Pakistan is a significant energy consumer and an important country in the security of South Asia, especially in light of its nuclear tests in 1998. Opportunities exist for foreign direct investment in Pakistan's energy sector, though some foreign investors have encountered problems in recent years.
Note: information contained in this report is the best available as of February 2000 and can change.
Recent economic developments in Pakistan have been dominated by the country's decision to undertake a series of nuclear weapons tests in late May 1998, and the military coup which brought General Pervaiz Musharraf to power in October 1999.
The nuclear tests followed an announcement by regional rival India of its own tests earlier in the month. As required by law, the United States imposed sanctions against Pakistan, in addition to those which had already been in effect since 1990 mandated by the Pressler Amendment.
By far the most significant sanctions were the suspension of U.S. government credits and guarantees (such as Eximbank loans and OPIC risk insurance) and U.S. opposition to further loans from International Financial Institutions (IFI's).
Suspension of Japan's foreign aid program for Pakistan also had a sizable impact. Pakistan responded to these actions with a freeze on most foreign currency transactions.
In October 1998, after both India and Pakistan had declared moratoriums on nuclear testing, and had made commitments to eventually adhere to the Comprehensive Test Ban Treaty (CTBT), the U.S. Congress passed a bill providing the President the authority to waive some of the sanctions measures for a period of one year.
In November 1998, the most significant sanctions dealing with OPIC and Eximbank activities, as well as mandatory U.S. opposition to further IFI loans to Pakistan, were suspended.
The October 1999 military coup has had a significant impact on Pakistan's economy, calling into doubt further lending from IFI's. Given Pakistan's already weak position in terms of foreign exchange reserves, this has led to serious concern about the country's future solvency. Pakistan's real gross domestic product (GDP) growth rate is projected to fall to 1.8 percent in 2000, from a high of 4.7 percent in 1998.
Inflation is projected to rise to 15.6 percent in 2000. Pakistan's external debt is equal to more than half of its annual GDP, and its debt payments due each year exceed its receipts from exports.
Population growth is currently running at 2.8 percent per year. The government also suffers from a relatively ineffective system for tax collection.
While formal legal protections for foreign investment in Pakistan generally are good, inadequate infrastructure, a poorly educated workforce, sectarian and ethnic violence, and a slow-moving judicial system have proven to be obstacles to attracting foreign investment.
The government's recent investigations into the affairs of Pakistan's Independent Power Producers (IPP's), several of which have partial foreign ownership, and the forced changes to their rate agreements with the state owned power company, have been a significant blow to the confidence of foreign investors.
Pakistan produced 59,000 barrels per day (bbl/d) of oil in 1998, and consumed 350,000 bbl/d, requiring net oil imports of about 290,000 bbl/d. While there is no prospect for Pakistan to reach self sufficiency in oil, the government has encouraged private (including foreign) firms to develop domestic production capacity.
Pakistani domestic production centers on the Potwar Plateau in Punjab and lower Sindh province. Most of the foreign firms active in Pakistan in the oil exploration and production sector are small independent firms.
The two most significant foreign oil firms in Pakistan are Atlantic Richfield (which acquired Union Texas Petroleum in 1998) and British independent Lasmo Oil.
State owned Oil and Gas Development Corporation (OGDC) also is a major player. Malaysia's Petronas has acquired a stake in an exploration block in Sindh province, in cooperation with Lasmo Oil.
Recent exploration activity has yielded several minor new discoveries. The most ambitious exploration contemplated in the near term is TotalFina's plan to drill in a block offshore from Baluchistan province in the southwest.
Pakistan also awarded five onshore blocks to American independent Orient Petroleum, which intends to invest approximately $70 million in seismic surveys and exploratory drilling over an initial period of three years.
Pakistan's net oil imports are projected to rise substantially in coming years as demand growth, much of it associated with new oil-fired power plants, outpaces increases in production.
Demand for refined petroleum products also greatly exceeds domestic refining capacity, so the majority of current imports are refined products rather than crude oil. Pakistan's consumption of refined petroleum products is nearly two and a half times the country's domestic refining capacity.
