Critics say prime minister trying to deflect attention from massive IMF loan.
Prime Minister Imran Khan has come under fire after his government abandoned an offshore drilling project due to failure to find any oil and gas, with some critics saying he had announced the doomed plans to deflect attention from the massive loan it was negotiating with the International Monetary Fund.
Pakistan began negotiating the $6 billion IMF loan last year in the hopes of staving off a balance of payments crisis. But with tough conditions attached to the loan, the prime minister and some of his fellow cabinet members were quick to announce "good news" in the form of the drilling project, critics said.
Pakistan launched the drilling project, its first, in search of oil and gas at the start of the year in the Arabian Sea off its southern coast. Undertaken by Exxon Mobile and Italy's ENI, together with two local companies, the drilling initiative was set to catapult the country to becoming an OPEC member, according to some politicians close to Khan.
Their desperate optimism was largely fueled by Pakistan's proximity to the Middle East, notably the nearby Persian Gulf surrounded by oil and gas rich countries including Saudi Arabia, the United Arab Emirates, Qatar and Iran.
"Best of luck to ExxonMobil & ENI when they start drilling. Let us all pray for a global discovery. From the looks of it, big news Inshallah (by the will of Allah)" announced Ali Haider Zaidi, Pakistan's minister of maritime affairs on Twitter in December.
Those promises were abruptly broken on May 18 when government officials pulled the project after failing to find any gas or oil reserves. Now Khan and his government faced mounting criticism.
"They [government] played up this whole initiative without thinking it through," said Shahid Khaqan Abbassi, Pakistan's former prime minister who had also previously served as minister of petroleum, in an interview with Nikkei Asian Review.
Abbassi who stepped down as prime minister in early 2018 before parliamentary elections brought Khan to power added: "The government deliberately created a hype to turn people's attention away from a tough period ahead as they impose conditions under the IMF program."
Opposition leaders had warned that the coming IMF program would lead to a steep rise in energy tariffs and the removal of subsidies that help to make public welfare services affordable for Pakistanis.
Saudi support or the IDB loan can not be a substitute for Pakistan to reduce its dependence on imported energy resources. © Reuters
Economists said that even if the offshore oil and gas project had been successful, it would still take years before the benefits would feed down to consumers. "By the time energy [resources] were going to be put out if the drilling would have been successful, you were easily looking at four to five years," said Mushtaq Khan, a respected economist and former head of economic research at the central bank, the State Bank of Pakistan.
In an interview with Nikkei, Khan added: "The government built up expectations without having a clear idea on the scale of the expected [oil and gas] reserves."
Khan's government, however, has received some good news. Ahead of the annual budget for the next financial year which begins in July, Pakistan announced on May 22 that Saudi Arabia had agreed to defer up to $275 million in monthly payments from July for oil shipments to the country for a total of $9.6 billion over a three-year period.
A few days after that, de facto Finance Minister Abdul Hafeez Shaikh said that Jeddah-based Islamic Development Bank, the largest developmental institution in the Islamic world, had agreed to lend $1.2 billion to Pakistan to finance oil imports from July.
These commitments in the short term will help Pakistan with its oil import bill, which according to economists, is expected to reach $17 billion to $19 billion in the next financial year.
Yet, economists said, they leave Pakistan with more debt in the long term and do not address the country's need to reduce its dependence on energy imports.
"As Pakistan goes through a difficult adjustment period under the IMF loan, of course these gestures [support from Saudi Arabia and IDB] provide an important cushion," said one western economist who did not want to be named. "But these loans eventually have to be paid back."
A senior executive in a foreign oil company based in Pakistan said that Islamabad must be prepared to undertake more drilling initiatives. "Sometimes you have to drill up to 20 or 30 different locations before you can find promising results," he said. "The first drilling project which failed had a cost of about $100 million. Pakistan needs to be prepared to spend more money."
As it prepares to finalize details of the IMF bailout, the government would be keen to find large new investments on further offshore drilling projects, but analysts said it would also have learned the painful lesson that predicting overly optimistic outcomes can easily backfire.
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