PAKISTAN OIL RESOURCES: ENERGY CORRIDOR WANTED

UNCLAS SECTION 01 OF 03 ISLAMABAD 000921 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ENGY EFIN ECON EINV PREL PK SUBJECT: PAKISTAN OIL RESOURCES: ENERGY CORRIDOR WANTED ¶1. (SBU) SUMMARY. Pakistan's oil reserves of 353.4 million barrels are inadequate to meet the country's growing energy requirements. Pakistan depends on expensive imports of crude oil, furnace oil and diesel to meet its energy needs, costing the country over 30 percent of its export earnings. A proposed energy corridor with China could expand production at Gwadar port. END SUMMARY. ¶2. (U) This is the third in a series of cables on Pakistan's energy sector and provides background on oil resources in Pakistan. -------------- Overview -------------- ¶3. (U) As of June 2007, Pakistan has recoverable oil reserves of only 353.4 million barrels compared to original recoverable reserves of 883.47 million barrels, according to the Hydrocarbon Development Institute of Pakistan. Pakistan is a small oil producer; in comparison, Saudi Arabia has proven oil reserves of over 260 billion barrels. At the present rate of production (24.6 million barrels per year),this oil will deplete in 14 years unless new discoveries are made. The majority of oil production comes from proven reserves located in the southern half of the country, with the three largest oil-producing fields located in the Southern Indus Basin and additional fields in the Middle and Upper Indus Basins. Pakistan has not added new oil fields since the late 1980s. As a result, oil production has remained fairly flat, at around 60,000 barrels per day (bbl/d). During the Pakistan fiscal year ending June 2007, Pakistan produced 65,577 bbl/d, however, Pakistan has ambitious plans to increase its current output to 100,000 bbl/d by 2010. At this increased production rate, oil reserves will deplete in 10 years. ¶4. (U) Due to Pakistan's modest oil reserves, domestic production is also modest and the country is increasingly dependent on oil imports to satisfy domestic oil demand. As of November 2006, Pakistan had consumed approximately 350 thousand barrels of oil and various petroleum products, of which more than 80 percent were imported. The majority of oil imports come from the Middle East, principally from Saudi Arabia. Primary Energy Supplies by source ¶5. (U) At present, Pakistan meets about 75 percent of its total energy requirement from domestic sources. In the Pakistan fiscal year 2006-2007, approximately 48.5 percent of its energy needs were �00A;met by indigenous natural gas, 30 percent by domestic and imported oil, and 12.6 percent by hydro electricity. In addition, coal contributes 7.3 percent, nuclear electricity 0.9 percent, liquefied petroleum gas 0.5 percent and imported electricity 0.1 percent. The increasing gap between energy supply and demand remains a challenge for Pakistan, but also provides investment opportunities for local and international investors. -------------- Sector Organization and Privatization -------------- ¶6. (U) Pakistan's Ministry of Petroleum and Natural Resources regulates the country's oil sector. The Ministry grants oil concessions by open tender and by private negotiation. To encourage oil sector investment, the Ministry has offered various tax and royalty payment incentives to oil companies. Pakistan's three largest national oil companies (NOCs),include the Oil and Gas Development Corporation Limited (OGDCL),Pakistan Petroleum Limited (PPL) and Pakistan State Oil (PSO). All three operate under joint ventures and partnerships with various international oil companies (IOCs) and other domestic firms. Major IOCs operating in Pakistan include BP (UK),Eni (Italy),OMV (Austria),Orient Petroleum Inc.(Canada),Petronas (Malaysia),Chevron/ CalTex (USA) and Tullow (Ireland). ¶7. (U) In response to conditions laid down by lenders, such as the International Monetary Fund and the World Bank, Pakistan continues to strive for privatization of its state-owned companies. PPL owns the Sui fields in Balochistan, as well as exploration interests in 22 blocks, while PSO holds a majority share in the domestic diesel fuel market with more than 3,800 retail outlets. Pakistan plans to have a share issue from OGDCL for the equivalent of 15 percent of the NOCs capitalization. Five percent of the company was previously divested in November 2003 in an initial public offering. Pakistan ISLAMABAD 00000921 002 OF 003 hopes to reap significant revenues from these privatizations over the next several years. -------------- Exploration and Production -------------- ¶8. (U) British Petroleum (BP) is the largest oil producer in Pakistan, with production averaging approximately 30,000 bbl/d. BP operates 43 fields and more than 100 wells