Petroleum: PAKISTAN PETROLEUM LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 2008
Pakistan Petroleum Limited is one of the oldest and largest E&P companies in the country. The primary activities of the company are exploration, development and production of Pakistan's natural reserves of oil and gas.
It was incorporated on 5th June 1950 after the promulgation of the Pakistan Petroleum Production Rules in 1949. PPL inherited all the assets and liabilities of its parent company, the Burmah Oil Company (Pakistan Concessions) Limited and commenced business on 1st July 1952. The company remained under the management control of Burmah Castrol, UK till 1997. After that the government purchased the entire equity interest of Burmah Castrol PLC, formerly Burmah Oil Company.
After June 2004, Government of Pakistan disinvested around 15% equity through an Initial Public Offering (IPO). The government intends to privatise PPL and IPO was a significant step to achieve this objective. As at June 2008, the government of Pakistan owned 78.4% stake of PPL, the International Finance Corporation (IFC) had 3.43% of shareholding and the rest 18.17% is free-float. It is listed on all the three stock exchanges of the country. Karachi Stock Exchange (KSE) rated PPL as one of the top 25 companies for the two consecutive years 2006 and 2007.
PPL is the second largest exploration and production (E&P) company both, in terms of production and reserves. PPL has been playing a crucial role in augmenting hydrocarbon resources since 1955. Presently, the PPL contributes around 25% of country's total natural gas production. It is also one of the market leaders in terms of its holdings of exploration area. Out of 242,714 sq.kms area under exploration in Pakistan, PPL holds the second largest share, more than 22% in joint venture with partners.
PPL is aggressive in exploration but at the same time conservative in selecting drilling sites. It has discovered eight gas and three oil fields. PPL has working interest in 24 exploration blocks, of which eight are PPL operated and the other 14, including 4 off-shore are partner operated. Sui and Kandhkot gas fields are two of the major PPL operated fields where PPL has 100% ownership.
In 1952 the company discovered the largest gas reserves at Sui. Within three years (1955) the supply of natural gas to Karachi for industrial and domestic use began through pipelines. Sui caters to about one-fifth of the total gas demand in the country.
In 1959, vital discoveries at Kandhkot gas field and Mazarani were made. Crude oil was discovered at Adhi field in 1978 and commercial production started in 1980. In 1990, the liquefied petroleum gas (LPG) and natural gas liquid (NGL) plant was installed and the production of LPG, NGL and gas from Adhi commenced.
In 2007, PPL made oil and gas discovery at Mela-1 well (Nashpa Block) and two gas discoveries at Latif-1 (Latif Block) and Tajjal-1 (Gambat Block). In the same year, the first exploratory well Mela-1 at Nashpa Block was completed as oil and gas producer and the Extended Well Test production commenced.
Bolan Mining Enterprises (BME) is a joint venture between PPL and the Government of Balochistan for the development, mining, grinding and marketing of barites mineral deposits found near Khuzdar and other minerals in the province of Balochistan. The company operates a Baryte mine in Balochistan.
RESERVES
Total oil and gas reserves of Pakistan fell by 3.6% during the first half of FY08. The country's oil and gas reserves declined from 5.95bn barrels of oil equivalent at the end of Jun-07 to 5.74bn barrels of oil equivalent (boe) by end of December-07.
Overall oil reserves stood at 340m barrels at December FY08, as against 353m bbl at Jun-07, showing a decline of 3.8%. The only increase in oil reserves was noted in Naspha block (an increase of 7.15m bbl) and in Tando Allah Yar North (oil reserves revised up by 0.20m bbl to 0.37m bbl).
The total gas reserves of Pakistan decreased by 3.4% (from 32.38tcf in Jun'07 to 31.27tcf in December-07). Mela and Uch were the two fields that showed significant upward revision in gas reserves. The gas reserves of Mela field were revised upward by 32.47bcf to 78.86bcf at the end of December-07 from 46.40bcf earlier at the end of Jun-07. The reserves of Uch field were up by 54.75bcf to 4.49tcf at the end of December-07.
Thus the total reserve life of the country fell to 22.2 years during the first half of FY08 from 23.1 years at the end of Jun-07. PPL has around 19% of total oil and gas reserves in Pakistan and it is second to OGDC in this regard.
