Wednesday July 24, 2024

E&P firms scale back drillingby 50pc amid cash flow crisis

By Khalid Mustafa
May 19, 2023

ISLAMABAD: Local oil and gas exploration (E&P) companies have scaled back their drilling activities by 50 percent due to a cash flow crisis resulting from a halt in outstanding payments from Sui gas companies, totaling Rs1,244 billion ($4.4 billion).

The reduced drilling activities to hit the gas supply chain in the country. Non-payment of the huge outstanding amount has virtually made E&P companies unable to meet their contractual obligations like payment to contractors for rig rentals/services, payment of cash call to operators, royalty/ taxes and other overheads, according to a letter of PPEPCA (Pakistan Petroleum Exploration and Production Companies Association) written on May 05, 2023 to the Secretary Petroleum Division.

The cash flow crisis of upstream companies (OGDCL, PPL, and GHPL) is evident from the curtailment of the exploration and development drilling activities, which has been mentioned in the PPIS (Pakistan Petroleum Information Service) report of March 2023, against 65 planned wells only 32 wells were drilled which shows 50 percent drop in the drilling activities.

If the cessation of the payments from Sui gas companies continues, a collapse of the country’s indigenous gas exploration and production sector is not far away.

The local E&P companies held meetings with Petroleum Division top officials on April 07, April 10 and April 12 and informed them about the unprecedented default of Sui gas companies.

The exploration and production industry is producing 3.205 bcfd (billion cubic feet per day) system gas that comprises over 30 percent of the primary energy consumption of the country.

The E&P companies operating are paid a fraction of the cost of imported gas (LNG) and out of their proceeds a major share of it is paid to the government treasury in the form of taxes and royalties and in addition, industry re-invests a significant portion back into the country.

The receivables of the PPEPCA member companies as of March 31, 2023, have ballooned to Rs1244 billion ($4.4 billion), causing an acute cash flow situation for E&P companies.

The E&P companies stressed that under the GSAs (gas sales agreements), the payment should be made within thirty days from receipt of invoices by the buyer. Accordingly, outstanding invoices should not be more than Rs75 billion ($ 263 million).

However, the sui companies have grossly violated the terms of GSAs. The letter mentions that due to the rapid deterioration of the liquidity position of sui companies over the years, the sui companies have been gradually reducing payments to E&P companies. Payment has become negligible during 2023 (Jan to March) where payment of 7-15 percent of the outstanding invoices was made.

E&P companies are required to make payments of 18 percent sales tax and 12.5 percent royalty and advance income tax. The payment made by the sui companies did not even cover payment of these government taxes and royalties due to which E&P companies are struggling to manage funds for operating the fields and hardly any funds are available for meeting exploration, development and other expenditure, according to the letter.

“The payment of controlled E&P companies (OGDCL, PPL, GHPL) are suffering payment delays of 25-30 months whereas these companies are the backbone of the country’s E&P business which are delivering over 60 percent of the country’s gas supplies. And if the status quo continues, then the local gas supply chain breakdown is not far away,” the letter warned.