THE fall of over 60pc in international oil prices since June 2014 may force oil exploration companies to scale back their operations this year, which should depress their bank credit demand.

Sources in an exploration company told Dawn that the company had decided to drill only 31 exploratory oil wells this year, against over 50 last year. This suggests how the declining oil prices — hovering around $47 per barrel now against $115 a barrel in June 2014 — affect oil exploration companies. This is why bankers fear that credit demand from these companies might remain subdued this year.

While oil exploration firms have just started slowing their exploration activities, some of them must have begun containing their non-core expenses a few months earlier in view of decelerating oil prices.

That is perhaps why banks’ net lending to oil and gas extraction companies during July-December 2014 fell below Rs1bn from about Rs2bn in July-December 2013, according to latest SBP statistics.

Meanwhile, the free fall in oil prices has, for the time being, lowered the operational cost of electricity producing companies and reduced their working capital requirements.

This is reflected in the decline in banks’ net lending to electricity, gas and water sector to just Rs4.4bn during July-December 2014, from Rs31.5bn in July-December 2013. Bankers link it largely to lower credit intake by private power producers.

However, borrowing by the petroleum refining and coke producing sectors went up to Rs14bn from Rs12bn during the period under review. This happened as some refineries continued to receive installments of their long-term project financing from banks.

The free fall in oil prices has, for the time being, lowered the operational cost of electricity producing companies and reduced their working capital requirements

Besides, till the second half of last year, local crude production had remained strong due to aggressive oil exploration activity in 2013 and in the first half of 2014, and refineries had more processing jobs at hand, industry sources say.

However, bankers say as the power sector circular debt keeps expanding, both oil exploration and marketing companies may still seek bank funds. These borrowings may rise further if the debt crisis remains unresolved.

How the circular debt is affecting the domestic oil supply chain is evident from the fact that Pakistan State Oil’s inability to maintain decent oil reserves was owing to its weak financials. This, at one stage, reportedly led PSO to defer payments of oil import bills.

PSO officials claim that the issue has been sorted out and their relationship with banks are intact. And after Prime Minister Nawaz Sharif’s directive to keep at least two months’ worth of oil reserves, imports of crude and refined petroleum products are sure to increase, meaning regular banking business for the financing of import LCs, they add.

Bankers say as the energy sector steps up its recovery drive, the financial health of oil marketing companies (OMCs) and electricity and gas distribution firms should improve. This means that their working capital requirements may remain subdued, or see little growth. The problem is with OMCs that would need huge bank funds to clear up debts of petroleum refineries even if they manage to recover part of their stuck-up outstanding bills with electricity companies.

Bankers guesstimate at least a $1bn drop in the oil import bill in FY15 due to six-year low oil prices. This, they say, would translate into lower bank earnings on LC margins, but that should be more than compensated by the increase in overall imports. In the first half of FY15, the country’s total import bill surged by about 11.7pc to $24.2bn.

Bankers also talk about several indirect consequences of the flattening of oil prices on the banking business. For example, automobile sales have been growing and are expected to rise further. This, in turn, would keep fuelling car financing. Declining inflation and falling interest rates coming in the wake of the oil price plunge are also expected to keep the demand for consumer credit high.

On top of it all, reduced local oil prices have led to higher profitability for the transport sector, as transporters have not fully passed on this benefit to commuters and goods’ movers. However, the transport sector continues to get enough bank credit, presumably for investment in capacity-building, given that inland trade has been growing, bankers say.

The SBP doesn’t report data on lending to the transport sector alone. But a Rs10bn increase in net bank loans to the transport, storage and communication sector during the first half of this fiscal — against a nominal Rs1.2bn rise in the year-ago period — lends credence to bankers’ view.

Regardless of some variations in sectoral disbursements, banks’ credit for the private sector has so far remained low. Between July 1, 2014 and January 9, fresh lending to the private sector totalled Rs153.6bn, against Rs234.6bn in the same period of the prior year.

Published in Dawn, Economic & Business, January 26th , 2015

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