Introduction
Pakistan’s oil and gas sector, while not as resource-rich as its Middle Eastern counterparts, plays a crucial role in the country’s economy. Over the past decade, the industry has faced significant challenges, particularly in maintaining production levels. This blog explores the current state of the sector, analyzes it using Porter’s Five Forces framework, highlights key challenges for exploration and production (E&P) companies, and provides insights into the future outlook
Structure of Pakistan’s Oil and Gas Sector
Pakistan’s oil and gas industry is categorized into three main segments:
- Upstream
Upstream companies focus on exploration and production (E&P) activities. They extract crude oil and natural gas, conduct water treatment (since extracted oil often contains water), and supply crude oil to refineries and processed natural gas to distribution companies. - Midstream
Refineries process crude oil into usable products such as petrol, diesel, and kerosene. These refined products are essential for transportation, energy production, and industrial applications. - Downstream
Downstream companies distribute refined petroleum products to end consumers. Pakistan State Oil (PSO) is a key player in this segment, operating a vast network of fuel stations across the country.
Consumption vs. Production
Pakistan consumes around 16-17 million metric tons of oil annually, with only 20-25% of this demand met through local production. The remaining 75-80% is imported, making Pakistan highly dependent on global markets.
For natural gas, 4 billion cubic feet per day (bcfd) is consumed, with 80% sourced locally and 20% imported as Liquefied Natural Gas (LNG).
Current State of the Oil and Gas Sector
Unlike Middle Eastern nations with abundant reserves, Pakistan’s oil and gas resources are relatively limited. The country’s oil production peaked at 95,000 barrels per day (bpd) in 2015, driven by significant discoveries in Khyber Pakhtunkhwa (KPK), such as the Nashpa and Tal Blocks. However, due to the lack of new major discoveries, crude oil production has declined to around 71,000 bpd as of 2024.
Similarly, gas production has declined from its peak of 4.3 bcfd in 2012 to 3.2 bcfd today. Major fields like Sui, Uch, and Mari were discovered decades ago, and recent discoveries have been relatively small. This decline raises concerns about Pakistan’s energy security and economic stability.
Competition and Pricing in the E&P Sector
Despite the demand-supply gap, the sector remains heavily regulated, preventing companies from freely determining prices. Key pricing factors include:
International Oil Prices – Local oil prices are linked to global market fluctuations.
Exchange Rate Volatility – Prices are set in US dollars, but transactions occur in Pakistani rupees, making exchange rates a critical factor.
Additional Revenue Streams
Interest Income: E&P companies often invest in government securities like T-bills and PIBs, generating returns.
Exchange Gains: Currency devaluation can result in additional income for these companies.
Major Expenses
Royalties: Payments to the government, usually 8-12% of revenue.
Transportation Costs: Moving oil and gas from fields to refineries.
Operating Expenses: Includes salaries, depreciation, and administrative costs.
Exploration Costs: High costs associated with surveys and drilling, often leading to dry wells.
Porter’s Five Forces Analysis of the Sector
Porter’s Five Forces framework provides insights into the industry’s competitive landscape:
Threat of New Entrants:
High barriers to entry due to capital-intensive operations and strict government regulations.
Bargaining Power of Suppliers:
Limited as the government controls pricing through regulatory policies.
Bargaining Power of Buyers:
Low, as the government is the primary buyer of natural gas, while refineries purchase crude oil under regulated pricing policies.
Threat of Substitute Products:
Increasing due to renewable energy alternatives like solar and wind. However, a full transition remains slow due to infrastructure limitations.
Industry Rivalry:
Low, as the industry is highly regulated and companies don’t need to compete aggressively to sell their products.
Key Challenges in the Oil and Gas Sector
The sector faces multiple challenges, impacting its stability and growth potential:
- Declining Production Levels
The absence of major new discoveries has led to falling production levels, making it difficult to sustain even current output. - Rising Exploration Costs
With fewer discoveries, companies must invest more in exploration, increasing operational expenses without guaranteed returns. - Circular Debt Crisis
This long-standing financial issue, which emerged around 2008-09, has worsened over the years. Rising receivables and delayed payments have strained liquidity, forcing major companies like OGDC and PPL to cut dividends and limit expansion.
Future Outlook for Pakistan’s Oil and Gas Industry
The future of Pakistan’s oil and gas sector depends on several key developments:
- Offshore Exploration in Abu Dhabi
Pakistani E&P companies have secured offshore leases in Abu Dhabi, an oil-rich region. Success in these projects could provide a much-needed boost to domestic production and revenues. - Resolution of the Circular Debt Crisis
Efforts to increase gas prices to improve cash flow for E&P companies have been made, but more policy interventions are required to resolve liquidity issues and encourage investment. - Expansion of LNG Imports and Renewable Energy
With local production declining, increasing LNG imports and investing in renewables could help bridge the energy gap and reduce reliance on crude oil imports.
Conclusion
Pakistan’s oil and gas sector is at a crossroads. While declining production, rising costs, and financial constraints present significant challenges, opportunities exist through offshore exploration, policy reforms, and diversification into alternative energy sources. Addressing these issues will be critical to ensuring the country’s long-term energy security and economic stability.
