Lt. Gen (retd) Ishfaq Nadeem Ahmad, MD MPCL, sits for a detailed discussion with GVS. He explains how a consortium of Pakistani gas and petroleum companies is bidding for blocks in Abu Dhabi, UAE, and how this may allow Pakistani companies to go global. He also explains the challenges faced by the country’s oil and gas exploration companies in both the brownfield projects and their quest to reap the benefits of greener sustainable energy in the form of solar and wind projects.
GVS: Recently, we have heard that three Pakistani companies led by PPL and including MPCL and OGDCL, are bidding for blocks in the UAE. What’s the significance of this initiative?
Gen Ishfaq: This initiative is of considerable significance because this is the first time that the three most prominent energy companies in Pakistan, the PPL, MPCL, and OGDC, are joining hands to achieve a shared goal. It’s a project worth about 350 to 400 million dollars, spread over several years.
The purpose is that we venture into a market that is outside Pakistan – regional market. The blocks in UAE that we are looking at are potentially those where discoveries have already been made by the UAE government and by ADNOC, which is a UAE entity.
But they have not brought in production. So, there are two kinds of rewards; definite discoveries exist, and there is potential for bringing those into production, and then there is additional potential for more to be explored and discovered.
GVS: So, are Pakistani companies making their own dollar investments into this production?
Gen Ishfaq: Yes, they would. Actually, four companies have joined hands. The fourth one is Government Holding Private Ltd (GHPL); we have 25% percent share each into the venture, and we will be sharing the costs and the revenues as well.
In about three years, the revenues will start flowing, that if we are successful in the bidding, and if that block is allocated to us and if things work out well, there will be revenues.
GVS: You mean, If the block is allocated to you, then the production is a sure shot in the sense that it is guaranteed that there will be production?
Gen Ishfaq: There is. I mean, there is a lot of potential, almost close to a hundred million barrels of oil or equivalent is there. And a couple of discoveries have already been made, but they have not been brought to production.
So, we have to look at that possibility as well as the upside potential of it where you carry out the seismic survey and then look for other prospects as well within the same block.
GVS: But you said that the seismic surveys have already been done, what about that?
Gen Ishfaq: Yes! Certain seismic surveys have already been done. But the UAE government has now decided to carry out what is called the “carpet seismic survey” of the entire Abu Dhabi. We are talking about, particularly Abu Dhabi. Not the entire UAE. So, ADNOC, the Abu Dhabi National Oil Company, is the company which is actually bidding out these blocks.
GVS: But why are they bidding out when they, in the UAE, have such significant experience in terms of production and exploration?
Gen Ishfaq: This is not something new. They have previously done that as well. They want to give it to companies that have a lot of potential. They are more interested now in gas rather than oil because they feel that there is a higher requirement of gas in the country and Abu Dhabi itself.
The blocks in UAE that we are looking at are potentially those where discoveries have already been made by the UAE government and by ADNOC, which is a UAE entity. But they have not brought in production. So, there are two kinds of rewards; definite discoveries exist, and there is potential for bringing those into production, and then there is additional potential for more to be explored and discovered.
For this project, they wanted companies that have vast experience in the gas sector, and the Pakistani companies have considerable expertise in the gas sector. So, we have a fair chance, depending upon how the bidding goes, that we may be able to get this block because we are looking at the companies that have more experience with the production of gas.
GVS: So, when will we find out if you are successful in the bidding?
Gen Ishfaq: It will take some time. December 31st, 2019, was the last date of the bidding. It was a complicated process because of the shortage of time, and we are thankful to the government that they have been fully supportive throughout the process.
PPL has led it efficiently and effectively. As we speak, the ECC (Economic Coordination Committee) meeting is going on, which will give the approvals for the amount and the utilization of the dollar amount over the next nine to 10 years.
GVS: So, if you’re successful in the bidding, will it then lead to a PSA; will there be a production sharing agreement?
Gen Ishfaq: Yes, there will be a PSA. As per the policy of UAE, they will become 60 percent partners, the economics that have worked out with all these companies is based on the assumption that Abu Dhabi and ADNOC may become 60% partner and we will get 40% percent of what is brought into production. But there is so much potential there that even with 40 percent, it would generate quite a bit of revenue.
