KARACHI – The regulatory situation after the eighteenth amendment and increased security issues have emerged as key hurdles in drilling during 2011/12 (only 24 percent target delivery) and pose risks to exploration and field development projects. But the earnings upside of two to five percent from lower exploration write-offs in 2011 and a relative dry patch in exploration news flow will lessen the impact of the issues mentioned in the case of Pakistan Oilfields Limited (POL), Pakistan Petroleum Limited (PPL), Oil and Gas Development Company (OGDC) and their stock prices, which have corrected by between five and twenty four percent from their December/ January peak while earnings have grown on the back of strong oil prices.
The three-year volume Compound Annual Growth Rate (CAGR) of 15 percent, three percent and 11 percent for POL, PPL and OGDC, respectively analysis suggests that production growth faces nominal risk of delay as approvals for major projects are already lined up.
While likely delays in production on new finds will not disturb our earnings estimates as we have not incorporated the same, earnings upside, estimated at 10-13 percent for POL and between three and four percent for PPL from new finds, faces risk of delays, said Mohammad Fawad Khan at KASB Securities. A constitutional change in April 2010 made with the objective of ensuring provincial autonomy has left the role and ownership of natural resources between federal and provincial governments rather ambiguous. While discussion on the legal aspects is beyond the scope of this report, we highlight the best solution in the case of Exploration and Production (E&P) entails no change in regulatory framework, he asserted.
The worst case is one where the industry has to report to multiple regulators while facing the risk of transfer of regulatory authority and potential changes in agreed terms on existing exploration and drilling and production leases. As low E&P activity hurts all stakeholders, a political consensus between major stakeholders to provide clarity on the issue is likely over the medium term, he said. A case filed against a provincial government’s ownership claims on dormant fields and likely legal wrangling over the government’s efforts to temporarily raise tax levies to fund flood-related expenses will provide clarity on the future legal course and decision-making among political parties, in our view, he opined.
It is to be pertinent to mention that the overall security issue is localized and limited to specific areas and the spread of violence is unlikely. Interestingly, drilling and production in all affected areas remains on track. Drilling on two exploration wells in Tal and one each in Sui and Uch are currently underway. Production on Sui and Uch has been restored already.
