Gas Outlook Bearish Despite Sofiya Discovery


BMI View: OMV has provided further upside to Pakistan's beleaguered upstream oil and gas sector with a gas and condensate discovery on the Mehar block. Despite this positive development , Pakistan will continue to struggle with meeting its gas demand as pricing disputes hamper upstream development. This will add to the growing pressure on the c ountry's rising fiscal deficit and economic outlook.

Austria' s principal oil and gas company, OMV , announced it has discovered gas and condensate from a well drilled in the Mehar block , Pakistan . The Sofiya-2 well saw test flows of 4,500 barrels of oil equivalent per day (boe /d ), constituting of 0.5mn cubic metres per day (Mcm/d) of natural gas and 1, 55 0 barrels of condensate per day (b/d) .

The discovery at the Sofiya-2 well is of particular importance a s it only around 10km away from the Mehar gas plant that OMV is developing to process gas from the Mehar block. Production from the Mehar field is anticipated to begin from Q413, meaning the Sofiya-2 discovery, once appraised, could quickly be connected to existing infrastructure and provide upside to Pakistan's gas and liquids production forecast.

Greater Liquids Upside
Oil (RHS) And Gas (LHS) Production Including Mehar Discovery, 2008-2020

The latest discovery will however provide more upside for liquids production rather than gas due to the considerable condensate p roduction achieved at the well and small impact of the 0.5mcm of gas produced consideration Pakistan's total production of 62.5b n cubic meters (bcm) in 2012 . This is a positive for OMV which ha s been at loggerheads with the Pakistani government over gas pricing , but could see better profits from the liquids production . The pricing dispute relate s to the fact that the government pays OMV US$2.9 per million British thermal units (/mnBTU) for gas from the Tajjal field according to pricing structures outlined in petroleum policy established in 2001 . However, OMV believes prices should be subject to the deal it signed in 1997 which relates to policy formulated in 1994, which has seen exploration and production (E&P) companies receive up to US$12/mnBTU. New price incentives for E&P introduced in late 2012 outline prices capped at US$6.6/mnBTU for onshore E&P.

The impact of the pricing inconsistencies could hurt the production prospects for gas in Pakistan, which is seeing an increasingly tight supply and demand scenario. M eddling with price with one of the largest foreign investors in the Pakistani oil and gas sector could cause further difficulties for a country plagu ed by gas shortages . T he Iran-Pakistan (IP) pipeline enabling gas imports from Iran will alleviate some of the current shortfall by 2015 (see, 'IP Pipeline Likely Despite Financial Difficulties', Aug 08 ). However, Iran also made it clear that it was not ready to offer a favourable pricing structure for gas exported to Pakistan.

Growing Strain As Gas Demand Strengthens
Natural Gas Production And Consumption 2010-2020, bcm

Furthermore, Pakistan appears to be moving forward with liquefied natural gas (LNG) import projects to sure up gas supplies. Two fast-track projects, which will retrofit liquid petroleum gas (LPG) terminals to enable a combined regasification of around 7 bcm a year, could come online by late 2014 and 2016 respectively. Current LNG import prices to Japan are around US$15/mnBTU, and while Pakistan may negotiate better prices, the cost will likely be above the US$ 6.6 /mnBTU cap for onshore domestic developments.

Pakistan would therefore benefit from promoting production of its domestic resources to minimise the impact of the future gas import costs of the fiscal budget. According to our Country Risk team Pakistan's budget deficit is set to increase from negative US$15.2bn in 2012 to negative US$28.3bn in 2020, largely on the back of growing energy imports. Inconsistent pricing policy and limited incentives for foreign investment has reduced the attractiveness of investing in the country, hence the limited presence of major oil and gas companies in the country. We anticipate this situation will sustain and continue to impact the economic prospects of the country .

This article is tagged to:
Sector: Oil & Gas
Geography: Pakistan