GVS: Will this be a production sharing agreement in terms of oil only or also in terms of gas?
Gen Ishfaq: Oil and gas, both. But we will not be transporting gas back into Pakistan. But there are certain things which will evolve as we go along, depending upon how the bidding goes.
GVS: So, will this help in terms of increasing Pakistan’s oil production, if you have a production sharing agreement?
Gen Ishfaq: Pakistan would be helped in terms of the revenue that gets generated, and the dollars would begin to come into the country. That would be the best; it would become sustainable. And if we are successful here, that would set a good precedent for us to undertake such projects in Abu Dhabi and elsewhere in the world.
GVS: Is there any scope for Pakistani consortium and companies to become like PETRONAS?
Gen Ishfaq: Yes, there is. The basics are there. The potential is there. But we have to capitalize on that potential. And there are quite a few things which have to happen for us to be able to get it.
GVS: Coming back to Pakistan’s domestic scene. Pakistan is in a unique situation, an unfortunate situation that it imports 80% of its energy resources in terms of gas, LNG, and petroleum. In contrast, in most countries, it’s less than 50 percent. India has about 48%. What can be done to reduce Pakistan’s reliance on imported energy?
Gen Ishfaq: Yes, we spend almost $14 to 15 billion a year on these imports. The local oil and gas industry has to be encouraged in the sense that when the oil or gas is produced, we should be able to sell that oil and gas in the market.
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The gas that we produce is under five dollars per MMBTU cost. The LNG cost is more than this. And therefore, obviously, we should get a preference if you want the local industry to progress; also, it’s in the national interest. And about the energy security of the country, it is essential that we maximize our domestic production.
GVS: What kind of change in government policy can help?
Gen Ishfaq: Certain changes have been approved recently in the petroleum policy. Just last week, in the CCI meeting, they had been approved in which we had suggested that the organization which is responsible for all the oil and gas companies should be represented. It’s called PEPCA. I am the chairman of that committee for one year. And we had proposed that a separate zone should be created for difficult areas.
There are currently three zones, and depending upon the potential geology and the difficulty, each zone has a different price that the government has laid down for the production that you achieve from there. We had suggested to create a super zone. That should be for difficult areas in FATA and some areas of Baluchistan and KPK.
Those should be the areas where the government should be able to give us more significant incentives. The government has now agreed to do that in the last CCI meeting.
The government has now stated that the companies that have government shareholdings should be eligible to participate or work with foreign state-controlled companies that acquire blocks on the government-to-government basis.
These are the blocks that are not put on bidding. And if an interested foreign company says that this is the block that they want, then they will now be able to work – in addition to OGDC and PPL – with other Pakistani companies that have government shareholdings. So that way, it opens up the field, and there will be more foreign companies coming in.
GVS: Foreign companies are there, but they are not significant investments. Despite the 2012 policy, which is appreciated a lot but not many major companies have actually come in to invest?
Gen Ishfaq: They are not because we look at foreign companies from Pakistan’s perspective alone. They look at the international scenario, and their decisions are based on that, and therefore, they have to see what they would be able to achieve in Pakistan.
Additionally, when they look at Pakistan, they also look at the region and so on. I agree some companies have left over the last few years, but others are interested here.
GVS: So, which foreign companies have left and why?
Gen Ishfaq: There were some foreign companies in Pakistan for the last 10 years, but some have left. For example, OMV left. There’s a company called Tullow; it’s an Irish-based company that operates out of London.
They sold their assets and left. But that was primarily driven by the oil price crash a few years back. They were actually sort of trying to hedge their bets, and they wanted to wind up their operations.
GVS: How significant and vital foreign investments and companies are in the oil and gas sector? How will they help?
Gen Ishfaq: We feel that they are essential in the sense that they bring their expertise. And we are now looking not just at conventional gas, but we are also looking at shale resources.
We, the Pakistani companies, do not have any experience or expertise in this area. So, therefore, we are interested in the foreign companies to come and join hands with us to explore not just the conventional oil and gas but also the shale.
GVS: But many reports indicate that Pakistan’s oil and gas sites have matured in the sense that there’s not much potential left, like look at Sui in Baluchistan and Southern Sindh? Do you think we have more potential that has not been explored in Baluchistan, FATA, and in other areas?
