Tight Gas Policy Approved

To overcome the prevailing energy crisis in the country, the Minister of Petroleum has approved the much-awaited ‘Tight Gas Policy (TGP)’.

The policy offers a price premium of 40-50% over the conventional wellhead gas prices in PP09 (Petroleum Policy 2009).  As per early estimates, country has Tight Gas (TG) reserves of approx. 40-50tcf (trillion cubic feet), separately from the recoverable balance reserves of 27tcf of the conventional gas.

On this count, we expect PPL (Pakistan Petroleum Ltd) and OGDC (Oil and Gas Development Co.) to be relatively well placed as compared to their peers. This is due to the fact that both have working interest in Sawan and Miano fields where the operator OMV has reported to have found traces of TG.

Estimated reserve of 40-50tcf

TG is a form of unconventional gas locked in extraordinarily impermeable, hard rock, making the underground formation extremely "tight." For this reason, TG requires more expensive unconventional drilling techniques and thus, requires higher incentives for E&P (exploration and production) companies to tap these reserves. 

Therefore, the recent promulgation of TGP, offering 40% premium over conventional gas prices as prescribed by PP09, has subdued a major hurdle in the development of TGR which are estimated to be around 40-50tcf in the basins stretching from lower Indus to Potwar region.

Furthermore, at current international oil prices level wellhead gas prices is estimated to be US$6.1-US$7.5 per mmbtu against PP09 levels of US$4.4-US$5.4 per mmbtu. Mover-over, per well CAPEX required is estimated to be US$19-20mn as compared to US$6-7mn for conventional drilling.

PPL & OGDC to benefit the most

The development will bode well for PPL on account of its working interest in OMV operated fields of Sawan and Miano, which has already reported discovery of TG. Furthermore, OGDC is also expected to benefit from the policy approval as it has 52% working interest in Miano field.  

However, we believe circular debt remains a major hurdle, which is refraining the companies to endeavor into high CAPEX exploration and development programs of TG. For this reason, we expect future Exploration & Development (E&D) activities to primarily focus on maximizing output from current fields rather than finding new hydrocarbon reserves.

Below Target E&D program in 10MFY11

During 10MFY11, OGDC is behind its current year target of 26 wells as the company has so far drilled 13 well during 10MFY11, while PPL has recently drilled its targeted 1 exploratory well target for the year. However, on account of firm oil prices along with augmented oil and gas production from existing fields, we maintain ‘Over-weight’ on the sector with ‘Buy’ on PPL and ‘Hold’ on OGDC,

Thanks T/L