PPEPCA’s letter to caretaker energy minister: Exploration, production firms facing cash flow crisis, may suspend activities

ISLAMABAD: The OGDCL, PPL and GHPL, country’s public sector exploration and production (E&P) entities, are facing an unprecedented cash flow crisis, owing to which they all have not only substantially reduced seismic activities but also put on hold by 50 percent their exploration and development activities.

The gas companies, Sui Southern and Sui Northern, have so far defaulted the OGDCL, PPL, and GHPL by not paying the huge amount of Rs1.361 trillion. If the payments are not made on an urgent basis, the public sector E&P companies may be forced to suspend production operations leading to the cessation of supply of gas and massive shortage, which the country would not be able to cover by importing highly expensive LNG due to shortage of foreign exchange and lukewarm response of international LNG suppliers.

So much so, the payments made by the Sui companies are not even sufficient to cover payment of 18 percent sales tax, 12.5 percent royalty, and income tax (at the rate of 50 percent and 40 percent). As a result, nothing is available to fund the operating, development, and exploration expenditures. Under such circumstances, the companies are forced to borrow funds at the exorbitant rate of 25-30 percent to run the gas production operations and have shelved most of the planned exploration and development drilling activities. All this has been stated by the Pakistan Petroleum Exploration and Production Companies (PPEPCA) in its last letter written on September 11, 2023, to caretaker Energy Minister Muhammad Ali.

It said: “Pakistan’s upstream oil and gas sector is the backbone of Pakistan’s economy, which is currently producing 3,260 (mmscfd) gas which comprises over 30 percent of the primary energy consumption of the country.

“Due to the unprecedented default of Sui companies in the payment of gas invoices of the upstream companies, our sector is suffering a severe cash flow crisis, due to which the companies have been forced to drastically cut exploration and development activities. During the fiscal year of 2022-23, half of planned drilling was deferred. There was a dismal response to the recent (June 2023) bid round of new exploration licenses. As of August 31, 2023, only 12 rigs are operational and there is substantial reduction in seismic activities.”

Earlier, the PPEPCA also wrote letters to the then finance minister Ishaq Dar and state minister Musadik Malik during the PDM government, informing that the OGDCL, PPL, and GHPL were facing an acute crisis owing to the default of the Sui gas companies.

However, in the letter to Muhammad Ali, the PPEPCA drew the attention of the minister that the outstanding receivables of PPEPCA member companies (OGDCL, PPL, GHPL) as of August 15, 2023, have now ballooned to Rs1.361 trillion ($4.4 billion), which has triggered the unprecedented cash flow situation, barring the exploration and production activities to a large extent.

More importantly, more than 12 months of USD invoices of foreign companies are outstanding, whereas the PKR invoices of over 28 months are due for payment. Many invoices of state-controlled companies, PPL, OGDCL and GHPL are outstanding for more than four years.

The Sui companies are not able to make payments to gas producers due to massive revenue shortfall which has occurred as the consumer gas prices were not revised adequately to cover the revenue requirements of Sui companies.

The letter says: “Through OGRA (Amendment) Act, 2022 on March 3, 2022, section 8(4) of the OGRA Ordinance 2002 was amended which states that if the federal government fails to advise the Authority within the time specified in the sub-section (3), the category-wise prescribed prices so determined by the Authority under sub-section (1) and (2), as the case may be, shall be notified by the Authority as the category-wise sale price. The OGRA has failed to discharge its statutory duty of timely revision of consumer prices to meet revenue requirements of its licensees, due to which the entire indigenous oil and gas exploration and production sector has been severely affected.”

In order to avert the crisis, the PPEPCA underscored the caretaker minister to ensure the provision of budgetary grant/ tariff differential subsidy (TDS) of at least Rs500 billion to Sui companies for partially adjusting accumulated revenue shortfall of Sui companies, which would eventually facilitate upstream companies in meeting the operating expenditure and carrying out planned exploration and development activities for sustaining/ enhancing indigenous gas production.

The PPEPCA also asked the minister to increase the consumer gas prices to meet the revenue requirements of Sui companies which have been increasing due to high international oil prices, massive currency depreciation, and other incidental factors. It also requested the minister to advise the SBP for the allocation of foreign exchange for making payments of foreign E&P companies in an equitable manner.