There has been a net addition of 1.36m barrels in PPL's oil reserves while the reserves of other major companies like OGDCL and POL declined by 6.9m barrels and 1.02m barrels respectively. However, PPL's gas reserves fell by 0.01TCF. The gas reserves of OGDC and POL also declined by 0.36TCF and 0.24 TCF respectively.
DRILLING
E&P sector missed drilling target in FY08 as the companies could spud in 72 oil and gas drills as against the target of 87 oil drills. The sector missed its target mainly due to deteriorating law and order situation in Balochistan and NWFP. Also the target was burdensome because the drilling target for FY08 included the target of outgoing fiscal year.
Pakistan Petroleum Limited (PPL) announced only one gas discovery during last fiscal year at Adam-X well in Hala Block. In addition, the company is also a JV partner in oil and gas discovery at Mamikhel in Tal Block. PPL has set its target 10 wells average drilling target for a year.
Overall the E&P sector of Pakistan made 11 oil, gas well discoveries, 23 exploratory and drilled 49 development wells. The new oil and gas discoveries have resulted in a success ratio of 1: 2.1 wells (47 percent), significantly higher than country's historical average of 1: 3.4 wells (29 percent).
PRODUCTION
Pakistan's oil and gas production during FY08 stood at 703,000boepd (barrels of oil equivalent per day), depicting a growth of 2% as compared to FY07. Oil production alone stood at 698,000 bpd (thousand barrels per day) versus 674,000 bpd depicting a growth of 4%. Similarly, gas production also increased by 1.9 percent to 3.9bcfd (billion cubic feet per day).
PPL is primarily a gas producing company, however with increased production of crude from Tal block and Adhi fields as well as additional production from Mela field, the production of crude oil increased during FY'08. This was in line with the sector trend.
The total production of crude oil and gas in the E&P sector improved during the first 11 months of FY08.
Crude oil production grew 4.0% to 69,565bpd during 11mths'08 as against 66,900bpd in the corresponding period of FY07. Natural gas production during the same period stood at 3,910mmcfd as compared to 3,841mmcfd in 11mths'07, showing a nominal rise of 1.8%.
PPL showed considerable increase in crude production supported by additional production from Mela 1 during the period Jun-07 to May-08. Crude oil production by the company stood at 4,031bpd in 11mths FY08 as against 2,726bpd in the same period in FY08. Along with this, the production from Tal block also showed an impressive growth of 37.4% and contributed 17.1% of total oil production of the company.
Gas production declined nominally to 989mmcfd during 11mths'08 as compared to 993mmcfd in 11mths'07. Sui and Kandhkot fields are the main contributors to the company's gas production. The Sui gas field still remains an important source of gas supply meeting a substantial part of gas demand of the country. The volume of gas sales during FY08 from the field was 202,771 million cubic feet as against 207,746 million cubic feet in FY07. The volume of gas sales from Kandhkot field during FY08 was 52,594 million cubic feet as against 48,370 million cubic feet in FY07.
PPL registered a growth of 1% in total oil and gas production in FY08. Oil production of PPL registered a growth of 50% and stood at 43,000 bpd, while in contrast, gas production remained stagnant at 982mmcfd. This was due to decline in gas production from Sui field, which offset the impact of increased production from newer fields. As shown by the field wise contribution of gas and oil, PPL holds the most attractive exploration portfolio and its growth profile is therefore more impressive than other companies in the sector.
RECENT RESULTS 3Q09
The company continued its healthy growth both in terms of revenue and profitability during the nine months period ended March 31, 2009. The profit after tax of the company grew to Rs 20,970 million during the nine months compared to Rs 14,971 million during the corresponding period of the previous year, representing an increase of 40.07%.
The increase in profitability during the nine months compared to the corresponding period in the previous year is mainly attributable to deferred impact of high international oil price on gas prices and depreciation of Pakistani Rupee against US Dollar. During the period the decline in production of gas, mainly from Sui and Sawan fields was partially offset by increase in production from Kandhkot and Nashpa fields and commencement of production from Gambat and Latif Blocks. Increase in production of Crude oil from Nashpa field was partially offset by decrease in production of NGL/crude oil from Adhi and Tal fields.
