Energy is one of the world's most important resources. Over the last century, petroleum products have become the major supplier of the world's energy demand. In Pakistan petroleum products supply 42 per cent of the energy needs. The industry which comprises exploration and production (upstream), refining and marketing (downstream), is the single largest contributor to the national exchequer.
Demand for oil products has grown at nearly 8 per cent per annum in Pakistan since 1948 and is expected to continue at similar levels in the years to come. This translates into the demand of oil increasing from the current 14 million tonnes to almost 25 million tonnes within 10 years. With the government's emphasis on rapid economic growth, road construction and a shift towards greater urbanization, the country's vehicle population is expected to reach 3.9 million by 1999 from the present 2.6 million. Tractors are also expected to add to the demand for diesel fuel.
The country has a long history of petroleum exploration. The first oil well was drilled in 1866 at Kundal in the Mianwali district of Punjab. The first commercial success came when Khaur 1 was drilled by Attock Oil Company in 1915 in the Potwar Basin.
After the creation of Pakistan, the government decided to regulate the petroleum industry according to its own laws. The Pakistan Petroleum (Production) Rules were promulgated in 1949. According to these, oil prospecting came under direct control of the Central Government rather than the provincial government. The new rules stipulated that concession areas could only be granted to companies incorporated in Pakistan. As a consequence of this Attock Oil transferred its activities to a new local subsidiary Pakistan Oil Fields Ltd., (POL) while Burmah Oil, the other major explorer, formed Pakistan Petroleum Limited (PPL). The Government held 30 per cent equity in both the new companies.
With the increasing interest in oil exploration in the country, in 1961 the Government of Pakistan established the Oil and Gas Development Corporation (OGDC). By 1970 OGDC had drilled eight structures and discovered one oil field at Toot in the Potwar Basin. Encouraged by this find and the unprecedented increase in world crude prices in the mid 1970's, several foreign oil companies entered the Pakistani market. Amongst these were Union Texas and Cities Services who made important oil discoveries on the Thar Slope of the Lower Indus Basin. Both Union Texas and OGDC have to date discovered fifteen oil fields. Another foreign company, Occidental Petroleum began exploration in the Potwar Basin and in 1983 discovered a major oil field at Dhurnal. Shell secured concessions in Southern Punjab but was unsuccessful in striking a major find. It subsequently wound up its exploration operations in the mid-80s.
As Pakistan entered the nineties a conscious effort was made by the Government to move towards a market economy. Attracting foreign investments formed a major part of that effort. In 1994 the Government of Pakistan announced a Petroleum Policy containing improved terms for petroleum exploration contracts to encourage further investment. Under this new Policy 27 licenses for exploration and three for production were issued.
The country has significant exploration potential and a declining oil production of around 55,000 barrels per day which meets about one quarter of its petroleum needs. The balance is met by imports worth $1.5 billion. Pakistan is estimated to have recoverable oil reserves of about 491 million barrels, which at the present rate of consumption will last for seven years. In such a situation stepping up oil exploration activity is a matter of obvious priority.
Pakistan has three simple, but aging, refineries with a total capacity of 6.3 million tonnes. Two of them are located in Karachi while the third is at Morgah near Rawalpindi. There are plans for the establishment of a new refinery near Multan. Half the indigenous crude oil is processed at the Attock Oil Refinery. Imported crude is also processed at the Karachi refineries (National Refinery Limited and Pakistan Refinery Limited). Due to lack of profitability in the refining sector there has hardly been investment in refining since the late 1970s. The dependence on imported finished products has risen substantially and local refining now only meets 40 per cent of the demand. It is estimated that even after the commissioning of the PARCO mid-country refinery this figure will rise to only 50 per cent.
Pakistan Refinery Limited, which currently processes 23 per cent of indigenous oil supplies and 40 per cent of total imported crude oil, is considering expansion of its current capacity. This issue becomes particularly significant in the light of the increasing demand for petroleum products in the country coupled with the requirement that these products must become environmentally friendly. However, inadequate and unrealistic refinery product pricing and capping of refinery's profits by the government discourages investment.
Oil marketing, like exploration, is also dominated by a state-controlled organisation. Pakistan State Oil (PSO) commands 75 per cent of the market share of all petroleum products. Shell Pakistan Limited has 20 per cent market share, and Caltex 5 per cent. The current dominance of PSO is due to the merger of its predecessors Pakistan National Oil, Premier Oil and Esso Inc. into one company. The former two were nationalised while the latter sold out its interests to the government.