throughout the country. OGCDL is Pakistan's second-largest oil producer, with average production of 25,000 bbl/d. While there is no prospect for oil self-sufficiency, the GOP has encouraged private (including foreign) firms to develop domestic production capacity. In 2005, NOCs and IOCs drilled a total of 29 onshore development wells in Pakistan. BP led the development by drilling ten wells in its Lower Indus Basin acreage, while ODCGL drilled nine wells, with the majority being on its acreage in the Middle Indus Basin. PPL expanded its interests in 2005, by drilling offshore at the Pasni X2 shallow water field. It was the first time a Pakistani oil company had explored offshore. -------------- Licensing Rounds -------------- ¶9. (U) Historically, Pakistan has held few large licensing rounds, and instead, has conducted private negotiations for acreage between individual companies and the Ministry of Petroleum and Natural Resources. In February 2006, Pakistan opened a rare licensing round offering nine onshore and offshore blocks. From the blocks offered, the Pakistani government awarded OGDCL three exploration licenses in the southern Sindh and Baluchistan provinces. The licenses cover the Tegani, Thal and Than Beg Blocks and OGDCL has committed to conducting geological surveys and to drilling four exploration wells on the blocks. In June 2006, the government awarded POL an exploration license for the Kirthar Block in southern Pakistan. In July 2006, Pakistan awarded BP three blocks (U, V, and W) in the offshore Indus Delta region. -------------- Downstream -------------- ¶10. (U) Pakistan's net oil imports are projected to rise substantially in coming years as demand outpaces increases in production. Demand for refined petroleum products also exceeds domestic oil refining capacity; so nearly half of Pakistani oil imports are refined products. Pakistan's largest port is located in Karachi, which serves as the principle point of entry for oil imports. PSO leads Pakistan's fuel distribution market, with its main storage facilities located at Karachi's Port Qasim. -------------- Energy Corridor -------------- ¶11. (U) During President Musharraf's February 2006 visit to China, the GOP suggested establishing a trade and energy corridor, allowing Chinese access to Central Asian energy measures. The government is working on an ambitious plan to establish an 'oil city' with investment of USD 40 billion at Gwadar Port, potentially making it the biggest crude and refined oil storage base in the region, and largely funded by the Chinese government, with some Chinese private sector financing. In April 2006, Pakistan and China signed a bilateral memorandum of understanding for energy cooperation. ¶12. (U) Board of Investment (BOI) Director General, Muhammad Muslim, told ECONOffs that the GOP has allocated 12,500 acres of land in Gwadar to be leased at nominal rates to companies interested in setting up refineries or making investment in oil logistics and storage facilities. Muslim said that the BOI is developing a package of incentives that include a proposed zero custom duties on plant and equipment, a five year tax holiday and an increase in initial depreciation allowance from 50 percent to 100 percent. ¶13. (U) The "oil city" project would be completed in two phases. In phase-1, a "petrochemical city" will be set up with an initial investment of USD 12.5 billion, including a large refinery, and petrochemical, oil logistics and storage facilities. In the first three years, the refinery will be able to refine 214,315 bbl/d of ISLAMABAD 00000921 003 OF 003 oil annually. The capacity of this refinery will be increased up to 428,630 bbl/d in seven to nine years. The GOP expects the Chinese Petroleum Chamber to come up with USD 12.5 billion investment for the project. Under the second phase of the plan, the "oil city" refinery capacity will be enhanced to 1,285,890 bbl/d in fifteen years. ¶14. (U) In addition, China and Pakistan have optimistically agreed in principle to build a trans-Karakoram oil pipeline along the Karakoram Highway connecting the Middle East with the north-western China. If developed, the trans-Karakoram oil-gas pipeline will enable Caspian oil to reach the world oil market, particularly the rapidly growing Asian economies. -------------- Comment -------------- ¶15. (SBU) Pakistan is looking for opportunities to address its energy crisis and is keen to explore all options. While most of the energy cooperation plans seem overly optimistic, the GOP is resolved to explore all options, but must make the necessary regulatory changes to promote greater interest by foreign investors in Pakistan's energy sector. Pakistan now realizes that it can ensure its energy security only through regional cooperation. PATTERSON