OGDCL

Oil and Gas Development Company (OGDCL)

Oil and Gas Development Company (OGDCL)Risks Relating to Business & Mitigators.Mahmood AliSehar Salman AdilSindhya KirshanSyed Labib IqbalAbout the CompanyEstablished in 1961.National oil and gas company of Pakistan.Listed on all three stock exchanges as well as London Stock Exchange.

RISKS RELATING TO BUSINESS

Risk # 1Prices for crude oil, gas and petroleum products could decline substantially and extended decline would have adverse effect on the business financial conditions and operations. Oil PricesPrices are benchmarked internationally and volatility in international oil prices affect the businesses. Prices have fluctuated because of global and regional supply and demand, uncertainty, prices and availability of alternative fuels, global economic conditions, access to pipelines, natural disasters etc. Risk # 1Gas PricesOGDCLs gas prices are based on international Middle East crude oil prices subject to a floor of US$10 per barrel and a ceiling od US$36 per barrel. Thus, gas prices are subject to limited exposure to fluctuation in international gas prices. But a significant decrease in international prices could have an adverse affect.Mitigation for Risk # 1Reduce the time taken for negotiations between the company and the government of Pakistan to discuss the petroleum policies. This will speed up the payment procedure and prevent prices rising unexpectedly during that time.To reduce the impact of fluctuations, OGDCL should engage in hedging transactions and derivatives trading. Risk # 2Crude oil and gas reserves data are only estimates and the actual deposits may differ from these.The estimates made by the company and the consultants is a subjective process and cannot be measured in the exact manner as they are based upon:Historical productionAssumptions on future oil and gas pricesAssumptions of future operating costsInterpretation of geological and geophysical data

Risk # 2The following may differ from the actual reserves:Quantities and qualities that are ultimately recovered.Actual Production and operating costs incurred.Prevailing crude oil and natural gas prices for OGDCL.Production performances of the reservoirs in which company holds interests.

Mitigation for Risk # 2Try and improve some efficiency in petroleum engineering to help reduce the gap between the actual and estimated results.Do substantial upward and downward revisions to the companys estimates. But do them as needed as sometimes downward revisions can adversely affect the companys situation. Risk # 3Failure to implement key elements of companys strategyOGDCLs drilling rate is the highest in the industry in Pakistan. Finding and development costs from a third party benchmarking show the lowest rate compared to peer companies. Business Strategies of OGDCL:To have sustained production growth coupled with an industry leading cost position.Expansion of offshore business activitiesExpand into selective international activities.Mitigation for Risk # 3When offshoring and entering into international joint ventures, depending on partners might be needed for technical expertise. The company needs to ensure that trust is built amongst both the parties to successfully execute business plans. OGDCL should have ability to secure access to rigs at cost effective price to meet drilling targets. Risk # 4Possibility of Terrorist attack like pastThree of its fields are located in Balochistan, accounts for approximately 31% of its total gas production.

Conflict between government and local tribes.

Mitigation of Risk # 4Choosing locations in areas with less law and order issuesTrying to create good relations with local tribes and their spokespersons to mitigate the risk of becoming target in conflict between GoP and local tribesAdopting proper insurance policies to mitigate the risk.Risk # 5Government can Influence the company and its interests may conflict with ordinary share holders.The Government of Pakistan will beneficially owns 80% of OGDCLs paid-up share capital.Government of Pakistan has the ability to continue to control the appointment of its Board of Directors and management, as well as other policy decisions relating to its operations.

Mitigation of Risk # 5GoP will have two directors to represent them and six out of eight Directors will be chosen having expertise in Petroleum and related fieldTheir appointment will be in accordance with the criteria set forth in the Code of Corporate Governance in PakistanRisk # 6The Company will engage in transactions with entities owned or controlled by the Government of Pakistan that may present conflicts of interest. Various agencies and departments of the Government of Pakistan exercise regulatory functions over its business activitiesMinistry of Petroleum and Natural Resources determines petroleum policies and therefore sets the floor and ceiling for its gas pricesThe Oil and Gas Regulatory Authority, or OGRA, notifies its gas wellhead prices pursuant to pricing formulae set forth in the relevant petroleum policy and terms set forth in gas purchase agreements.

