Circular debt takes its toll on oil and gas exploration


Omair Zeeshan June 11, 2010

KARACHI: The growing circular debt is taking its toll on exploratory drilling for oil and gas.

Drilling by exploration and production (E&P) companies was down by 26 per cent. Only 81 wells, including carry-over wells, were drilled in the first 11 months of the fiscal year 2010, as compared to 110 wells that reached bedrock or had standpipes set in them, during the same period last year.

Oil and Gas Development Company’s (OGDC) drilling activity has declined by 25 per cent as it bears more than 60 per cent of the circular debt, said Topline Securities’ analysts. OGDC, Pakistan’s largest oil and gas exploration company, drilled only 33 wells this year, compared with 44 last year.

The decline in OGDC’s drilling activity is due to their growing liquidity constraints, said Topline Securities’ analyst Farhan Mahmood.

This does not bode well for the long term profitability of these companies and it could hamper their ability to pay dividends, said the analyst.

Exploration, rather than development wells

E&P companies focused less on development wells this year. The percentage of development wells drilled this year was 55 per cent of the total 81 wells drilled so far compared with 70 per cent of the total 110 wells drilled in the same period last year. This includes wells carried over from last year as generally companies roll-over their drilling activities to next year due to work delays.

“If we exclude carry-over wells of last year, the industry drilled total 54 wells which is almost 50 per cent lower than the current target of 100 wells,” said Mahmood. He explained that exploration of existing reserves important as exploring new ones.

The industry did not meet the current year targets and has shown that the liquidity crunch has affected the country’s drilling activities.

OGDC not meeting current year target

OGDC probably will not be able to meet its current year targets as it is far short of the drilling target.

The company would need to drill 15 more wells in the remaining one month to achieve the target, which analysts believe is unrealistic in the time left. OGDC drilled only 18 wells in the 11 months of fiscal year 2010, 42 per cent lower than the target of 31.

Burdened by circular debt worth Rs65b

The major reason behind the decline in drilling activities is the sharp increase in OGDC’s receivables from gas utilities and oil refineries due to circular debt. The company’s debt has increased by 125 per cent. It is now owed Rs63 billion as of March 2010, compared with Rs28 billion due on June 30, 2009.

Analysts believe that the company would be reducing cash payout to meet its drilling target, which has been evident from this year’s payout which is around 40 per cent. “This is one of the lowest payouts ever recorded by the company,” said Mahmood.

Published in the Express Tribune, June 11th, 2010.

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