While the local E&P companies might be seen continuing their increased drilling and exploration activity, the primary reason is that the reserves are depleting fast and despite discoveries, the new finds are small in size with small hydrocarbon content. This can be seen in the decline in production volumes of both natural gas and crude oil in recent years. In FY21, the trend continued somewhat.
Overall, the revenue of the four key listed players in the upstream oil and gas sector together was flat in FY21, while earnings were up by around five percent year-on-year. Of the four listed E&P giants, OGDCL led in revenue as well as earnings growth (3 and 9 percent, respectively). The sluggishness in revenues was primarily due to weak production volumes of natural gas with some recovery in crude oil production. Where OGDCL witnessed some recovery in its crude oil production which climbed by 2.3 percent year-on-year, its natural gas production on average fell by 2.6 percent year-on-year in FY21. For PPL, crude oil production climbed by 3 percent year-on-year, and natural gas production declined by around 4 percent in FY21. POL’s oil and gas production fell by one and three percent, year-on-year, respectively. However, Mari Petroleum saw a 17 and 8 percent rise in its oil and gas production during the year.
On the expenses side, the largest overhead: exploration and prospecting expenditure remained on the lower side, declining year-on-year in some cases and remaining flattish for others. Slower growth in exploration costs should technically support the bottomline, but it could also mean lower drilling activity. Exploration costs usually entail the cost of dry and abandoned wells - a decline of which year-on-year means that a lesser number of wells were declared dry compared to the previous period; but it could also show that fewer attempts were made or that overall recoverable reserves are declining.
Overall, the E&P sector’s profitability was among key sector performance on the stock market. The sector performed well in the last quarter of FY21 due to a surge of over 150 percent in crude oil prices year-on-year as well as an increase in oil and gas production, which also supported the overall FY21 performance.