REVENUE
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Q3'09 Q3'08 9M'09 9M'08
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Sales revenue(net) 15,732 11,960 45,337 33,126
Profit before taxation 11,065 8,472 31,995 21,964
Taxation 3,870 2,796 11,025 6,993
Profit after taxation 7,195 5,676 20,970 14,971
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The net sales revenue of PPL increased by around 19% during FY08 as the total revenue increased from Rs 38.4 billion earned in FY07 to Rs 45.7 billion in FY08. This increase in revenue was mainly helped by higher production from Kandhkot, Adhi, Qadirpur, Sawan and Tal fields which more than offset the decline in production of gas from Sui, Mazarani and Miano fields and commencement of production of gas and crude oil from Mela-1 and Mela-2 wells in Nashpa Block.
Also, higher sales volume of PPL's all product categories and better wellhead gas prices caused the rise in revenue in FY08. The well head gas prices improved due to phased increase in pricing under 2002 pricing agreement. The last such increase in pricing became effective from January 2007.
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Rs in millions
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Revenue Breakup - PPL FY'06 FY'07 FY'08
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Amount Share Amount Share Amount Share
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Natural gas 29,617.40 93.30% 34,685.36 90.37% 37,291.64 81.57%
Oil/ Condensate 1,816.20 5.70% 3,288.55 8.57% 7,732 16.91%
LPG 167.5 0.50% 408.74 1.06% 693 1.52%
Total Revenue 31,756.70 100% 38,382.65 100% 45,717 100%
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The company is less vulnerable to oil price movements because of a greater share of natural gas in the total production. The table shows that natural gas has made a higher contribution to total revenue over the years and in FY08 natural gas contributed to 81.57% of revenue.
PROFITABILITY
Pakistan Petroleum Limited posted a profit after taxation of Rs 19.7 billion for the period FY08 as compared to Rs 16.77 billion earned during FY07, showing an increase of almost 18%. The company's operating profit increased from Rs 24.5 billion in FY07 to Rs 29.5 billion. This 20% increase in the company's operating profit resulted despite 15% increase in field expenditure mainly due to extensive exploration activities carried out and 20.5% increase in royalties during the period. The reason for increased operating profit in FY08 was the rise in sales revenue earned.
The company registered an increase of 19% in the sales revenue in FY08. The sales revenue increased from Rs 38.4 billion in FY07 to Rs 45.7 billion in FY08. This improved sales performance was largely due to the growth in the overall production and increase in sales volume across all product categories.
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Product wise break up of sales revenue
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FY'07 % Change FY'08
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Rs in million
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Natural Gas 46,815 4.5% 48,925
Gas supplied by Sui Villages 99 8.2% 108
Internal consumption of gas 132 6.2% 140
Condensate Sales 1,015 83.1% 1,859
NGL (condensate) sales 1,465 55.0% 2,271
Crude oil sales 1,082 249.6% 3,783
LPG sales 471 69.5% 799
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The increase in gas production was mainly on the back of rise in production from Kandhkot, Sawan and Adhi fields. Total oil production by the company rose impressively by 82.3% during the first half of FY'08 due to addition by Mela and increase in production from Adhi field and Tal block. During the 3QFY08, there was increased gas production from Kandhkot, Adhi, Qadirpur, Sawan and Tal fields and additional production from Nashpa.
Also, high international prices resulted in higher profits for FY'08. Arab light prices grew almost by 40% during 3Q FY'08 as compared to same period in FY'07. The change in pricing of Sui and Kandhkot field also boosted the profits for FY08. The wellhead gas prices especially that of Sui and Kandhkot improved due to phased increase in pricing under 2002 pricing agreement with last such increase becoming effective from January-07.
The gross profit margin of the company has had a declining trend over the past years because the gross profit earned has fallen during all the previous fiscal years. In FY06 the gross profit margin had increased by 36% while in FY07 the increase in gross profit was only by 21%. During FY08 the gross profit grew by 19% as compared to FY07. This has been because over the years the royalties have grown more in proportion to the sales revenue of the company. During FY08 the sales revenue increases by 19% while the royalties payment increased by 21%.
The company was able to almost maintain its profit margin during FY08. Over the past years the company has had an increasing trend in its profit margin because profit after taxation grew more in proportion to sales.
