The government is considering a utility exchange for the gas crisis

Islamabad:

As ill-conceived and costly liquefied natural gas (LNG) imports have reduced domestic gas supplies, the government is now considering a proposal to switch gas supplies between two utilities. This proposal will be discussed at a high-level meeting chaired by Finance Minister Ishaq Dar on September 2.

Sources told The Express Tribune that ill-timed LNG imports have led to a cut in domestic gas supplies, adversely affecting the cash flows of exploration companies. Natural gas utilities have reportedly refused to receive the full volume of domestic natural gas supplies due to contracted LNG imports from Qatar, resulting in financial hardship for these companies.

Gas utilities have sent letters to all exploration companies, including Oil & Gas Development Company (OGDCL), Pakistan Petroleum Limited (PPL) and MOL, asking them to cut domestic gas supplies to make room for expensive LNG imports. Ironically, while domestic consumers run out of cooking gas after 10pm, utilities are not ready to accept cheaper gas supplies. LNG prices are currently between $10 and $12 per mmbtu, while domestic gas costs are between $2 and $6 per mmbtu.

Despite the availability of cheaper local natural gas, consumers are forced to use expensive LNG, which has created cash flow problems for oil and gas exploration companies. The matter has been brought to the attention of the prime minister and the Directorate of Petroleum.

The main problem is in the Sui Northern Gas Pipelines Limited (SNGPL) system, while there is no pressure in the Sui Southern Gas Company Limited (SSGCL) system. SSGCL is currently facing a gas shortage of 550 million cubic feet per day (mmcfd), prompting a proposal for a gas exchange between SNGPL and SSGCL.

Earlier, Chief Minister Shehbaz Sharif was informed that oil and gas exploration and production (E&P) companies have incurred losses of Rs 14 billion due to reduction in natural gas supplies from domestic fields. It noted that natural gas utilities were unable to sell both locally produced gas and imported LNG, causing cash flow problems for exploration companies.

E&P companies have also complained about late payments from natural gas utilities, which have further slowed their cash flows. As a result, these companies were forced to cut gas supplies by up to 320 mmcfd. The companies had pledged to invest $5 billion in exploration activities at potential sites to increase Pakistan’s oil and gas production, but told the prime minister that current cash flow problems would prevent them from funding new exploration activities. Representatives of these companies have reported outstanding claims of more than $600 million, which their customers in Pakistan have yet to settle. The Pakistan Petroleum Exploration and Production Companies Association (PPEPCA) also claimed that LNG imports are taking precedence over increasing domestic gas exploration, leading to a 300 mmcfd reduction in gas supplies from local fields.

Currently, the upstream industry produces 3,200 mmcfd of natural gas along with 70,000 barrels of oil per day, accounting for 35% of the country’s primary energy supply. However, as of February 2024, only nine of the planned 23 wells have been drilled during the current financial year. Currently, only 19 rigs are operating in the country out of 42 available, and there has been a significant slowdown in seismic activities. Oil and gas exploration companies have put drilling activities on hold due to cash flow problems.

Implementation of oil policy

Earlier, the caretaker government approved amendments to the oil policy to boost the share of natural gas offered to third parties. The government allowed oil and gas exploration companies to sell 35% of natural gas to third parties, significantly higher than the previous share of 10%. However, after the Pakistan Muslim League-Nawaz (PML-N)-led coalition government came to power, the new oil minister began questioning the legitimacy of these amendments.

Although the Special Investment Facilitation Council (SIFC) is urging the Petroleum Directorate to implement the policy amendments to open up the oil and gas market to the private sector, these changes are yet to be approved. The issue was also raised with Prime Minister Sharif to ensure the implementation of the policies approved in the past.

Another major challenge is the implementation of the strict natural gas policy, which was also approved by the caretaker government. This policy was seen as a milestone aimed at adding the hitherto untapped tight gas fields to the system. The tight gas is produced from reservoir rocks with such low permeability that massive hydraulic fracturing is necessary to produce the well at economic rates. The gas is sealed in very impermeable and hard rocks, making their formation “tight”.

According to sources, the current administration in the Petroleum Directorate is strongly opposed to the implementation of this policy. When oil and gas exploration companies highlighted the issue, the Prime Minister formed a committee to resolve all related issues. Background discussions with E&P companies revealed that they are seriously concerned about the delay in adopting the amended oil policy. They fear that the current management of the Petroleum Sector intends to roll back the policies adopted during the tenure.