Gen Ishfaq: There is. There is potential, but we have to keep in mind that for any oil and gas company to work successfully, it has to achieve a good, what we call RRR, Reserve Replacement Ratio.
So, if any company is producing a hundred units per year, they have to discover another 100 at least to be able to survive. Otherwise, sooner or later, you will run aground. The seismic surveys are the ones that actually slow us down most of the time.
Gen Ishfaq: Because there are less number of seismic crews. They have to carry out surveys that take their own good time.
GVS: It’s a human resource issue?
Gen Ishfaq: Yes, it’s a human resource issue, but it’s also about the difficulties they face in some areas. Security was another concern. The security situation has, in recent years, substantially improved in Baluchistan and FATA, and we have taken the lead – Mari has. (means MPCL). Several areas were under what you call “force majeure” conditions for the last 10 or 15 years.
We have taken it upon ourselves on the direction of the government and the military that we undertake projects in areas where previously there was militancy. We are working in the Balochistan block because the security situation has improved.
GVS: If the security is settled, then why companies other than MPCL are not barging into Balochistan and FATA?
Gen Ishfaq: They want to come in. Different companies want to work with Mari Petroleum. Based on our credentials, some Russian companies want to come and collaborate in the seismic surveys while some other Russian companies want to come in and join us for exploration. There are Chinese & Polish companies and a Kuwaiti company willing to work there.
Pakistan would be helped in terms of the revenue that gets generated, and the dollars would begin to come into the country. That would be the best; it would become sustainable. And if we are successful here, that would set a good precedent for us to undertake such projects in Abu Dhabi and elsewhere in the world.
So many companies want to come and work here, but they want good Pakistani partners. And they are looking for Pakistani partners, who are efficient and whose cost of production and operating is less.
It is a new market for these entrants, and they want a reliable Pakistani partner so that they can take some baby steps initially and after that to build on that.
GVS: So apart from the security and law & order situation, what are the other challenges for the oil and gas exploration in these areas in Pakistan?
Gen Ishfaq: There is the security cost. Although the security situation has improved, it is still one of the biggest challenges. We have not been able to bring the security costs down as yet.
The military basically looks after the security cost, and they are constantly interacting with us to bring the security costs down.
GVS: What about human resource and finance expertise?
Gen Ishfaq: Obviously, you need the best human resource. In our case, we have opened up the company to even foreign human resources, and we are looking at all kinds of options; employees coming in from the Middle East, Turkey, and elsewhere. The selection is based on merit because, as long as we have excellent resources, we can deliver results.
GVS: Certain things on record look pretty impressive for MPCL, for instance, MPCL’s success ratio in terms of the exploration of the wells is almost 70 percent, and its operational cost is only 10 percent of its gross revenue of sales. How is MPCL achieving all this?
Gen Ishfaq: Basically, what we do about the success ratio is that we are cautious before we decide to go in for exploration. Our seismic crews are incredibly efficient, and the equipment that we have is the best in Pakistan.
It is French equipment that we have acquired a few years back. We have recently added a few more things, and that is why the results of our seismic surveys are outstanding.
Additionally, we carry out processing at multiple levels. We carry out in-house processing. We have a facility here, but we get a second opinion as well.
For processing, we sometimes take advice from Abu Dhabi or China. Only after having adequate processing done by multiple sources do we go ahead and decide that this is where we want to drill.
Previously, we did not have a drilling department; we created a drilling department to be sure that we can drill the well in minimum time without any difficulties. Every passing day, there’s a cost that has to be borne by the company, so if we reduce the number of drilling days, we can save on cost. So that is what we try to do.
GVS: What is MPCL’s achievement so far? And what would be MPCL looking for in 2020?
Gen Ishfaq: In the previous four to five years, we have increased our profits substantially. We have grown by about 331 percent. We started with a profit a few years back.
The profits then after-tax were around Rs.6 billion on the stock market, where we are a listed company. Last June, we closed at Rs.24.3 billion. This year we are targeting Rs.40 billion. We may not be able to get the target, but we are trying.
GVS: What is the vision for the next five years?