One major refinery is currently under construction in Pakistan, the "Pak-Arab" refinery planned in Punjab, a joint venture between the Pakistani and Abu Dhabi governments. Capacity at "Pak-Arab" will be 100,000 bbl/d. Construction is underway, and the facility is expected to be completed in late 2000.
Another major planned project is the "Iran-Pak" refinery, which would have a capacity of 130,000 bbl/d. The refinery would be located near the border with Iran in Baluchistan and would be a 50:50 partnership between Pakistan's Petroleum Refining and Petrochemical Corporation (PERAC) and the National Iranian Oil Company (NIOC).
Oil processed at the Iran-Pak refinery would come almost exclusively by sea from Iran, and would be unloaded at a terminal to be built especially for the refinery.
The project has not reached financial closure, and negotiations have been stalled in recent months. A smaller 30,000 bbl/d project planned for Badin was cancelled in 1999 due to inability to reach financial close.
In the fuel and lubricant distribution sector, the government of Pakistan plans to privatize the Pakistan State Oil company, which holds a 76 percent market share in fuel distribution and has more than 3,000 outlets. Bids were solicited in October 1999 for a foreign firm to act as an advisor on the transaction.
As part of the privatization process, the government of Pakistan is setting up the Gas Regulatory Authority (GRA) and the Petroleum Regulatory Board (PRB), which will separate out the government functions from the state owned companies to be privatized. Pakistan's hopes to reap $14-$15 billion in revenue from these privatizations over the next several years.
Pakistan has 21.6 trillion cubic feet (Tcf) of proven gas reserves, and currently produces 0.7 Tcf of natural gas per year, all of which is consumed domestically.
Natural gas producers include Pakistani state owned companies Pakistan Petroleum Ltd. (PPL) and Oil and Gas Development Corporation (OGDC), as well as Atlantic Richfield, Lasmo Oil, OMV, and BHP.
The largest currently productive fields are Sui, with 650 million cubic feet per day (Mmcfd), Adhi and Kandkhot (120 Mmcfd), Mari, and Kandanwari.
Pakistan's demand for natural gas is expected to rise substantially in the next few years, with an increase of roughly 50 percent by 2006, according to Pakistan's oil and gas ministry.
Pakistan also plans to make gas the "fuel of choice" for future electric power generation projects. This will necessitate a sharp rise in production of natural gas, and also has generated interest in Pakistan in pipelines to facilitate imports from neighboring countries.
One possibility is that Pakistan could eventually be linked into the Dolphin Project, a scheme to supply gas from Qatar's North Dome gas-field to the United Arab Emirates and Oman, via a sub-sea pipeline from Oman.
A second possible gas pipeline would link gas-rich Turkmenistan with Dalautabad in central Pakistan via Afghanistan, with an oil pipeline sharing the right of way through Afghanistan and terminating at Karachi.
Unocal had been the main foreign backer of the plan until August 1998, when it withdrew from the project after the U.S. strikes against terrorist training camps associated with Osama bin Laden in Afghanistan.
Since then, the governments of Pakistan and Turkmenistan have been holding talks with the Afghan Taliban authorities about continuing the project without Unocal, but it appears unlikely that the project will be implemented in the near future.
While interest has focused on imports, much of Pakistan's increased gas demand will be satisfied by increased domestic production. Austrian OMV's 1998 discovery at Sawan is expected to produce 450 Mmcfd by 2001.
Lasmo reported a new find in March 1999 in western Sindh province which is expected to produce 20 Mmcfd. Hardy Oil (UK) also reported a new discovery last year in the Middle Indus region of Sindh which tested at an initial 58 Mmcfd.
Premier Oil has begun exploration in the Dadhar block in Baluchistan. Recent offshore exploration concessions have also been granted to Lasmo, Shell, OMV, and others.
Some independent observers of the Pakistani gas market believe that increases in domestic gas production, coupled with a slower growth in demand than projected by the Pakistani government, will render the gas pipeline projects economically inviable. In addition, Pakistan's weak financial position will make it difficult to secure financing for such ambitious projects.
Source: United States Energy Information Administration
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