LAHORE - The federal government, in the upcoming budget 2012-13, will continue to focus only on maximizing the potential of its existing oil reservoirs rather than finding new wells.

Experts said that with challenging security environment and circular debt, the exploration and development activity would remain muted during next fiscal year, as there is no considerable allocation in this regard despite severe energy crisis.

They said that the budget 2012-13 will be non-event for the E&P sector that is the largest contributor to government revenue and 29 per cent to total market capitalization.

According to them, in FY13, the country’s oil production will increase by 5 per cent, while gas production is expected to increase by 4 per cent. During 9MFY12, the sector’s oil production has remained stagnant, while gas production increased by 5 per cent.

The government will reaffirm its commitment for the resolution of energy crisis through energy chain restructuring. However, political consideration may not allow the government to follow through its plan.

The budget to reveal government dividend estimates for OGDC & PPL. The govt may reaffirm secondary public offering of PPL and issuance of exchangeable bonds of OGDC ($500m) to bridge fiscal deficit while possible indication of progressive petroleum policies to overcome energy and particularly gas shortage.

Political compulsion will cause government to surpass its subsidy allocation of Rs120 billion to Rs200 billion in FY13 but it would be lower than estimated subsidy of approximately Rs300 billion last year. This would slow down the built up in the circular debt. The expected lower subsidy disbursement against FY12 is due to recent increase in electricity tariff by 16 per cent, which would slightly ease the liquidity strain on E&P firms.

Due to favourable pricing scenario and augmented oil and gas production, the sector is expected to show robust earning growth of 41 per cent and 12 per cent in FY12E and FY13F, respectively. The companies are expected to benefit from firm oil prices (Arab Light crude assumption of $100 per barrel) and production enhancement from Tal block, seeing volumetric growth led by their working interest in Naspha and Tal Blocks.

Government would target Rs120-140 billion as Petroleum Levy (PL) in FY13, in line with last year target of Rs120 billion but higher than estimated collection of Rs70 billion in FY12. Given political consideration to keep petroleum prices in check, it is estimated the collection to be in the range of Rs70-80 billion in FY13.  The deemed duty for refineries will remain intact at 7.5 per cent on HSD. Though not falling under the ambit of Federal Budget, government would delay full deregulation of the petroleum prices by keeping IFEM (Inland Freight Equalization) element intact in pricing mechanism.

Government reaffirm its commitment for the resolution of circular debt by TFC issuance and recent increase in power tariff by 0.5 per cent turnover tax to continue for downstream oil sector. Budget will also reveal government FY13 dividend expectation from PSO that has been marred with circular debt. Recent electricity tariff increase would likely slow down the circular debt built-up. It is estimated actual subsidy will reach Rs200 billion in FY13 versus Rs300 billion estimated in FY12.

Thus, OMCs cash position is expected to be relatively better in FY13. The issuance of new bonds is expected to be a short-term remedy for the liquidity problems of the energy chain with full and final settlement of the circular debt lies in the complete revamping of the entire energy chain.

With political compulsions playing a road block to energy sector reforms, it is expected that liquidity problem particularly for PSO will persist in the coming year, but to a lesser extend as against FY12.

The recent decline in oil prices may lead to inventory loss for domestic refineries as well as reduce deemed duty in absolute terms.