Tapping into Pakistan’s Massive Oil and Gas Reserves

Editor's Note: This report is from oilprice.com an energy intelligence firm which thrive on its expertise and intelligence network for this insight. Geopolitics is not all about oil but it does play a significant role which cannot be overseen by any analyst or policy maker. Pakistan’s Tribal Areas (FATA) and Frontier Regions (FR) are believed to have massive reserves of oil and natural gas—which Pakistani officials have suddenly become very keen to demonstrate. But this is a highly restive, war-torn area where one right move could make all the difference, and one wrong move could ignite a conflict with irreversible consequences. For now, the area remains unexplored and it was only in 2008 when Pakistani geologists began to study the area in earnest, with the support of the local authorities in the Federally Administered Tribal Areas (Fata) and the Frontier Region (FR). The results of this research were collected, processed and digitized in June 2012. The geologists discovered seven new oil and gas seepages during the mapping. The geologists also claim that 11 oil and gas exploration companies have already reserved 16 blocks in Fata. The potential: •    Pakistani geologists say Fata in particular is poised to become a “new oil state” whose production could rival Dubai’s in only five years •    The FR is bursting at the seams with gas, so they say Here’s what the interest looks like so far: •    17 companies have initiated operations in Fata/FR (in Khyber, Orakzai, North and South Waziristan, Peshawar, Kohat, Bannu, Tank and DI Khan) •    Tullow has been active in Pakistan since 1991, but since 2008 it has sought to transfer its Asian licenses to focus on Africa and the Atlantic Margin •    The other players in Fata are juniors and they include: Mari Gas Company (Pakistan), HYCARBEX Inc. (part of American Energy Group Ltd-AEGG), Saif Energy (Pakistan), MOL Pakistan Oil and Gas, Orient Petroleum International (Ocean Pakistan Limited/Cayman Islands), ZHEN (China), and others •    The Oil and Gas Development Company (OGDC-Pakistan) is set to begin exploratory drilling in FATA and FR soon Infrastructural Geopolitics In terms of infrastructure, China has been the chief architect, and investor. The Gwadar Port is a shining example. China has invested around $300 million so far in the deepwater Gwadar Port, in the Gulf of Oman. Construction began in 2002 and the goal was to make this port the transit like for trade with landlocked countries (read: Afghanistan) and to boost transit from the Persian Gulf to East Africa. China plans to invest a total of $1.6 billion in the port—so far it’s cost $200 million to build the first three berths, which can handle $2 billion in cargo annually. Despite its capacity, cargo has been slow to move through this port, largely because it’s not connected to the rest of the country. China was hoping that Pakistan itself would work on this problem, but in the end China has had to go it alone. Right now, it’s building a highway from Gwadar to Quetta, the capital of increasingly restive Balochistan, which sits on the border with Afghanistan. From here, the highway will connect up with the country’s national network and eventually to a highway that leads right to China. Beijing is also building an airport at Gwadar, which is slated to open this year.  In late December, Byco Oil Pakistan Limited completed the country’s largest oil refinery at Mouza Kund in Balochistan. The refinery’s capacity is 120,000 barrels of oil per day, which can eventually be expanded to 180,000 bpd. Another, smaller refinery in Khyber-Pakhtunkhwa is also just getting off the ground, though construction has not begun, will boost refining capacity by an additional 40,000 bpd. But it is the Gwadar Port that has everyone up in arms. The port has two oil terminals, but more than that, if it gets off the ground (and it will) it could shift the central stage of “Great Game” of Central Asia to Pakistan (with Afghanistan the gateway). Strategically, this port could become the most important new port in the world, close to the key oil transit corridor, the Strait of Hormuz. It is positioned at the crossroads of three key oil transit regions—the Middle East, South Asia and Central Asia.   But it’s in Balochistan. Here’s the rub. The US, India and Israel are frightened by this prospect. For the US, whose relations with Pakistan are on a steep downward spiral, the prospect is worrying. But China—always pragmatic—is running this show; and while there will be no immediate rewards for building up Pakistan’s infrastructure, Beijing tends to demonstrate a quiet patience in geopolitics, going for the long-term prize. The US, Israel, Saudi Arabia and India are bent on destabilizing Balochistan as a bulwark against Iran, which has its own restive Baloch population, and the creation of a new energy corridor that would see China in control of another strategic gateway and give it more room to maneuver in the Indian Ocean (China’s “String of Pearls”). The only thing standing in China’s way right now is Pakistan itself—namely, a dysfunctional government whose corruption and political horse-jockeying have hindered progress on the port. BUT—and there is a big BUT—late last year, Pakistan simply handed the port over to China, making Beijing the key manager and operator. New Oil Potential and Security—More than a Hindrance Now let’s look at the key obstacle—law and order, which is described in a very understated way by Pakistani officials as “a hindrance”. Here there may be a challenge to the goal of more production than Dubai in five years. This is territory characterized by the fallout from the never-ending war in Afghanistan and highly controversial US drone attacks that have killed too many civilians for the Pakistani’s taste.  It is the home of an array of fractured militant groups, as well as the Pakistani Taliban. It is the home of some very complicated tribal politics—and people who have resisted any takeover of their territory since the time of Peter the Great. On 13 January, a roadside bomb in North Waziristan killed at least 14 Pakistani soldiers and wounded at least 25. This is one of the biggest recent attacks in the area, but it was only one of a wave of attacks the preceding week that left more than 130 people dead. This was the day after the Pakistani Taliban called for a cessation of attacks on the military in the area. On 15 January, militants attacked check points in the Khyber tribal area and six Pakistani security forces were killed in the ensuing skirmish, 28 other injured. These were newly established checkpoints and they were attacked by militants belonging to the Lashkar-i-Islam group, which hasn’t launched an attack in three years. On 8 January, a US drone attack in North Waziristan killed at least seven people, said to be militants. The week before, another US drone attack targeted South Waziristan. Pakistan’s militant groups are unpredictable and divided, and the uncertainty in Pakistan’s tribal areas makes Iraq look stable. While Balochistan is tinderbox link in the infrastructure chain, FATA is a cocktail of militants and combat troops (over 100,000), and the latter are there to stay for some time, even if peace looks possible. And peace will not be possible as long as Afghanistan remains unresolved. So while a developed oil and gas industry in FATA and FR could be the answer to the region’s energy crisis and the socio-economic causes of unrest, Afghanistan will remain the spoiler. The Chinese, however, are rather immune to these security concerns, so look here for any significant foreign involvement. Chinese-Pakistani relations are long-running and deep—and only occasionally stunted by China’s rapprochement with India. On the security front, China’s lower vulnerability to security threats is due to the fact that it knows the Pakistani military would protect its interest more. They enjoy a certain privilege of protection that the West (or Russia) would not. Russia, too, is attempting to turn Pakistan from enemy to ally, and one shouldn’t be surprised to see Gazprom taking stock of the energy possibilities here as Russia increasingly looks east. With the US withdrawing from Afghanistan, it becomes much more important for Russia to make friends with Pakistan—and Moscow is keen to take advantage of souring US-Pakistani relations. The west, particularly the US, will find Pakistan extremely challenging.