Gen Ishfaq: First of all, we need to expand the core business by going abroad. We have recently acquired a block in Iraq. Percentage-wise, it was a PPL-owned block, and we have become 22% partners with PPL (Pakistan Petroleum Ltd) in that.
That well has already been completed. It is under testing, and in a few weeks, we will know the results of that block. We are hoping for good news there.
We are also bidding in Abu Dhabi, as explained earlier. We are looking at some other projects in Yemen, Nigeria, and Central Asian republics.
What we are trying to do is that in addition to exploration within Pakistan, we are looking at possibilities outside Pakistan to be able to generate revenue and bring in foreign currency back into the country.
GVS: So, becoming international is one of the objective or part of the vision for the next five years?
Gen Ishfaq: One is that. The other is to diversify into midstream & downstream and into sustainable energy and greener energy. Three-four years ago, we asked ourselves the question: Is the core business at risk?
We wanted to be sure that this oil and gas business would last. And having carried out in-house studies and third-party analysis, we have concluded that the core business is not at risk for the next 10 to 15 years. So, therefore, we still want to grow in the core business.
GVS: And the core business is oil and gas?
Gen Ishfaq: Oil and gas exploration upstream but along that we want to go midstream, which is the pipeline business. And downstream business as well. Plus, we want to go into greener energy; solar and wind, and some other areas.
GVS: Exactly. This is where I wanted to come because when you look at these surveys, Pakistan probably does not have many new sites where we can find oil and gas. That means we have to, all these companies, like MPCL, will have to get into shale, solar and wind. What is the progress in these areas so far?
Gen Ishfaq: We have looked at various projects concerning solar and wind. We are close to closing a deal in a 50-megawatt solar project. We are also looking at other solar & greenfield projects. It was a brownfield project that I was talking about, and we are also interested in getting into the LNG & CNG business as well.
Our challenge, the most significant challenge of any oil and gas company, in addition to exploring, is that the allocation that the government makes for a customer is greater than what that customer absorbs.
The off-take by that customer is comparatively lesser than the allocated gas, which means that if there’s a customer which is supposed to take a hundred units of gas per day, they are taking 90 units or 80 units.
It means the company is losing 20 units per day per customer that it can’t give to anyone else because it is allocated to customer X. All this amounts to about three to five billion rupees, which we’re absorbing as loss because the customer is not buying it.
To address this issue, what we do is that we look for swing customers – the customer whom we are not bound to give a fixed amount of gas per day. We give them whatever is not utilized by the customer X.
He is happy if we give him 5, 10, or 20 units per day. We are close to finishing our deal in that context, which will substantially increase the revenues for Mari.
GVS: As you mentioned that you’re looking into the wind and solar and shale. Shale is part of the oil and gas, but for wind and solar, you will have to set up separate expertise institutions within the company; have you started doing that?
Gen Ishfaq: We have started doing that. We have created a team which we call the “strategic team”, whose responsibility is to look at all the potential projects. We carried out a study, and we decided on the projects that we would acquire.
We have created a direction, a strategic direction, about the areas that we need to focus on over the next 20 years. So, what we are trying to do is to achieve 40 percent of our revenues from non-core business in about the next 8 to 10 years. One of the areas that we’re looking at is green energy: sustainable energy, solar, and wind.
GVS: Given the fact that this country has such ample space and so much sunlight, twelve months a year. It looks very much possible. So, what are the challenges that are stopping you and other Pakistani companies from reaping the benefits out of wind energy and solar energy? What stops you?
Gen Ishfaq: Well. Nothing stops us actually. What is happening now is that the government’s policy is in the offing, and the government is focused on renewables, and they are encouraging renewables. So, what we are looking at is that we have to decide if we want to go into brownfield projects or we want to go into greenfield projects.
What we are trying to do is to achieve 40 percent of our revenues from non-core business in about the next 8 to 10 years. One of the areas that we’re looking at is green energy: sustainable energy, solar, and wind.
With greenfield projects, obviously, the revenues would be more, but they would come in at a later stage because it would take its own time for the project to get established and start producing power.
Brownfield projects are the ones that are already running, and we want to become partners therein and begin generating revenues. So, we are looking at both options. We are closing our deal shortly about a brownfield project, and we are looking at some greenfield.