The main issue in oil marketing however is that of distributors' margins. For 30 years margins remained frozen by the government. Some relief was given in 1993 and again in 1995. But even these increases left margins much below the required level to sustain the planned investment in infrastructure and the fight to ensure that the public is given proper measures and unadulterated fuel. They are also way below the margins in South East Asia and Middle East. Gross margins range from 1.36 per cent on Kerosene to 2.17 per cent on Mogas of selling price. The resultant low revenue generation predictably presents a barrier to investment in much needed infrastructure. Margins need to be doubled to ensure that the proper level of investment is made feasible.
Another factor affecting the oil companies' performance is the rigid freight pool rules. These result in wasteful expenditure such as back freighting and the promotion of numerous small, uneconomic depots. The existing rules discourage the development of an efficient, rationalized distribution network and the separation of the freight spending authority from its financial accountability opens a potential Pandora's Box malpractice.
That the freight pool cost is estimated to rise from Rs.8.5 billion to Rs.11 billion between 1995 and 1996 demonstrates the size of the problem. The best solution would be to pass full responsibility for the management of inland freight to the oil companies. Currently, the movement of oil (which is imported only by the Government of Pakistan) from the tanker at the port to distributors and eventually dealers, takes place strictly according to government directions. The transfer price at each stage of the process is also fixed by the government.
In order to provide rationalised product movements there is a need to reduce dependence on expensive and dangerous road transportation of product by moving towards a safer and more economical transportation system. A consortium, including PSO, PARCO and Shell Pakistan, has embarked upon a study of a new product pipeline from Karachi to the Punjab. This pipeline will replace the existing PARCO pipeline (which will be used for transportation of crude oil once PARCO's mid-country refinery at Multan is commissioned) and will also provide substantial additional capacity. The pipeline is estimated to cost US $ 600 million.
The Petroleum Policy of 1994 is a step forward but it needs to be converted into an act of parliament to give it more authority and permanence. To ensure the foreign investor's trust, the government has to be steadfast in the concessions and incentives it offers. Revoking previously agreed tax-breaks (as was done in the imposition of a 55 per cent duty on concessionary items in the exploration and production sector) results in mistrust and confusion in the foreign investors regarding government policies and intentions.
For a sensitive product like petroleum, which requires specialised storage and distribution facilities, there is a need for an integrated plan for the development of infrastructure such as ports, shore tankage, pipelines and rail transportation.
Despite the newly increased tanker handling capacity at Karachi Port, more economical large sized tankers cannot be accommodated. The future expansion of KPT (OP-1 renovation) will only give temporary relief. The unloading facilities at Karachi Port for crude oil, finished products and other bulk liquid cargoes have become totally inadequate. This is resulting in congestion at the port, delays in cargo discharge and loss of valuable foreign exchange in the form of demurrage charges. The position has somewhat improved with the addition of OP-V at Keamari and the facility of receiving fuel oil at Port Qasim (PQA). However, with the decommissioning of OP-1 in 1996 for three years for revamping and increased demand for petroleum products, the industry will face berthing problems at Keamari.
However, there are plans to develop crude oil and gas oil discharge facilities at Bundal Island which would ease the pressure on existing facilities at Karachi Port considerably. It is hoped that the Government of Pakistan will vigorously give its whole-hearted support to this plan. There has been an embargo on further tankage in the Keamari area since 1971. The infrastructure development plans such as FOTCO/SBM Khalifa Point/Gwadar all have major economic and operational constraints. There is also an embargo by Ministry of Railways on leasing of additional land at most existing oil marketing companies depots, thus further restricting expansion of existing railhead storage capacity and thus necessitating the construction of new art of tax depots.
The need to protect the environment is one of the most pressing tasks confronting both the Government of Pakistan and oil marketing companies. The importance of this issue has been recognised and the Government is taking steps to raise the quality of fuels in Pakistan. A seminar on Environmentally Friendly Petroleum Fuels was held to initiate the process and a range of proposals adopted for implementation in 1996-97. However, the detailed implementation programme, the necessary initiatives and the cost-recovery mechanisms have yet to be agreed and this work needs to be progressed urgently.
However, foreign investors seek an open and balanced approach from the government. Pakistan is a large country with a growing market but there is much need for a collective dialogue between stakeholders in the petroleum industry and the government. The relationship of the oil companies and the government is a symbiot one. We have received good vibes from the present government in this regard and we hope to see a mutually agreed formula being implemented to raise the infrastructure of the petroleum industry to enable the industry to provide Pakistan with its most important energy resource.
From the above it can be seen that there is a huge demand for investment in the Petroleum Industry, both for exploration as well as for refining and marketing infrastructure. Estimates range from US $ 2-5 billion over the next five years. These sums will have to come from abroad.…