Pakistan’s Oil and Gas Opportunity

(This article was published in Cotizalia on May 5th 2011)Today we will talk of Pakistan, a very rich country in natural resources, which contrast with its extremely poor current state. A report to which I had access estimated that with a maximum of $20 billion in investments the country would increase its oil production by nearly 2.5 times and natural gas could be exported for the first time, including a new pipeline and liquefaction plant near Karachi.

Today Pakistan is a disaster. Despite having a U.S. aid of $7.500 billion over a period of five years, and important natural resources, it still sees its potential unfulfilled due to its poor security and geopolitical contradictions.

Starting with geopolitics, part of the problem in Pakistan can be explained by the mixture between modernity, tradition and support for radicalism embodied in Dr. Abdul Qadeer Khan, almost a national hero, responsible for a nuclear proliferation program in the country, named by Time Magazine as the “Merchant of Menace”, creator of a black market accused of selling nuclear technology secrets to Iran, North Korea and Libya. If we add that several provinces, including the largest, Baluchistan, and the border with Afghanistan, rich in oil and gas, are controlled by radical armed groups completely independent and separate from Islamabad, the capital, we have the perfect recipe for geopolitical unrest.

As for its natural resources, Pakistan has 436 million barrels of oil and 840BCM of gas in proven reserves, yet more than a third of its 827,000 square kilometers of sedimentary areas are under-exploited. Thus, the country imports more oil than it produces, doesn’t export any gas and has been unable to attract sufficient investment to reduce the decline of oil production, which will likely fall 46% in 2020 according to internal estimates. Despite being the 49th country in proven reserves, it is well below number 60 in production. Less than 60,000 barrels per day, which could easily be doubled if the legislative and regulatory environment was safer, and as such currently the country only extends about 40 exploration licenses annually.

Taking a brief look at the oil companies present in Pakistan proves the caution of the large oil companies to invest in the country. The first thing that surprises is the minimal presence of the largest players of the sector. The country boasts that there are 17 international companies operating, but the most relevant, Petronas (Malaysia), OMV (Austria) or MOL (Hungary) are not exactly the top groups in operational efficiency, and the two Europeans mentioned can not even presume of having a robust financial position. On the other hand, in 2010 BP sold almost all its exploration and production assets in Pakistan to United Energy Group, a Chinese holding company, for $775 million.

China seems very well positioned to gain a strong foothold in the country, with good ties to the government, and a historical track-record of managing quietly the most difficult geopolitical environments (Sudan, Nigeria, Iraq).

For Pakistan to regain a strong position in the oil and gas market I believe we would need to see three fundamental conditions

a) The end of the conflict in Afghanistan , which would close the geopolitical axis Turkmenistan-Afghanistan-Pakistan, isolating the influence of Iran and make attractive a large-scale presence of big oil investments. This is especially important to implement the infrastructure (a pipeline of more than $2 billion investment) to carry gas from Afghanistan to Pakistan and connect to a liquefaction plant to allow liquefied gas exports from Afghanistan and Pakistan to either China or the U.S.

b) The establishment of a strong government that recovers the lost provinces, particularly Balochistan, and to adopt a sustainable and predictable legal framework.

c) The involvement of China and U.S. in Pakistan to develop the fields (onshore and offshore) is essential to bring oil export production to 120,000 barrels per day and gas production from 37BCM year, primarily for domestic consumption, to export up to 67 BCM.

Who would win? The main beneficiary if Pakistan would rise would be Schlumberger, the U.S. oil services company, with expertise and resources to develop the fields and local staff. But Pakistan, at least in the short term, is much more a risk than an opportunity.

Improving the economic situation of Pakistan with a current estimated GDP growth (+2% 2011) ridiculous for the area, is really complicated and depends on the future access to natural resources development, which is intrinsically linked to political normalization in a country with the nuclear bomb and that remains a hotbed of support for radicalism. An unequivocal commitment to eradicate the terrorist support may be the key that opens the door to growth. Being “Merchant of Menace” only brings poverty.

About Daniel Lacalle

Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Author of bestsellers "Life In The Financial Markets" and "The Energy World Is Flat" as well as "Escape From the Central Bank Trap". Daniel Lacalle (Madrid, 1967). PhD Economist and Fund Manager. Frequent collaborator with CNBC, Bloomberg, CNN, Hedgeye, Epoch Times, Mises Institute, BBN Times, Wall Street Journal, El Español, A3 Media and 13TV. Holds the CIIA (Certified International Investment Analyst) and masters in Economic Investigation and IESE.

8 thoughts on “Pakistan’s Oil and Gas Opportunity

  1. Thank you for the info. It sounds pretty user friendly. I guess I’ll pick one up for fun. thank u

    Thank you for your feedback. It really motivated me.

    Gas Salamander

  2. No doubt by radical armed groups completely independent and separate from Islamabad, the capital, we have the perfect recipe for geopolitical unrest but Pakistan belongs four province :- :- 1) Punjab (poor in oil , Gas & other resources )0%
    2)Sindh (Rich in oil , Gas & other resources )70%
    3)Khiabar pukhtunkhwa (poor in oil , Gas & other resources ) 05%
    4)Blouchistan (Rich in oil , Gas & other resources )25%
    Sindh is those province where peace full people are living here & here is fully peace full atmosphere for investment other three provinces under different unrest condition it is true

  3. Sustained law and order and minimal bureaucracy to hinder work, I think Pakistan has a bright future in minerals. Oil and gas has not been expolored in the vast areas of Balochistan, parts of southern Punjab, Parts of NWFP, where the Brit.s found the first oil field in 1908. With the fracking process abundance of hydrocarbons is a possibility in the Indus basin. Off shore there are good prospects too of finding not only oil but huge amounts of gas, as is the case in Oman and Iran. Two copper finds, Sandak and Reko Diq, huge coal deposit what else do you need to be on the fast track to progress. All needed is a stable government with honest people to set it in motion.

  4. @Lal Khan The biggest contributing province over all is Punjab and Sindh is actually only because of Karachi which is also in the control of violent political parties like the MQM.

    Province or territory
    (millions of USD)

    Punjab 94,930
    Sindh 45,799
    Khyber Pakhtunkhwa 13,323
    Balochistan 4,996
    FATA 2,498
    Islamabad 1,332

    The safest place to invest in Pakistan has to be Lahore,Islamabad or Rawalpindi and believe it or not Peshawar. The army should be deployed in Karachi to flush out all violent Party members and Terrorists. After this Karachi would become really strong economically. Sindh is stricken by poverty and our agriculture industry is in the heart of Punjab.
    Really good article. Punjab suffers from less amount of terrorism than Sindh as a whole. Radical parties reside in Sindh such as (mentioned before) the MQM. There is a need for a giant coalition of multinational companies to enter Pakistan to exploit a very high consumer spending. Pakistan right now in Asia has the highest spending consumers overtaking China (obviously per person)

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