PPL's profits were boosted by other sources apart from sales revenue. The share of profit in Bolan Enterprises increased by 17% to reach Rs 55.8 million in FY08. Other operating income rose to Rs 3.0 billion, an increase of 26% over FY07, mainly due to effective fund management policy followed by the company. Income on loans bank deposits and term deposits increased. There were substantial increases in the income on long term held to maturity investments and rental income on assets increased from Rs 2 million in FY07 to Rs 45 million in FY08. Similarly the exchange gain on foreign currency amounted to Rs 246 million during FY08 as against Rs 2.77 million in FY07.
LIQUIDITY
The liquidity management of PPL had been improved greatly since FY03 as illustrated in the figure. The liquid funds generated from operating activities contributed to the improvement in the ratio. In FY07, the company managed to catch up with and supersede the industry, thus breaking the trend of lower than average current ratio.
PPL had increased its investments in short term instruments, contributing to the improvement in current ratio during FY07. Also, the company has maintained a lower level of inventory than the other major players in the sector. This reflects company's strength in asset management as well as the liquidity of its asset portfolio. The large amount of cash balances and short-term investments maintained by the company will also help PPL in financing future exploration activities.
The liquidity position of the company deteriorated during FY08 after a better liquidity position in FY07.
This has been due to a 76% increase in the current liabilities of the company while current assets increased only by 12.7%. The company's trade payables and other payables increased during FY'08. Taxation liability also showed an increase.
However, the claims to have a comfortable liquidity position since an amount of Rs 21.6 billion was generated from operating activities of the company. This amount was used to meet the expenditures on capital projects, operational requirements, payment of dividends to the shareholders and investments (short and long-term). At the end of FY'08, the company had cash / bank balances and short-term investments amounting to Rs 22.1 billion. Thus, the company is comfortably placed to meet its existing short-term and long-term commitments and financing requirements of future exploration and development expansion plans.
ASSET MANAGEMENT
PPL has performed well in terms of asset management, exhibiting a positive trend for inventory turnover and DSO over the years since FY03. The company's efficiency in inventory management has resulted in its operating cycle being shorter than the industry average.
FY08 saw a further increase in the collection period of receivables for PPL and the trade debts continued to mount. Although high DSO is an industry wide trend in the E&P sector but a reduction in the period will improve the company's efficiency and have a positive impact on the company's financial strength.
The turnover of all the company's assets improved during FY08 due to a 21% increase in assets relative to a 19% increase in sales. This shows that the total asset turnover ratio has increase in FY08 due to increase in the increase in investment and production capacity. Although less sales were generated relative to the increase in total asset investment, the company can be expected to improve sales and asset management in the future. The sales to equity ratio increased indicating that the company's asset management has been satisfactory.
Debt management:
PPL has the lowest level of leverage among the major players in the E&P sector. This is evident in the lower debt ratios of the company compared to the other companies. The debt ratios are low and have been steadily declining over the last few years, indicating that the company is largely equity financed.
PPL has not undertaken any long term loans during the past few years. This shows that the company does not rely on loans or other such instruments to finance its growing exploration activities. This trend reflects upon the financial strength of PPL compared to its peers.
Despite the equity financed nature of the company, the financial charges have been mounting and the TIE ratio of PPL has shown a negative trend since the FY06. This may be attributed partly to the increase in assets subject to financial lease in the last one and a half years. However despite the decline, the TIE remains substantially strong. In the FY07, a large portion of the finance cost accrued to the unwinding of discount on decommissioning cost.
RECENT RESULTS 3Q08
PPL posted a sales revenue of Rs 33,126 million for 9M07 compared to Rs 28,034 million in the same period last year, depicting an increase of 18.2%. Profit after tax of the company grew to Rs 14,971 million during the nine months ended March 31, 2008 compared to Rs 13,105 million during the corresponding period of previous year, representing an increase of 14.2%.
The increase in PAT is due to rising world oil prices, which offset the decline in production from Sui gas fields. Also contributing to increase in profitability was an increase in gas production from Kandhkot, Adhi, Qadirpur, Sawan and Tal fields which more than offset the decline in production from Sui and Miano fields, commencement of gas/crude oil production from Nashpa field and phased increase in Sui and Kandhkot gas prices under the 2002 Gas Price Agreement, with the last such increase becoming effective from January 01, 2007.
