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.

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Overview
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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
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.

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Sector Organization and Privatization
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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

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hopes to reap significant revenues from these privatizations over
the next several years.

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Exploration and Production
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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.

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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.

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Downstream
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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.

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Energy Corridor
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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

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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.

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Comment
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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