THE much-awaited GDR offering of Oil and Gas Development Company (OGDC), promoted as Pakistan’s largest ever, fell short of expectations in terms of size and pricing with a negative impact on OGDC share price in the local stock market. The KSE 100-share index dropped by 231 points to close at 10,388 on Friday following the offering in London.

The sale of government’s 8.8 per cent (376.79 million shares) stake in OGDC raised $712 million on November 30, but did not meet the earlier target of selling 10-15 per cent stake to raise $1 to $1.5 billion.

The Minister for Privatisation had billed this as the largest ever equity offering of a Pakistani company abroad at a press conference on November 12 but this GDS offering did not exceed the $900 million sale of a 10 per cent stake in Pakistan Telecommunication Company in September 1994.

However, it is a welcome development that a Pakistani company has been able to raise such a large amount in the international capital markets after a long time and does indicate confidence of the international investment community in Pakistan’s economic prospects as well as about OGDC’s future.

The government expects to get another $38 million from the sale of 21 million shares to the retail investors at the rate of Rs110/share during the third week of December 2006 and another $100 million if the underwriters choose to exercise the green-shoe option within 30 days of the issue. The exercise of this option by underwriters is usually indicative of their positive view of a stock’s expected performance.

Hence, it will be interesting to watch if the underwriters choose to exercise this option. Following the GDS placement, the OGDC share was lower by about 5 per cent in the local market on Friday December 1 amid a dampening sentiment and concerns about a supply overhang. OGDC GDRs will start trading on the London Stock Exchange on December 6.

Some analysts feel that the issue could have been better timed as timing and sentiment are important factors that determine success of equity issuances. It was in December 2005 that the Privatiszation Commission had invited Expression of Interest (EoI) for the appointment of a Financial Advisory Consortium for the divestment of 10 — 15 per cent equity (430 to 645 million shares). The EoIs were to be submitted by January 31, 2006.

It took the Commission another four months to appoint Citigroup and Goldman Sachs to act as joint global coordinators and joint bookrunners for the global offering. However, the actual launching of the GDS offering started only on November 15 by which time the oil price in the international market dropped by about 24 per cent off its peak level of around US$78 a barrel reached in July 2006 and the sentiment about international energy stocks had turned from bullish to mixed. The offering price of Rs115 a share represented a 9.5 per cent discount to the closing price (Rs128.15) of OGDC shares on the Karachi Stock Exchange but a discount of about 20 per cent to the OGDC share price average during July 2006.

The total proceeds from the sale of government’s stake in OGDC would ease the pressure on the growing current account deficit and foreign exchange reserves will exceed $13 billion mark from existing $12.4 level. Prime Minister Shaukat Aziz said on November 6: “we are attracting new investors into the country and opening new avenues for raising money compared to the traditional syndicated loan market.” Sale of equity stakes through international capital markets is no doubt a new source for raising money, but sale of oil and energy assets is more than about just raising money.

From Sudan and Nigeria in Africa to all the oil producing countries in the Middle East and from Russia, China and India in Asia and Brazil and Venezuela in Latin America, if there is one sector that remains firmly under the government control despite the growing trend towards privatisation and deregulation, it is the oil and gas industry.

Oil and gas together account for about 6 per cent world’s energy needs and this percentage has not gone down during the last two decades despite massive investments in developing alternative energy sources. The oil price has tripled since 2001 as the demand for oil from the emerging markets grew faster than the oil production growth rates and contributed to about 80 per cent of the growth in global oil demand during 2001-2005.

Of the 20 biggest oil and gas firms in the world, in terms of reserves, 16 are under national or government control. The national oil companies (NOCs) manage about 90 percent of world’s oil. Exxon Mobil is the world's most valuable listed company, with a market capitalization of $448 billion. But if oil companies are ranked by their reserves, Exxon ranks a lowly fourteenth. All 13 of the oil firms that outshadow it are national oil companies (NOCs): partially or wholly state-owned firms. The list is headed by Saudi Aramco, National Iranian Oil Company and Russian Gazprom respectively.

While the NOCs have entered into joint ventures with foreign companies for oil and gas exploration projects, their governments have shunned from privatisation due to the extremely strategic and sensitive nature of the role of energy in the world economy and global politics. While both China and India have gradually liberalisd their economies, energy sector is a noticeable and conspicuous exception. The Chinese and Indian oil and gas companies not only remain under government control but have been spending billions of dollars on overseas acquisitions to add to their oil and gas assets with the full backing and support of their respective governments.

So does it make sense to sell shares in Pakistan’s oil and gas companies, particularly OGDC which is Pakistan’s largest oil and gas exploration and production company. It is the largest company in Pakistan in terms of market capitalization and is extremely profitable. It had revenues of Rs97.3 billion (or about $1.6 billion) in FY2006 with a net income of Rs45.8 billion (or $750 million).

During the first quarter of its financial year 2006-2007, that ended on September 30, 2006, its net income rose by 37 per cent to Rs12.3 billion (or $203 million) compared to a year earlier due to higher production and prices. OGDC has a 27-year gas reserve life (seven years for oil), and is laying the groundwork for an increase in gas production at 15 per cent per annum over the next three years.

OGDC’s strategic importance assumes a critical dimension given the fact that Pakistan is one of the most gas-dependent economies globally. Natural gas meets about 50 per cent of Pakistan’s energy needs compared to a global average of 19 per cent. Power is the largest consumer of gas at 40 per cent of consumption, followed by fertiliser and household at 22 per cent and 18 per cent respectively.

Over the past three years, gas has gained further prominence over oil as an energy source in Pakistan. The three-year annual average growth rate in demand for oil was actually a minus 6.4 perr cent while for gas it was 12.1 per cent and electricity 10 per cent. The decline in the use of petroleum products in the household, agriculture, transport and power sectors was due mainly to the availability of alternative and relatively cheaper sources of fuel (e.g., natural gas and LPG). Furthermore, compressed natural gas (CNG) for transport has been an additional growth segment.

OGDC is perhaps Pakistan’s most important energy asset in that it currently accounts for 25 per cent of Pakistan’s hydrocarbon production, 31 per cent of reserves and owns nearly 40 per cent of the licensed acreage for oil and gas exploration. Further, OGDC is embarking on an extensive exploration programme, targeting about Rs36 billion or 120 exploration wells, over the next four years. It accounted for around 40 per cent of the exploration wells drilled over the past ten years. Over the past two years, the figure is closer to 60 per cent.

After the current phase of sale of OGDC shares is completed, the government’s ownership will probably get reduced to 80 per cent. The key question is: Will the government stop here and or does it intend to eventually hand over control of Pakistan’s highly profitable oil and gas assets to the private (local or foreign) sector? If so, it may earn the questionable ‘distinction’ of becoming the only government in the developing world to privatise its oil and gas assets.

The writer is a former head of Emerging Markets Equity Investments, Citigroup.