Key Takeaways:
Pakistan has discovered significant oil and gas reserves, potentially ranking 4th largest globally, though commercial viability remains uncertain.
Chinese firms are poised to lead Pakistan’s energy sector, leveraging existing Belt & Road Initiative infrastructure for efficient resource extraction and transportation. This strengthens China’s energy security while reducing reliance on Russian gas, reshaping regional dynamics and challenging Western strategic interests.
The commercialization of Pakistan’s oil and gas reserves could challenge Saudi and Russian dominance in South Asia’s energy market, shifting regional supply chains, while the resulting revenue boost is likely to increase Pakistan’s military spending, intensifying tensions with India and further destabilizing the region.
The commercialization of Pakistan’s reserves is likely to bolster its economy, revitalizing key sectors like textiles and positioning the country as a potential low-cost manufacturing hub. Enhanced trade and energy exports will benefit transit and logistics companies, while increased defense spending will create opportunities for defense manufacturers, especially from China.
Overview
Pakistan has discovered significant oil and natural gas reserves within its territorial waters after a three-year exploration survey conducted in collaboration with an unnamed allied nation. KSG assessment concluded this nation to be China. Preliminary estimates indicate these reserves could place Pakistan among the top global holders of hydrocarbon resources, potentially ranking 4th largest worldwide. However, the commercial viability of these reserves remains uncertain, pending further analysis and exploration.
News of the discovery was released in early September. Since then KSG has conducted thorough intelligence collection and strategic assessment.
Western Energy Exit
Persistent and severe security challenges significantly complicate the recent discovery of hydrocarbon resources in Pakistan. Typically, a discovery of this magnitude would attract substantial international interest, with major energy companies vying for a foothold in the market. However, in this case, there is a clear trend of international companies, such as TotalEnergies and Shell, divesting from the country due to the deteriorating Pakistani security environment. In June 2023, 18 oil and gas blocks were put up for auction in Pakistan with only 3 receiving bids, underscoring the lack of investor confidence.
The militant group Balochistan Liberation Army (BLA), alongside others, have repeatedly targeted critical infrastructure, including the strategically vital Chinese-operated Gwadar Port. Suicide attacks have disrupted operations along the China-Pakistan Economic Corridor (CPEC), with some projects being suspended indefinitely. This has raised serious concerns about the feasibility of sustaining foreign operations despite the security measures provided by the Pakistani government.
Deepening China-Pakistan Relationship
The Pakistan-China relationship remains pivotal in South Asia, defined by strong economic, energy, and defence collaboration. Despite Pakistan's volatile security environment, China continues to deepen its involvement, positioning itself as the primary foreign stakeholder in Pakistan's energy and infrastructure sectors.
A key pillar of their partnership is the China-Pakistan Economic Corridor (CPEC), which both nations are committed to expanding. Recent developments highlight enhanced cooperation in geological surveys, resource evaluation, and offshore oil and gas exploration. Plans for a new joint marine geology survey are underway, signalling a shared focus on leveraging Pakistan's untapped hydrocarbon reserves. On September 22, 2024, Pakistan's Oil and Gas Development Company Limited (OGDCL) signed a memorandum of understanding with the China Coalfield Geology Engineering Corporation (CCDC) to develop Pakistan's shale and tight gas reserves, making China the dominant foreign actor in Pakistan's energy market.
Tensions with the West
Relations between Pakistan and the West, particularly the United States, have significantly deteriorated in recent years. Calls to end Pakistan’s designation as a Major Non-NATO Ally (MNNA) reflect mounting U.S. skepticism about Pakistan’s alignment, fueled by concerns over its links to militant groups and closer ties with China. This strained relationship limits the ability of U.S. and Western private sector companies to operate effectively in Pakistan, particularly in sensitive sectors like energy and infrastructure.
Russia-Pakistan Relationship
While Russia maintains limited economic ties with Pakistan, the recent energy crisis has pushed Moscow and Islamabad closer. Shared interests in expanding energy cooperation, such as LNG exports, has seen Russia pursuing greater engagement. However, Russia's capacity to match China’s extensive involvement remains constrained by its own economic and geopolitical challenges.
Pakistan's Demand for Foreign Energy
Pakistan is currently facing significant energy challenges, heavily relying on imports to meet its fossil fuel needs, with oil and gas imports representing 22.78% of Pakistani import costs or $16.79 billion USD. This dependency has strained the economy, with rising energy costs and shortages disrupting critical industries. The textile sector, responsible for 60% of Pakistan's exports, has been particularly hard-hit, forced to scale back operations due to insufficient energy supplies resulting in losses exceeding $1 billion.
Middle East Interest in Pakistan's Consumer Market
The Middle East has shown keen interest in Pakistan's growing energy consumer market, focusing on retail operations rather than exploration. Aramco, Saudi Arabia's state-owned oil giant, acquired a 40% equity stake in Gas & Oil Pakistan Ltd (GO), a major retail operator, marking its first retail investment in the country. This move aligns with Aramco's strategy to expand its global retail footprint, highlighting Pakistan as a high-value market. Similarly, Oman's state-owned Asyad recently purchased Shell Pakistan, further emphasising the region's interest in capitalising on Pakistan's energy distribution network and consumer base rather than its upstream oil reserves.
Forward look:
Upstream activities:
China is poised to be the primary foreign entrant in Pakistan's newly discovered oil fields, with a likelihood of 65%, according to KSG assessments. Chinese companies, known for their relatively low risk aversion, are well-positioned to capitalise on Pakistan's resources, whereas others may hesitate due to security concerns. The location of the Gwadar Port and CPEC offer an efficient route for the swift transportation of extracted oil and gas to China, reinforcing Beijing's energy security while further cementing its influence in Pakistan's resource development.
