Islamabad:
Oil exploration and production (E&P) companies have informed the federal government that gas utilities’ liabilities to foreign companies have risen to $600 million and have demanded a differential subsidy of Rs 75 billion to prevent the collapse of Pakistan’s oil sector .
In a letter to the Petroleum Minister, the Pakistan Petroleum Exploration and Production Companies Association (PPEPCA) claimed that liquefied natural gas (LNG) imports are preferred instead of intensifying efforts to explore natural gas in the country.
He argued that late payments became a major impediment to the ability of upstream companies to raise investment in their assets. “This issue has resulted in a 300 mmcfd (million cubic feet per day) reduction in gas due to low drilling activity.”
The association called for different measures to prevent the collapse of Pakistan’s upstream oil sector. It sought a fiscal subsidy or differential pricing subsidy of at least Rs 75 billion for Sui Southern Gas Company (SSGC) and Sui Northern Gas Pipelines Limited (SNGPL) to partially bridge the accumulated revenue shortfall.
The subsidy will make it easier for them to pay the upstream companies, which in turn will be able to cover their operating costs and carry out planned research and development work to maintain and enhance the country’s oil and gas production. He asked the government to direct the State Bank of Pakistan (SBP) to allocate foreign exchange for payments to foreign E&P companies in an equitable manner.
He also underlined the need to start work on underground natural gas storage facilities to avoid a cut in domestic gas supplies.
In the letter, the association of E&P companies draws attention to a critical situation unfolding in the upstream oil and gas sector.
“Our industry faces a complex set of challenges that require urgent action. Chief among these is the alarming amount of outstanding receivables, which currently stand at a staggering Rs 1,500 billion, of which over $600 million is payable to foreign companies.” He pointed out that companies have seen a significant reduction in domestic oil and gas production, with the shortfall being offset by costly energy imports, particularly LNG, resulting in growing energy shortages.
The issue of rising demands was not only affecting the financial health of companies in the sector, but was also jeopardizing wider energy security and foreign investment in Pakistan, the association warned.
It undermines the confidence of investors and creditors, preventing the necessary flow of capital and technology for exploration and development activities.
This is evidenced by the fact that no new international upstream companies, according to PPEPCA, have invested in any block or opportunity on offer in recent years, while a number of international E&P companies have exited the country.
“Our field currently produces 3,200 mmcfd of natural gas along with 70,000 barrels per day of domestic oil. This production accounts for 35% of the country’s primary energy supply, underscoring the sector’s critical role in meeting energy needs,” he said, adding that such a vital sector had been crippled by default on the part of government-backed natural utilities. gas.
He warned that the severe cash flow crisis was prompting companies to drastically cut back on exploration and development activities.
By February 2024, of the planned exploration of 23 wells during the year, only nine wells had been drilled. Currently, only 19 of the 42 available drilling rigs are operating in the country and there is a significant decrease in seismic activities.
Even development wells are being put on hold as companies are reluctant to bring additional volumes of natural gas to market. This loss of activity has curtailed approximately 300 mmcfd of natural gas production.
In addition, the preference for imported LNG over domestic gas is choking production in mature wells and fields, some of which may not revive.
“This has encouraged a situation where investment in finding new oil and gas fields and maintaining production in existing fields is drying up. As a result, natural gas production is rapidly declining and its replacement by expensive LNG will have significant implications for our economy and political landscape,” the union said in the letter.
It claimed that defaults have been rising steadily, despite raising gas prices for consumers twice in the last financial year, with effect from November 1, 2023 and February 1, 2024.
This situation requires the government to provide immediate capital to natural gas utilities to improve their liquidity position. Also, it should be noted that payments to foreign oil and gas companies are backed by government guarantees and any non-payment can be considered a government default.
To manage the crisis, the association asked the government to take necessary steps without further delay. Otherwise, its member companies may be forced to reduce or suspend production, leading to a huge shortage of natural gas.
Published in The Express Tribune, April 20u2024.
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