Pakistan’s sedimentary basins extend over 827,000 sq kms including six onshore and two offshore basins which to date remain quite underexplored owing to various reasons, including lack of resources and technology, uncompetitive fiscal regime and a confusing regulatory regime post-18th amendment.

However, there has been negligible exploration interest in offshore Pakistan with less than 20 odd wells drilled since independence.

Offshore deepwater development and exploration is very different from onshore exploration in the sense that it is significantly expensive, high risk and long term. Furthermore, given the scale of the projects, offshore development is less prone to short-term price changes as compared to onshore exploration and development.

Given the regional competition that Pakistan’s upstream hydrocarbon sector faces from India towards the East, and oil rich Gulf states towards the West, it is the duty of our government and state-owned national oil companies to aggressively explore and establish a strategic stake in offshore Pakistan to attract foreign interest. The offshore exploration costs and rates are arguably at their lowest currently and probably will not stay low for long. This is an ideal time to engage rigs and related services to do the job.

Owing to the costs involved, there is a need for the government to underwrite and the national oil companies to undertake the risk of drilling some exploratory wells

The local industry response — a lack of their offshore exploration interest — will revolve around the capital intensive nature of the venture, lack of finances, long timelines, technology, geological uncertainty and fiscal regime inadequacy along with the fact that onshore is still under-explored.

Considering that we are talking about the second largest submarine fan system in the world with up to 10km of sediment accumulation, and the Indus Basin being the largest channel levee system, a multi-million barrel offshore hydrocarbon resource discovery can be a game changer for the country. Therefore, the impediments highlighted above should be managed or circumvented one way or the other. This may require a changed managerial mindset with an entrepreneurial approach symbolised by the North Sea and Gulf of Mexico executives of the 1970s. Upstream offshore hydrocarbon is not for the faint hearted.

Looking at high level economics for Pakistan, it makes sense to understand that all offshore projects are unique, cost comparisons are at times vague, and do not capture the full story. Cost drivers for offshore exploration, development and production include well depth, water depth, reservoir pressure and temperature, field size, shore distance, availability of infrastructure and services etc.

Given the past experience with exploratory wells that have been drilled into the Indus Offshore Basin, and the uncertainty inherent in seismic studies due to the extremely thick sediment deposition of up to 10km, any further exploration effort should include plan to encounter high pressure and high temperature formations. This means that the cost of exploring will be higher than normal. Moreover, we should be prepared to go into deeper waters as well.

As far as deepwater lifecycle economics is concerned, current international projects in the sanction stage require a $60/bbl price for breakeven; however, projects in development are expected to breakeven at $50/bbl. Having said this, an extremely vigorous cost reduction drive is progressing in the industry with targets of 25pc to 35pc overall cost reductions.

The timeline from discovery to first oil or gas could range anywhere from six years to more than 10 years depending on a host of factors ranging from bureaucratic, financial and technological to reservoir characteristics and size.

Though it is difficult to arrive at estimated project costs independently given the critical nature of the information, one can safely assume in Pakistan’s case that the overall capital expenditure from discovery to production could range from $3.5bn to more than $10bn due to a lack of existing infrastructure in offshore basins. However, for us the capital spent could be a bit lower based on sourcing from the Far East and the development of local supply chain.

The finances involved are huge, however, the disbursements are staggered along the timeline of the project. To gain some local perspective, the cash balances available with OGDC and PPL as of March 2016 were Rs12.3bn ($0.12bn) and Rs17.8bn ($0.17bn) respectively as per their financial reports. This means that probably under their current capital structure, it would be next to impossible for any of these companies to fully finance these projects.

Evaluating the potential from a phased explore, appraise and develop model, we can argue that the initial financing should suffice for the exploration phase and drilling while rest may be arranged through equity floatation and/or farm-ins. In case of development, the overall capital outlay will be on the higher side in Indus offshore as there are no existing facilities or infrastructure such as platforms, pipelines etc, available.

Key drivers for offshore drilling are water and well depths which impact the number of days the drilling rig is contracted for.

The cost of a single exploration well can range from $60m to $200m considering that drill-ships or semi-submersibles will have to be contracted for deep waters and their median running rates as of today are approximately $380,000 per day as compared to $450,000 per day and above previously.

Contracting rigs from the Far-East could help shave a few points off the cost but we have to be careful that we may encounter high pressures while drilling in Indus Offshore.

In case of economic discovery, a field development plan will primarily cover a platform, pipelines and subsea systems which could start from a minimum of $2bn depending on production capacity, drilling facility, length of pipelines etc. In a nutshell, it is a mega project.

Owing to the costs involved in exploration of hydrocarbon resources there is a need for the government to underwrite and national oil companies to undertake the risk of drilling some exploratory wells, budget approximately $500m for the task while the relevant ministry revamps the fiscal regime in view of regional dynamics.

The payoffs can potentially be huge for our economy and could place Pakistan on the hydrocarbon map of the world.

mustafa.amjed@gmail.com

Published in Dawn, Business & Finance weekly, June 27th, 2016