KSG assesses major Western oil companies are unlikely to enter the Pakistani market, given their recent exits and the lack of interest in available blocks. This reflects a broader trend of Western disengagement from Pakistan's energy sector, driven by security concerns and operational risks.
Despite their current focus on retail activities in Pakistan, KSG assesses that Middle Eastern players like Aramco have the strongest opportunity among international firms, except the Chinese, to expand into the exploration and development of Pakistan's oil fields, given their infrastructure, expertise, financial resources and current presence in the country. This would allow them to secure long-term supply chains and strengthen their strategic foothold in South Asia's energy market.
Downstream activities:
Another potential entrant is Turkey, owing to its deep ties with Pakistan and substantial LNG infrastructure. Turkey currently operates as a key transit hub for energy from countries such as Russia, Iran, Azerbaijan, Algeria, and Nigeria, facilitating supply to the Black Sea region, including Romania, Bulgaria, and Hungary. KSG assesses that Turkey is likely to engage in a secondary capacity, contributing to infrastructure development or serving as a transit hub for exporting Pakistani gas to Europe. Direct involvement in the exploration and development of Pakistan's oil and gas fields appears less probable, given Turkey's strategic focus on energy transit and logistical expertise rather than upstream activities.
Although uninterested in upstream activities due to security concerns, KSG assesses that Western firms could explore opportunities in refining and distribution. ExxonMobil, known for its expertise in downstream operations within emerging markets, could particularly benefit from investing in refining or petrochemical facilities to serve Pakistan’s growing energy demands and industrial needs.
Impact on regional oil and gas trade:
KSG assesses that the commercialization of Pakistan's oil and gas reserves has the potential to pose a threat to Saudi and Russian oil and gas sales in the South Asian market. Furthermore, KSG anticipates that by the time these reserves are brought online in the next five years, the global clean energy transition will likely have advanced, contributing to a gradual reduction in demand for fossil fuels. This dual impact of increased supply from Pakistan and uneven demand growth could exert localized downward pressure on oil prices, particularly in price-sensitive emerging markets.
Impact on transit and logistics companies:
KSG assesses that enhanced trade via ports, fuelled by increased energy production and foreign investment, will benefit logistics and shipping companies, particularly those operating in Gwadar and along CPEC trade routes. Companies like Maersk and AD Ports Group can expect to benefit heavily.
Geopolitical Implications:
KSG assesses that with domestic energy supplies and cheap labor, Pakistan has the potential to emerge as a low-cost manufacturing hub, attracting investments in textiles, consumer goods, electronics, and chemicals, provided infrastructure and trade policies are enhanced.
The commercialisation of Pakistan’s oil fields will bolster its economy, positioning it as a regional manufacturing hub and enable increased defence spending. This will intensify tensions with India, destabilising South Asia, while further benefiting Chinese defence manufacturers.
KSG assesses that Pakistan’s energy development could diversify China’s supply of oil and gas, weakening economic leverage for countries like Russia, Australia and Saudi Arabia.
KSG assesses that overland transport of oil and natural gas via the CPEC will bolster China’s energy security by reducing its reliance on maritime shipments through the Strait of Malacca. This development will mitigate the impact of a potential U.S. blockade during a China-Taiwan conflict and enhance Beijing’s energy resilience. Pre-conflict, it also reduces the ability of the U.S. to deter a Taiwan invasion in the first place.
Most Likely Situation in 5 Years (December 2029)
Chinese drilling companies will have led the development of Pakistan's oil and gas reserves.
Commercialization of these reserves will have provided Pakistan with sufficient oil and gas to meet its domestic needs, diminishing its reliance on external sources. This self-sufficiency will have, in turn, reduced the investment incentive for Middle Eastern interests, for whom Pakistan was emerging as an important consumer market for their energy exports.
As Gulf states have lost market share in South Asia to Pakistan, they will have looked to deepen energy partnerships with Europe, particularly in LNG exports and hydrogen technologies, reshaping energy alliances.
China's newfound ability to source crude oil and natural gas from Pakistan will have reduced its dependence on Russian gas. This shift will impact Moscow's income stream and further tilt the China-Russia energy partnership in Beijing's favour, granting China greater leverage in their bilateral relationship. Such a shift will have fueled Russia to align more closely with India, who will have continued to import high levels of Russian crude.
This development will have deepened China-Pakistan ties, fuelling South Asian tensions, particularly with India. Revenue from the oil fields will likely boost Pakistan's military spending, while China's investments in coastal infrastructure, including Gwadar Port, will have enhanced maritime security collaboration to safeguard vital trade routes. These actions will heighten military tensions with India.
Trade between China and Pakistan will have and will be occurring in local currencies, reducing reliance on the U.S. dollar and strengthening the Chinese yuan.
The challenging security environment in Pakistan will have created opportunities for private security firms, particularly Chinese companies like Frontier Services Group (FSG), HuaXinZhongAn, and Shandong Huawei Security Group to protect Chinese personnel and infrastructure, given the insufficiency of security measures provided by the Pakistani government.
Through Chinese investment in infrastructure and extraction activities, the economy will have improved, and the security environment will have stabilised. These developments will have potentially mitigated the currently high-security concerns that are deterring investment from foreign parties other than China.
Western companies will have found little opportunity to enter Pakistan’s energy market due to deep Chinese integration in upstream and downstream activities.