Financial crunch: K-P refuses to acquire allocated stake in oil, gas firms

Offers to take control of 1-2% working interest instead of earmarked 2.5%.

ISLAMABAD:

The federal government and Khyber-Pakhtunkhwa (K-P) have failed to find common ground over the latter’s stake in public sector oil and gas companies engaged in hydrocarbon exploration in the province due to changes in resource-sharing formula after the 18th amendment to the constitution.

Though the Centre suggests that K-P should take control of 2.5% share in oil and gas companies, the province has refused to make a commercial offer for the allocated shareholding because of financial constraints, sources say.

K-P intends to make the offer for 1-2% non-operating working interest in producing assets of Oil and Gas Development Company (OGDC) and Pakistan Petroleum Limited (PPL) in the province. Under the new petroleum policy, K-P is eligible to acquire 2.5% shareholding.

According to the sources, state-owned oil and gas exploration companies like OGDC and PPL have termed reaching a deal according to the desire of K-P a highly risky venture due to lack of experience and resources.

K-P OGDC, a company established after the 18th amendment that gives 50% share to provinces in oil and gas resources, has proposed that it will assist in seismic and drilling work to fast-track OGDC’s activities.

“Offering services will mean acquiring equipment, technology and creating an organisation of highly skilled people which are scarce,” the companies commented. “This appears to be a highly risky venture since K-P OGDC has no operational experience and technology to compete with established service contractors.”

Assuming a viable business case existed, the companies said, they would have to qualify and compete technically and commercially on a level playing field with well-established contractors.

According to an official, OGDC and PPL have made investments in different blocks to build up the value of their portfolios. They have established such policies internationally that their asset value is not eroded such as with reputable foreign exploration companies which bring foreign direct investment into the country.

Moreover, the official said sale of producing assets at a point when the federal government was preparing to divest its holdings through a secondary public offering and global depository receipts or to a strategic buyer, to a provincial government entity would be inappropriate.

“For fast-track learning, K-P OGDC may acquire 2.5% working interest on full participation basis as per Petroleum Policy 2012 in the new PCAs (petroleum concession agreements) being executed and go through complete exploration and production learning cycle,” the official added.

Basin studies conducted by OGDC are for commercial sale and studies of reservoirs are not needed for the purpose of setting up a refinery or a power project. Gas and liquid projections for the economic life of the field could be used for this planning, he said.

Published in The Express Tribune, April 2^nd, 2014.

Like Business on Facebook, follow @TribuneBiz on Twitter to stay informed and join in the conversation.