indeed been under review, the Petroleum Division clarified that the amendments to the E&P Policy 2012 have not yet undergone scrutiny by the minister. 

The division refrained from offering detailed commentary on any policy prior to thorough review. However, the division emphasised the petroleum minister’s unwavering commitment to bolstering the E&P sector, ensuring the sustainability of the energy and petroleum value chain, and alleviating the economic burden of energy, particularly on country’s vulnerable populations.

It is pertinent to mention here that as the country stands at the precipice of an imminent energy crisis, the need for urgent action cannot be overstated. It is imperative to swiftly address these pressing issues to safeguard Pakistan’s energy future and avert the looming threat of further economic turmoil.