E&P firms sound alarm over cash flow plight

ISLAMABAD: The local exploration and production (E&P) companies have rung alarm bells saying they are on the verge of financial collapse because of severe cash flow situation. This has been triggered in the wake of default by Sui companies on payments amounting to Rs1,317 billion.

The state-owned companies, such as OGDCL, PPL and GHPL, have threatened to suspend production operations leading to curtailment of supply of gas if payments are not made. They said massive shortages could not be filled by import of highly expensive LNG due to shortage of foreign exchange and lukewarm response of international LNG suppliers.

This has been disclosed by Pakistan Petroleum Exploration and Production Companies Association (PPEPCA) in a letter written to Finance Minister Ishaq Dar on July 17. The minister has been informed about the financial plight of E&P companies that have squeezed the exploration and production activities manifold.

The PPEPCA, earlier, wrote a letter on May 5 to secretary Petroleum Division, highlighting the deteriorating cash flow situation because of massive default by Sui companies – Sui Northern and Sui Southern.

In the letter to finance minister, it said receivables of OGDCL, PPL and GHPL have further ballooned to Rs1.317 trillion ($4.65 billion). It triggered the cash flow situation owing to which half of the planned drilling was deferred in 2022-23. Furthermore, in the bidding round held in June 2023, out of 18 blocks, competitive bids were received for only one, which reflects the financial crisis of upstream oil and gas sector.

Pakistan’s upstream oil and gas sector is the backbone of the economy, producing 3.227 bcfd gas, which comprises over 30pc of primary energy consumption of the country. And due to the massive default of Sui gas companies in payment of gas invoices of upstream companies, the sector is suffering a severe cash flow crisis. More than twelve months of US dollar invoices of foreign companies are outstanding, whereas Pak Rupee invoices of over 28 months are due for payments. Many invoices of PPL, GHPL and OGDCL are outstanding for more than five years.

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

The Sui Northern is facing a cumulative shortfall of over Rs560 billion and Sui Southern Rs415 billion. In the letter, the state-owned E&P companies also disclosed the payment made by them is not even sufficient to cover payment of 18pc Sales Tax and 12.5 percent royalty and advance income tax. As a result, nothing is available to fund the operating, development and exploration expenditure. And under such circumstances, companies are forced to borrow funds at an exorbitant rate of 25-30 percent to run production operations. They have shelved most of the planned exploration and development drilling activities. And if the payments are not made urgently, PPEPCA member companies may be forced to suspend production operations. PPEPCA urged finance minister to ensure budgetary grants or tariff differential subsidy (TDS) of at least Rs500 billion to Sui companies for partially adjusting accumulated revenue shortfall. It would facilitate upstream companies in meeting the operating expenditure and to carry out planned exploration and development activities for sustaining and enhancing gas production. It also asked for an increase in the consumer gas price for meeting the revenue requirement of gas companies, which has been increasing due to currency depreciation and other factors. It further asked the finance minister to advise the State Bank for allocation of foreign exchange for making payment of foreign E&P companies in an equitable manner.