GVS: What is the timeline in which we will start to have significant energy from solar and wind in Pakistan?
Gen Ishfaq: I think it will be about 8 or 10 years before we begin to see significant energy from solar and wind.
GVS: What percentage of the energy mix are we looking at in the future?
Gen Ishfaq: Significant. The government is trying to achieve a significant ratio of that. I am not too sure about the ratios at this point; it would be premature for me because it depends on many things. It depends on the government policies, how the policies change, and if the policies are sustainable and so on and so forth.
And then how many oil and gas companies decide to do this. Internationally, most of the oil and gas companies, are moving on; in addition to their core oil and gas hydropower business, they’re going into greener pastures.
That is what we are also trying to do. We are trying to convert our fields to solar. We are also looking at the possibility of converting a major field in Pano Aqil in Sukkur.
GVS: Two more quick questions. The United States has benefited a lot from shale gas. Are we expecting to make progress? Is MPCL hoping to make progress?
Gen Ishfaq: We are. Basically, there was a study carried out some years ago, suggesting that about 105 trillion cubic feet of shale gas was available in Pakistan. The study indicated that oil was about 9 billion barrels. But our challenge is unlike North America, where this shale lies at shallow depths. Our shale is deeper and exists beyond 4000 meters.
And that’s the challenge. We need better technology & better expertise. That expertise is not available in-house. Also, as yet, there is no government policy on shale.
What the government had decided was that they gave a pilot project to OGDCL and PPL to drill a shale well and establish what’s the cost. Based on the results, the government wanted to bring in a policy laying down what would be the incentive for shale gas.
So that pilot project, I believe, is continuing, and after the results of the pilot project, probably the government would issue a policy. Meanwhile, we are looking at various foreign partners who have experience in shale gas.
We are trying to encourage them to join hands with us so that we can start. Initially, these companies will have to spend some money, and the returns may not be immediate.
Still, in the interest of the country and the long-term sustainability of the oil and gas energy market in Pakistan, we have to spend that money. So, there will be a cost involved which may not return for a longer duration of time.
GVS: What about your corporate social responsibility? MPCL appears to be interested in hockey.
Gen Ishfaq: Our CSR (Corporate Social Responsibility) is much broader than just hockey. We spend quite a bit to fulfill our CSR commitments. There is some obligatory responsibility which is laid down in the government policies. We do that, but we do much more than that.
There was a study carried out some years ago, suggesting that about 105 trillion cubic feet of shale gas was available in Pakistan. The study indicated that oil was about 9 billion barrels. But our challenge is unlike North America, where this shale lies at shallow depths. Our shale is deeper and exists beyond 4000 meter. And that’s the challenge. We need better technology & better expertise.
We are spending over Rs.300 million in a school in Quetta, which is a technical school. We have created a special children’s school in Daharki, Sindh, which will house about 300 to 400 children with special needs. The school is almost ready. It will be inaugurated in about a couple of weeks.
GVS: So, education too is an area of your CSR?
Gen Ishfaq: Of course, education is an area; health is an area. We set up health clinics all across the country wherever our fields are; sometimes, we send out mobile health facilities out to the villages. We are working in KPK and FATA; we’re hiring local people on daily wages to be part of our seismic crews.
We train them, and the results are outstanding, and the people are delighted; whenever we stop work, the maximum pressure comes from the local people who want us to restart work. Hockey, Yes! We decided about a few years back to create our own hockey team.
Mari (MPCL) has created a hockey team after carrying out trials all across the country. That team has reached the quarterfinals this year in the Junior National Championship, which has concluded. We are trying that the company should be able to achieve the results and lead the national team.
There is sufficient talent in Pakistan, but there are not enough grounds. Most of the children play on clay or grass, but eventually, they have to play on AstroTurf when they come to a particular level. There are not enough AstroTurf grounds in the country, and we thought that we needed to do a thing or two about that.
We looked at the possibility of setting one up here in the Pakistan Sports Complex, and then we decided to set one up initially in Ayub Park in Rawalpindi. It is almost ready and would be inaugurated in a week or two. We believe that this would be our contribution to Pakistan’s hockey; we are willing to do much more than what we have currently done.