As can be observed above, the E&P sector has shown an increase in its profits, due to rising international oil prices and an increase in gas wellhead prices. The productivity of both crude and gas has been higher compared to the corresponding period of FY07.
Pakistan's GDP has grown at an average of 5.8% for the last five years. The rapid growth in the industrial sector has triggered a surge in demand for energy products. The country's gas consumption has been rising at a rapid rate, a five-year CAGR of 5.4%.
The cumulative profitability of the listed E&P companies grown phenomenally over the last few years. The top line of these companies grew at a five-year CAGR of 24.8% mainly due to significant growth in the volumetric sales and significant surge in crude oil prices. Moreover, for the same period, the bottom line increased at a 5-year CAGR of 28.42%. For FY07, the profitability of E&P sector increased by a 4.9%. Oil production, however, grew only by 2.8% during the year to 67,415 bpd in FY07 compared to 65,577 bpd in FY06 and gas production increased negligibly by 0.9% to 3,872mmcfd from 3,836mmcfd in FY06.
In FY06, Sui contributed 67% of total gas sales of the company, higher than FY05. This increase however was due to less than 100% capacity utilisation in FY05. Later, the production from this field has declined due to its gradual depletion. As a result, the contribution of the field is likely to decline in the future.
In first nine months of FY07, Kandhkot and Sui fields contributed about 80% of the company's total sales. This was due to the unique pricing formula for the two fields. Both, the Sui and Kandhkot are the backbone of PPL.
Mazarani and Adhi are other major fields operated by PPL, where the company has 87.5% and 39% stakes respectively. Among the partner-operated fields, Miano, Sawan, Tal and Qadirpur are more prominent. The figure above shows the contribution of each field to the total gas production of PPL.
In order to meet the growing energy demands of the country, PPL has enhanced its exploration efforts. This includes the acquisition of new areas and working interests. As various agreements are finalised, the working interests of the company will increase to 24 areas, 19 onshore and 5 offshore. PPL has the second largest exploration programme in the industry. One of the major oil and gas discoveries since FY02 has been in the Nashpa block. The Tal block is another major find.
Among the activities undertaken during FY07, the Sarang X-1 well in Kot Sarang block was abandoned in the third quarter of FY07 as the dry hole. However, the seismic survey in Hala and Tajpur blocks has been completed. Besides this, activities also took place in PPL non-operated areas. Moreover, initial phase of drilling of the Adhi well was completed in FY06 and development of Sawan-6 and Sawan-10 was also completed.
The exploration efforts during FY07 reaped benefits in the form of three discoveries of oil and gas out of 10 exploratory wells drilled during the year. First, an oil discovery of 20.4mmcfd was made in Tajjal 1 of Gambat block in second half of the current fiscal year.
PPL holds 23.68% shares in this joint venture. Besides this, one oil and gas discovery was made at Mela-1 (Nashpa Block) and a gas discovery was made at Latif-1 (Latif Block). Lastly, PPL has recently made a gas condensate discovery in Hala Block at Adam X-1 well in Sindh. A successful drill test system was carried out which flowed at a rate of 1,301bpd of condensate and 27.4mmcfd of gas. PPL has 65% stake in this discovery. The testing for other prospective zones has been completed in this area and encouraging results have been produced.
Moreover, testing of one exploratory well drilled in PPL operated Hala Block (Adam X-1) has been completed and the results are encouraging. Another exploratory well in partner operated Tal Block (MamiKhel-1) has also shown encouraging results and is being tested for potential reservoir zones.
In addition, two more exploratory wells, i.e., Qadirpur Deep and Kahi Deep-X1 in Tal Block were suspended for further evaluation. The remaining three exploratory wells in S.W. Miano II, Tal (Sumari Deep-X1) and Kot Sarang blocks were plugged and abandoned due to discouraging results.
In addition to oil and gas discoveries, PPL has completed three major expansion projects during FY07. These include commissioning of the second LPG/NGL Plant at Adhi. Following commissioning, the performance test was carried out which has confirmed the design capacity of the plant.
