TEAM J SYNOPSIS OF DESK RESEARCH

OIL & GAS EXPLORATION & PRODUCTION:

Oil has been used for lighting purposes for many thousands of years. In areas where oil is found in shallow reservoirs, seeps of crude oil or gas may naturally develop, and some oil could simply be collected from seepage or tar ponds. Historically, we know of the tales of eternal fires where oil and gas seeps would ignite and burn. One example from is the site where the famous oracle of Delphi was built around 1000 B.C. Written sources from 500 B.C. describe how the Chinese used natural gas to boil water. But it was not until 1859 that "Colonel" Edwin Drake drilled the first successful oil well, with the sole purpose of finding oil. The Drake Well was located in the middle of quiet farm country in northwestern Pennsylvania, and began the international search for an industrial use of petroleum. These wells were shallow by modern standards, often less than 50 meters deep, but produced large quantities of oil. In the picture from the Tarr Farm, Oil Creek Valley, The Phillips well on the right initially produced 4000 barrels a day in October 1861 and the Woodford well on the left came in at 1500 barrels a day in July, 1862. The oil was collected in the wooden tank pictured, in the foreground. As you will no doubt notice, there are many different sized barrels in the background of the picture. At this time, barrel size had not been standardized, which made terms Photo: Drake Well Museum Collection, Titusville, PA like "Oil is selling at $5 per barrel" very confusing (today a barrel is 159 liters). But even in those days, overproduction was something to be avoided. When the "Empire well" was completed in September 1861, it gave 3,000 barrels per day, flooding the market, and the price of oil plummeted to 10 cents a barrel. Soon, oil had replaced most other fuels for motorized transport. The automobile industry developed at the end of the 19 century, and quickly adopted oil as fuel. Gasoline engines were essential for designing successful aircraft. Ships driven by oil could move up to twice as fast as their coal powered counterparts, a vital military advantage. Gas was burned off or left in the ground. Despite attempts at gas transportation as far back as 1821, it was not until after the World War II that welding techniques, pipe rolling, and metallurgical advances allowed for the construction of reliable long distance pipelines, resulting in a natural gas industry boom. At the same time the petrochemical industry with its new plastic materials quickly increased production. Even now gas production is gaining market share as LNG provides an economical way of transporting the gas from even the remotest sites. With oil prices of 50 dollars a barrel or more, even more difficult to access sources have

become economically viable. Such sources include tar sands in Venezuela and Canada as well as oil shales. Synthetic diesel (syn-diesel) from natural gas and biological sources (biodiesel, ethanol) has also become commercially viable. These sources may eventually more than triple the potential reserves of hydrocarbon fuels. In Pakistan: Oil and Gas sector in Pakistan has seen phenomenal growth since the independence in 1947 when oil quantities produced were scarce. At that time there was no gas production. Over the past half century the petroleum industry has played a significant role in national development by making large indigenous gas discoveries. These sources are supplying gas to consumption centers through 9,843 kilometers transmission networks and 71,863 kilometers of distribution system. Pakistan meets about 15% of its oil demand from local sources. Despite the economic down turn, Oil & Gas (O&G) Sector in Pakistan remains the highest recipient of Foreign Direct Investment (FDI). It witnessed YoY 21% increase in FDI to US$775million in FY 2008-9. Pakistan total primary energy consumption is currently 60.25 MTOE. 79% is contributed by O&G. Pakistans energy demand over the next 15 yeas is expected to grow at a rate of between 4.4% to 6.1% per annum based on the projected economic growth and is likely to be in the range of 115 to 148 MTOE by 2021-22. 80% of Pakistans crude requirements are met through imports, which is a severe burden on its foreign exchange reserves. Pakistan total recoverable gas reserves are estimated at 29.78 trillion cubic feet (@4,176 million cubic feet/day). Total Oil recoverable reserves are 326.678 million barrels (@70,205 bpd). The Government of Pakistan (GOP) is committed to increase local exploration and production (E&P) activity in the country. Recently, it took a number of initiatives to attract further investment into this sector. Last year, new petroleum policy was announced with attractive incentives for the E&P companies. The current Petroleum Policy allows 100% foreign equity and no restriction on repatriation of capital, profit and dividends. In June 2009, GOP conducted O&G road shows in London, Calgary and Houston to promote the opportunities in this sector and subsequently awarded 41 blocks to the potential investors. Pakistans sedimentary basin stretches over 827,268 sq. kilometers, including 300,000 sq. kilometers offshore. The country has a drilling density less than one exploratory well per 1500 sq. kilometers. Success rate is 1:3.4. Total discoveries made so far are 221 out of which 54 oil and 167 O&G/Gas/Gas Condensate. According to a recent study the total estimated risked future O&G reserves of Pakistan yet to be discovered are 1864.8 MMBOE. There are 26 E&P companies operating in the country out of which 16 are foreign. 6 British E&P companies are active in Pakistan.