Mitigation of Risk # 6Since petroleum is highly regulated industry OGDC will ensure to get the best possible prices using its negotiation power in the best of shareholdersAlso, transparency will be maintained during all the transaction between governmental organizationsAlso OGDC will adhere to 2001 Petroleum Policy in the negotiation with Ministry of Petroleum and Natural Resources

Risk # 7Failure to acquire rights to or discover additional crude oil and natural gas reservesIf acquisition and exploration activities are not successful, its total proved reserves and future production will decline.If the Company is unable to generate profitable production from such reserves, its results of operations and financial condition could be adversely affected.

Mitigation for Risk # 7The Company can try to negotiate commercially reasonable terms for such acquisition, exploration, development or production activities; Where the company may be facing political issues, it can seek protection from the government and also with the political entities available there The Company should regularly and actively monitor the works of its partners.

Risk # 8Exploration drilling involves risk that the Company will encounter no commercially productive crude oil or gas reservesThe cost of drilling, completing and operating wells is often uncertain.the Company may incur cost overruns or may be required to curtail, delay or cancel drilling operations because of many factors

Mitigation for Risk # 8Its future production depends significantly upon its success in finding or acquiring and developing additional reserves.Therefore, the company should be constantly be trying to find and acquire additional reserves.

Risk # 9Oil and gas companies may incur material costs to comply with, or as a result of, health, safety and environmental laws and regulations It may incur expenditures to:modify operations; install pollution control equipment; perform site clean-ups; curtail or cease certain operations; or pay fees or fines or make other payments for pollution, discharges or other breaches of environmental requirements.

Mitigation for Risk # 9To work as socially responsible company, these costs should be kept in mind.The company should try to abide by the regulations so the society faces minimum costs.If companys costs are going very high, it should negotiate with the Government to cut those costs because of the importance of their products.

Risk #10Oil and Gas companies are not insured against all potential losses and may be seriously harmed by natural disasters or operational catastrophesDue to the hazardous nature of oil and gas exploration, natural and man-made accidents could occur which can result in spillovers, fires and other incidents that could damage the companys assets/operations leading to reduced revenue and increased expenses.This also includes the companys inability to obtain insurance that covers acts of terrorism.

Mitigation for Risk #10The company will maintain a fund to cover several contingencies; however, if more than a several of these contingencies happen to affect the business at one moment in time, then the fund might not be enough to cover the costs.The company has assets located in scattered parts of the country which minimizes the possibility of natural disasters impacting all assets at one time.The company also maintains business-interruption insurance for all but two of its oil and gas fields.Risk #11The company may face increasing competitionThe Government of Pakistan has taken steps to liberalize the E&P sector of Pakistan. This will increase exploration activity in the country, which will increase competition for the Company as well, especially in the pursuance of concessions for exploration activity.Significant competitive pressure could result in its failure to acquire additional exploration licenses and development and production leases resulting in a reduced financial performance for the company.

Mitigation for Risk #11Build the Company up to such an extent that it is able to deal with the competition.Invest in technology and quality from an early stage to be better able to compete with the competition.Acquire concessions/licenses on exploration activities in collaboration with competition rather than competiting against them.Risk #12Petroleum polices governing the pricing for its petroleum products from future development and production leases are subject to change Any petroleum policy regarding prices could have an impact on the business, positive or negative. While most Oil and Gas companies believe that this policy will favorable impact the industry, there is still a likelihood of it being unfavorable.Mitigation for Risk #12This is one of the risks that doesnt have a huge likelihood of actually manifesting itself.All economic experts believe that policies to be submitted/amended in the near future will have positive economic effects for the Company.Barring the power of lobbying, the Company has no way to mitigate this risk. It will also equally hamper the competition as much as it cripples the Company so is an industry-risk.Thank You!