The completion of this project has more than doubled the field production capacity. Phase II of the SUL Compression at Sui and the revamping of Sui power supply system were the other two major projects completed during the year. At the same time, the Kandhkot Wellhead Gas Compression Project has been initiated to maintain the contractual delivery pressure of gas sales while maximising the reserves recovery.
PPL is also evaluating international business opportunities, both for venture exploration as well as acquisition of developed and undeveloped reserves. The company's efforts in International Exploration have paid off with its successful bid for a block in Yemen in a 50:50 joint venture with OMV as operator.
Currently, Product Sharing Agreement (PSA) negotiations are underway with the Government of Yemen for the Block. In addition, a three-member technical/commercial team has visited Morocco, Tunisia and Mauritania for evaluation of exploration opportunities in these countries. Evaluation of exploration investment opportunities in other North African and Central Asian countries has also started.
During FY07 the average oil production grew significantly by 58.2% to 2,830bpd from 1,789bpd in FY06. This growth can be attributed mainly to an improvement in production from Adhi field, Tal Block and additional production of 213.2bd from Mela field. The production from Adhi field increased especially after the commissioning of Adhi LPG/NGL Plant II.
FY07 saw a 301.2mmcfd reduction in average gas production from the Sui field, thus depressing gas production of the company. However, increase in production from Sawan in Nashpa Block, Tal Block and Adhi field, managed to partially offset the decline from Sui. As a result, the total gas production declined by 1.8% to 991mmcfd in FY07, as compared to 1,009mmcfd in FY06.
The sales revenue grew by 21% in FY07 to 38.4 billion. A number of factors contributed to this growth in sales. The higher international crude oil prices during FY07, together with the phased price increase under the Sui and Kandhkot Gas Price Agreement 2002 contributed to the growth in sales.
Moreover, the increase in production, especially from the Adhi field, Tal Sawan and commencement of Extended Well Test Production from Mela-1 discovery at Nashpa Block, also contributed significantly to the sales growth.
The growth in sales and production generated an all time high profit figure for PPL in FY07. The profit after tax for FY07 stood at Rs 16.8 billion, depicting a 25% growth over FY06, the highest among the three market leaders in the E&P sector.
Sales revenue increased by 36% in FY06 as compared to FY05. The phased increase in prices under the Sui and Kandhkot Gas Price Agreement 2002 was prominent factor behind the rising sales and profits. The higher international oil prices backed the trend. The rising gas supplies particularly from the Qadirpur, Tal and Kandhkot fields contributed to higher sales revenue. As a result, profit after taxation increased by a massive 55% in FY06 compared to FY05.
The profit margin for PPL continued with its positive trend in the FY06 and FY07. The company soars above the industry with respect to the profit margins. The ROA has shown improvement during FY07 but the ROE has declined nominally.
The company has benefited from a 63% growth in other income, one of the highest in the industry. This mainly came from higher financial income from deposits and other sources. Field expenditure increased by 18% in FY06 and 13.4% in FY07 largely due to heightened exploration activities since the company had working interest in 19 blocks in the FY07. The revision in wellhead gas prices of Sui and Kandhkot fields also contributed positively to the company's profitability.
PPL has performed well in terms of asset management, exhibiting a positive trend for inventory turnover and DSO. The company's efficiency in inventory management has resulted in its operating cycle being shorter than the industry average. FY07 saw a further increase in the collection period of receivables for PPL and the trade debts continued to mount. Although high DSO is an industry wide trend in the E&P sector but a reduction in the period will improve the company's efficiency and have a positive impact on the company's financial strength.
The total assets turnover and sales/equity have also fared better than the average industry for all years, once again depicting the company's strength in asset management. The total assets turnover rose slightly in FY06 whereas the sales to equity ratio fell marginally during the same year. This indicates a better utilisation of the company's assets than the industry.
The liquidity management of PPL has improved greatly since the FY03 as illustrated in the figure. The liquid funds generated from operating activities contributed to the improvement in the ratio. In FY07, the company managed to catch up with and supersede the industry, thus breaking the trend of lower than average current ratio. During FY07, PPL has increased its investments in short-term instruments, contributing to the improvement in current ratio.
Additionally, the company as maintained a lower level of inventory than the other major players in the sector. This reflects company's strength in asset management as well as the liquidity of its asset portfolio. The large amount of cash balances and short-term investments maintained by the company will also help PPL in financing future exploration activities.