In the downstream sector, Pakistan has a fairly well developed gas infrastructure. It has 10,285 kilometers of transmission and 93,961 kilometers of distribution pipelines, which is managed by two public sector companies. There are 7 oil- marketing companies (OMC). Shell Pakistan is the second largest OMC in Pakistan with market share of over 20% in white oils. Other major OMC are Pakistan State Oil (PSO), Total and Chevron. Pakistan has 5 refineries with a total cumulative capacity of 12.87 million tons/annum.

Opportunities for Oil & Gas exploration & production:

UPSTREAM:

In the last five years, Ministry of Petroleum & Natural Resources has granted 88 licenses to various E&P companies including 16 international groups such as BP of UK, Eni of Italy, MOL of Hungry, OMV of Austria, BHP of Australia, NIKO Resources of Canada amongst many others. The E&P industry has also committed an investment of US$486 million. Total 100 wells (48 exploration and 52 development) are planned for 200910. Last year during the same period, 27 exploration and 59 development wells were drilled. GOP wishes to encourage involvement of Pakistani O&G companies in the countrys upstream sector. There is an opportunity for the foreign companies to undertake JV partnership with any suitable local company to benefit from their local knowledge. According to the market sources the E&P companies in Pakistan will announce their development programmes for Pakistan. Subsequently, there will be demand for engineering consultancy firms, geophysicist, drilling and related services, drill pipe & casing pipe, drilling fluid chemicals and additives, production equipment and coating and rapping suppliers. Similarly, Offshore-drilling activity will commence this year. BP has acquired significant offshore acreage for petroleum exploration. BP has so far invested US$47million in 2D and 3D seismic acquisition and related offshore activities in the last three years. They are reviewing the data and plans to drill their first well in the current year (2010). Similarly ENI plans to drill its offshore well in the first qt this year (2010). Another areas of opportunity is capacity building/training for the workforce within the industry.

MIDSTREAM:
A new Oil Refinery (Khalifa Oil Refinery) has been approved by the GOP, which will have a capacity of 250,000bpd. The project is currently at an initial planning stage. However, in due course the consortium partners for

this project, International Petroleum Investment Company of Abu Dhabi and Pak Arab Refinery Limited (PARCO) will award the contract to a suitable EPC company. PARCOs current major business activities in Pakistan are Refining, Transportation, Storage and Marketing of petroleum products.

DOWNSTREAM:

GOP is looking at various options to meet the growing energy demand. There are a number of projects in the pipeline, which include LNG deal with Qatar. It involves Shell Pakistan who is actively negotiating with the GOP to import LNG from Qatar. It will result in opportunities pertaining to the development of LNG terminals and infrastructure. The following transnational gas pipeline projects are under consideration. 1- Turkmenistan Afghanistan -Pakistan Gas Pipeline 2- Iran Pakistan Gas Pipeline 3- Qatar Pakistan Gas Pipeline Minister for Petroleum & Natural Resources Mr. Dr. Asim Hussain said that Pakistan is the world's seventh most populous nation, one of the largest economies of the world in need of energy, the second largest offshore basin of the world, largely unexplored territory located next to one of the largest reservoirs of oil and gas in the world, an aggressive and focused Exploration and Production Policy and a welcoming nation. He said that he can go on adding to this list of reasons why the world's exploration companies should be keeping Pakistan on top of their list of options to invest in. Pakistan has so far discovered 1 billion barrels of oil and 54 trillion cubic feet of natural gas. It has a sedimentary area of 827,000 Sq. Km out of which 1/3rd is under exploration and 2/3rd has yet to be looked into for aggressive exploration for oil and gas. At present 17 foreign E&P companies including major multinational companies are operating in Pakistan. The government of Pakistan is keen to exponentially increase its exploration efforts so as to meet the fast growing demand of its economy. The country has an energy hungry market which can immediately accept 2 bcfd gas and over 300,000 bpd oil. The government of Pakistan offers some of the best terms and conditions to E&P sector through the new petroleum policy 2009 and tight gas policy 2011. There is a huge opportunity available for the exploration companies to invest and look for oil and gas in Pakistan. I invite foreign E&P companies to make use of these incentives and opportunities, and to keep Pakistan as a focus for their strategy in the near future. I look forward to welcome them to Pakistan.

