The Geopolitical Implications of Pakistan’s Oil Discovery

The Pakistani authorities have recently announced that a considerable oil & gas field has been found in the seabed off Karachi’s coast. While explorative surveys to assess the real scope of the untapped reserves are still ongoing, the first findings suggest that these deposits could radically transform Pakistan’s role in the energy market. But beyond the economic dimension, what will be the international implications of the discovery?

The Recent Findings

According to declarations by top Pakistani officials, including the Minister of Petroleum Ghulam Sarwar Khan and even Prime Minister Imran Khan, the large oil & gas field is located at about 230 kilometres from the shores of Karachi, one of the country’s main ports. The area has been named Indus Block G, and it extends on a surface of 7,500 square kilometres at a depth of 1,900 metres. The field is currently operated by Eni Pakistan Limited, but drilling has been carried out by a group of foreign oil companies; the most important of which is ExxonMobil, who holds 25% of the shares in the area.

The exact level of hydrocarbons contained in Indus Block G remains unclear, but the first surveys suggest that it could be a game-changer for Pakistan. At the moment, the country meets only 15% of its oil demand via domestic production and is forced to import the rest. 

Its main suppliers are Saudi Arabia, The United Arab Emirates and other Gulf states. 

In 2017, crude and refined oil accounted for 18% of Pakistan total imports, for a value of almost $10 billion. Also because of this, Pakistan is facing serious financial troubles: its current account deficit reaches $18 billion, its public debt is estimated at 67% or even more of the GDP, and the external debt stood around $82 billion at the end of 2017. The parallel shortage of foreign currency only makes things worse. All this has cast doubts over Pakistan’s financial solvability, but things may soon change thanks to the announced oil discoveries. If the initial reports are confirmed, exploiting the offshore reserves would not only allow Pakistan to meet all of its demand with domestic production, but even to become an oil & gas exporter; possibly even among the world’s top ten oil producers.

This, of course, will have consequences far beyond the strictly economic realm. Pakistan’s external relations would also be affected, as it will gain more money to pursue its geopolitical objectives and as foreign powers – and most importantly their energy firms – will try to take their share of the oil exploitation.

The international consequences

First of all, provided that the scope of the untapped reserves is confirmed, and that Pakistan manages to set up the necessary infrastructure to actually become a hydrocarbon-exporting country, then it will reduce and possibly solve its financial strains. This would translate in more money at its disposal, that it could spend to develop its economy, strengthen its armed forces and pursue its foreign policy objectives. But what is more significant is the possible involvement of foreign powers, or at least their reaction to the discovery.

China is the first country to watch. Being a huge and energy-hungry economy, the PRC is eager to access new oil & gas sources to reduce its dependency on the Middle East and most importantly on the vulnerable sea lanes of communication upon which it depends to import the hydrocarbons that fuel its economy. 

Also because of this, Beijing has been fostering its ties with Islamabad in recent years, and today the two are very close partners. The most important initiative in this regard is the China-Pakistan Economic Corridor, or CPEC, a large-scale infrastructure project to connect China’s land-locked western provinces with the Indian Ocean via Pakistan’s territory; which is part of the broader “One Belt, One Road” project that the PRC is promoting to connect East Asia and Europe. Considering its energy needs and its friendly ties with Pakistan, it is virtually certain that China will try to take benefit from Pakistani oil it the Indus Block G turns out to be actually as rich as estimates suggest.

Another power that may take a cooperative stance is Saudi Arabia. While it is true that it could lose a client and possibly see it transforming into a competitor, it is also true that it has historically positive relations with Pakistan; and the Saudi Kingdom wants to keep them to put pressure on the western side of its arch-nemesis, Iran. 

As a result, it is reasonable to believe that Riyadh will seek a win-win solution; for example, by providing technical assistance and financial resources to Islamabad. After all, the Saudis have already pledged to invest $10 billion to build an oil refinery in Gwadar, a Pakistani port which is also the endpoint of the CPEC; and during a later visit by Crown Prince Mohammed bin Salman they promised another $20 billion investment in the energy sector.

On its part, Iran will not be very enthusiast about Pakistan’s oil & gas potential. In theory, it could also try to play the cooperative card, also as a mean to improve bilateral relations which have been rather cool for decades out of Islamabad’s ties with Washington and Riyadh, and that have recently been shaken by a terrorist attack on Iranian soil by a Pakistan-based group. 

But exactly for these reasons, it seems more likely that Iran will not help its neighbour in developing the Indus Block G field. Moreover, Pakistan itself will probably be hesitant to get Iran involved, as this would anger the Saudis and the Americans thus possibly hampering its chances of selling its oil & gas on the international market.

Finally, India will surely regard Pakistan’s hydrocarbon potential under a negative light. The bitter rivalry between the two powers since their creation in 1947 is well-known, and recent episodes like the terrorist attack on Indian soldiers in Kashmir by a group headquartered in Pakistan and the subsequent cross-border air raids by both sides certainly did not improve the relations between New Delhi and Islamabad. Now, the prospect of seeing Pakistan earning money from oil & gas exports certainly upsets India, since in its perspective this would translate into more resources at Islamabad’s disposal to modernize its armed forces and to finance anti-India terrorist groups. But apart from trying to lobby against it with relevant stakeholders, India can do little to stop Pakistan from developing its energy reserves.

Then, there are a few non-regional actors to consider. Russia might offer its aid, for economic reasons and for improving bilateral relations; even though this may upset India and Iran, two powers with whom it wants to maintain positive ties for geostrategic reasons. 

The United States is likely to react with detachment. Its relations with Pakistan have worsened in recent years, and especially under the Trump administration, because of Islamabad’s alleged support for Jihadi terrorism and also because Washington is keener to align with New Delhi out of the shared concerns on Beijing’s growing power. Yet, America is indirectly involved since ExxonMobil, the company who holds 25% of the stakes in the Indus Block G field, is a US-based firm. 

Lastly, the European Union and its Member States will probably express their interest: they are generally neutral in regards to regional disputes, just calling for a peaceful resolution of conflicts; and at the same time, they are interested in accessing new hydrocarbon reserves.

What to expect from Pakistan’s untapped reserves?

Determining what will happen on the Indus Block G and whether Pakistan will become a world-class oil & gas producer is difficult at the current stage. While the first surveys have been very promising, the final results are yet to be published. Until this happens, any assessment on the impact of Pakistan’s hydrocarbons is to be taken with a grain of salt.

Still, it is possible to make a few comments. First, Pakistan will need foreign assistance in both financial and technical terms to fully develop the field. The prospects are already favourable in this sense, since ExxonMobil and other multinational energy firms have expressed their interest in the area. 

If Islamabad manages to start extraction activities, it could stabilize its economy and obtain more resources to pursue its geopolitical objectives. 

At the international level, China is poised to take the greatest benefit from it. It is Pakistan’s closest partner and it needs oil & gas to meet its energy demand. As such, the discovery of a rich hydrocarbon field off Karachi’s coast is a positive event for it, even more in light of the CPEC and of Saudi Arabia’s commitment to sustain the Pakistani energy sector. On the contrary, Iran and especially India will hardly assist Pakistan. They may even try to undermine its efforts, even though they do not have many ways to do so. Other powers may be willing to cooperate, most likely the European countries.

Of course, the final outcome depends on a series of technical and economic factors; as well as on the choices of both governments and of private companies such as ExxonMobil, who will probably play an even more important role. But the initial prospects suggest that Pakistan’s oil & gas industry is to be carefully observed in the coming years.

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