EPS has shown a positive trend for the last few years and the high net profit during FY07 translated into a 25% growth in EPS, bringing it to Rs 24.5 per share. The DPS has shown similar growth as EPS. The company declared a dividend of Rs 11 per share for FY07.
Future outlook
PPL has shown good performance in the third quarter of FY08, both in terms of profitability as well as production. The Sui and Kandhkot Gas Price Agreement provides the company with an edge over the other players, and will continue to add to the profitability of the company.
The life of its reserves is around 20 years, thus promising a smooth flow of oil and gas for the next couple of decades. Even though the production from one of the backbone fields, Sui, is expected to decline in the future due to its depletion but the company has still been able to maintain a 100% reserve replacement ratio. However, the company is making efforts to extend the reservoir life and optimise gas recovery of the Sui Upper Limestone (SUL) reservoir.
Moreover, the increased production from Tal Block, Adhi, Sawan and Qadirpur blocks is expected to cover up for the decreased production from Sui. The commissioning of the Additional Processing Facilities, Phase II at Adhi has increased the production capacity of the field. This is likely to enhance production of the company in the coming years.
PPL has the advantage of holding a good resource base in terms of existing resources. Moreover, the company also enjoys additional reserves potential in some of its existing producing areas like Adhi, Qadirpur etc. This bodes well for the future production potential of the company.
In addition, the success rate of PPL exploration activities stands around 25% which is remarkable compared to the 10% international rate. Thus even though, the exploration involves a very high risk of drilling the dry holes; the company's success rate had partially reduced this risk. Furthermore, to revamp its exploration activities, the company has employed modern technology, including computer applications, remote sensing and communications techniques and other devices. This will further improve the success rate for the company.
The approval of the Petroleum Policy 2007 by the ECC (Economic Coordination Committee) bodes well for the E&P companies, especially those focusing on exploration activities. PPL, being the largest and oldest gas exploration company, would be one of the major beneficiaries of the policy.
Under the petroleum policy 2007, oil and gas processes are now indexed with the reference crude oil price, equal to C&F price of the Arabian/Persian Gulf crude oils, with proper adjustments for the quality differential for calculation of crude oil prices (providing 100% linkage with the international prices). The $36 per barrel cap has also been removed. As a result of this, formula, the gas price per unit will grow by a significant 38.5%. Hence the new policy will provide a positive change, especially to PPL and OGDC, the two companies more aggressive in their exploration activities.
An oil discovery of 20.4mmcfd was made in the Tajjal-1 of Gambat block in second half of the current fiscal year. PPL holds 23.68% shares in this joint venture. The discovery is expected to increase PPL's EPS by 0.18 in the coming fiscal year. Besides this, the discovery in the Hala Block where PPL holds 65% share will also augment production in future.
The new gas pricing formula will enable the company to benefit from the international oil and gas pricing tends unlike the former policy whereby they were offered a 30% ROE in addition to costs. Under the new Agreement, the pricing from both fields was to improve semi annually to reach, by 2007, 50% of international oil prices less applicable discounts under the Petroleum Policy 2001. The phased price increases from the Kandhkot and Sui fields, it is believed, will continue to accentuate profits for the company, especially in the face of the rising international crude oil prices.
In addition, the government in July 2007 announced new five-year energy policy. The new policy provides a 6-8% increase in oil and gas production prices on new discoveries the petroleum exploration and development companies would make in future. Secondly, under this policy, gas producers are required to pay 50% of the difference to the government in case the gas is sold to a third party.
Previously, the companies could only sell their produce to the government or its entities. However, the existing oil and gas producers will continue to follow the existing policy, hence their rates will remain unchanged. On the other hand, the companies currently under exploration phase or those, which have applied for the concession licence under the old policy, will be allowed to switch to the new policy but would have to offer a price at 0.2 GPG.
Lastly, the producers will also have to pay a marine research fee and coastal area development fee of $50,000 per year until the first discovery and the amount would double thereafter, until the declaration of commerciality. The fees would go up during the development phase and reach $500,000 during the production phase. These developments in the policy will also have significant impact on PPL, which is the second largest company in the sector.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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