THREATS:

Following are the top 10 threats for the oil & gas industry:
Human Capital Deficit: The growing human capital deficit in the sector has become a significant strategic threat to the industry. One study participant set out the issue: The ability of the oil and gas services sector to expand sufficiently to meet future demand growth is questionable, not least in terms of staff. Project delays and abandonment are as much a result of capacity constraints as financial calculations, although the two are intimately linked. Worsening Fiscal Terms: Worsening fiscal terms are seen as a high risk. In some cases, this is due to energy nationalism, although in others it is purely the result of political opportunism and high prices. Tax regime changes can spur additional oil and gas industry restructuring in countries such as Canada, Venezuela, Russia, and Algeria. The impact of political opportunism and high prices is a device that has been seen in both the developing and non-developing world. Cost Controls: The third operational threat is the inability to control costs. This threat was considered great enough to have a strategic impact, and a failure to manage the threat could undermine the competitiveness of oil and gas companies. Participants agreed that the problem extends from exploration all the way through the value chain, impacting everything from refinery build costs to pipeline construction. The Upstream Capital Costs Index, which measures cost inflation in oil and gas projects, has gone up by 79% since 2000, with most of that increase coming since May 2005. Competition for Reserves: Competition for reserves by national oil companies (NOCs) is a major threat to international oil companies (IOCs). Again, the problem is one of strategy: Western IOCs will find it hard to compete as deals are struck not through bidding or tenders but at a state-to-state level, bundled with development aid, for example, wrote one study participant. This observation follows evidence of such deals in the market. Political Constraints on Access to Reserves: Recent estimates suggest that NOCs control 75% of proven global reserves, making these companies the gatekeepers of the worlds oil and gas supplies. Unlike unexpected shocks, this has been well publicized in recent years. For the major IOCs, this could pose a greater strategic and competitive threat than that resulting from supply disruptions.

 Uncertain Energy Policy: An increasing risk for the oil and gas industry is the uncertainty of energy policy. This was defined by one participant: Energy policy goals include security of supply and climate change considerations, as well as more commercial goals such as afford ability and meeting demand growth. The noncommercial goals will shape policy and result in increasing intervention in the market in areas such as carbon pricing, strategic reserve requirements, and subsidization of favored sources of energy. Another participant, a Harvard University-based economist, contended, Social value regulation in the form of measures designed to reduce risk and achieve health, safety, and environmental goals can lead to a regulatory regime that ignores cost/benefit analysis to the detriment of business. Demand Shocks: Demand shocks could be triggered by a number of global economic crises. A global financial meltdown emerging from derivatives and hedge funds was the threat rated highest by the economists who participated in the study. One comment, that echoed a frequently made observation, was that credit dis-intermediation has replaced international banking as a finance source with a range of specialized credit instruments held widely with risk exposures that regulators find it difficult to assess. Several economists believed systemic risks in finance have increased dramatically and, consequently, it would be prudent to expect greater international economic volatility. A global recession could also be triggered by an energy supply disruption. A [price] spike, especially if it lasted for a few months, could plunge the global economy into severe recession, wrote one analyst. Another participant highlighted how further social or political threats could contribute to a demand shock. Chinas sustained expansion in recent years has underpinned robust world growth but is producing tensions both internally and externally. An event that throws the country off track would have a big impact on expectations of future oil and gas demand growth. Climate Concerns: Our oil and gas panel may have been encouraged to rank the rise of climate change concern as a significant risk by the sobering comments of one of our subject matter experts, a specialist in science and international affairs: Current climate predictions are based on models and, naturally, the scenarios communicated to the policy world are the scientifically conservative scenarios [ i.e., the ones that most scientists agree are likely]. Yet, scientifically conservative scenarios are not necessarily what will happen; it is possible that the hazard is actually more imminent than is commonly understood. In this case, we may see physical climate surprises, as well as an increased policy response that is more abrupt than most firms are currently planning for.

 Supply Shocks: Another risk for the industry is that of sudden and unexpected disruptions to global energy supplies. While our participants did not agree on what the most likely cause of such a shock would be, they did agree that unexpected shocks could pose a severe challenge. Possible consequences include extreme price volatility, global recession, and ill-considered regulatory responses, as well as potential competitive impacts on affected firms. Energy Conservation: Not unexpectedly, the group voted for the possible success of energy conservation as the number 10 risk. Perhaps this ranking was swayed by the opinions of one of the subject matter experts, an energy economist, who wrote, The energy intensities of developing countries are very much higher than in most of the Organization for Economic Cooperation and Development (OECD) countries. Thus the scope for improved energy efficiency and indeed switching away from oil is potentially very large. An oil and gas analyst appeared to agree, noting that, The most powerful tool available to policymakers is energy conservation and it is the most under exploited. While there are no silver bullets, energy conservation comes close. The uncertainty is not so much one of policy failure but of policy success. It is important to note that this is only a snapshot and risks are subject to change at any time. These are not predictions, but considering them can help companies to prepare. Working through scenarios and impact studies can result in opportunities to tighten processes and controls, leading to dialogue and action plans that deliver value.