There is something fundamentally broken when a country spends roughly $9 billion importing petroleum products in seven months while shutting in its own oil and gas wells.
Yet, that is exactly what Pakistan did last year. Surplus imported LNG had flooded the national gas network, leaving no room for domestic gas. Wells were shut in not because they stopped producing, but because the system could not take what they produced. The cost to the national economy is estimated at roughly $378 million in a single year.
Much of that imported fuel transits the Strait of Hormuz, a corridor that recent events have shown can narrow or close without warning. A country so dependent on a single maritime chokepoint for its energy survival should be accelerating domestic production, not suppressing it.
The sector, meanwhile, keeps delivering. The Oil and Gas Development Company (OGDC) has crossed 40,000 barrels per day for the first time in six years and brought online Baragzai X-01, the largest single-well discovery in Pakistan’s history, now producing around 5,300 barrels a day. These gains were not enabled by the system. They were delivered against it. In any rational system, such results would trigger expansion, but in Pakistan they coexist with forced shut-ins.
But this is not one company’s story. International assessments point to billions of barrels of oil and over 100 trillion cubic feet of gas beneath Pakistani soil. Yet crude production in FY2025 averaged roughly 62,400 barrels per day, the lowest in two decades, and the 21 discoveries reported that year barely offset natural decline from aging fields. The geology is not the constraint. The fiscal and regulatory framework is.
The explanation is not complex. Pakistan’s upstream fiscal regime leaves little economic incentive to invest. A 29 per cent corporate income tax, up to 10 per cent super tax, 12.5 per cent royalty, 7.0 per cent in workers’ funds and a 15 per cent provincial tax on oilfield services together absorb nearly two-thirds of the value a well generates before investors see any return.
This fiscal burden sits atop a structurally flawed gas market. For decades, every molecule produced had to be sold to state utilities at administered prices. These entities supplied gas at subsidised tariffs, failed to recover costs and accumulated circular debt now estimated at around Rs3,200 billion, including roughly Rs1,500 billion owed to E&P companies. The result has been predictable: delayed payments, impaired cash flows, and a system that penalises production. Combined with security risks, currency volatility, and regulatory uncertainty, this framework has driven major international operators out of the market.
A partial course correction was attempted in January 2025, when E&P companies were allowed to sell up to 35 per cent of gas from new discoveries directly to private buyers. The logic was sound: create a parallel market where price signals could work. But the reform was undermined almost immediately.
An off-grid levy, introduced in part under IMF pressure, was extended to third-party buyers, effectively taxing the very transactions the policy sought to enable. The levy has since been challenged before the Islamabad High Court and is currently stayed. Neither the reform nor the levy is operational, and the estimated $5 billion in potential investment tied to this framework remains unrealised. One arm of policy undid the other. Security risks complete the picture and have become a major deal-breaker.
So what is to be done? Not another generic call to ‘improve the business environment’, but a sequenced reset in which each reform unlocks the next.
Start with the economics. Cap the combined burden of taxes, royalties and levies at 40 to 45 per cent, competitive with regional jurisdictions, and lock it into concession agreements through a fiscal stability clause that survives changes in government. In parallel, require Ogra to set a domestic gas floor price indexed to, say, 70 per cent of the landed RLNG cost. The state cannot import LNG at $11 to $12 per MMBtu while paying domestic producers a fraction of that. A predictable fiscal regime and a credible wellhead price are the minimum conditions for capital to enter. But capital is irrelevant if production cannot reach the market.
That requires removing restrictions on third-party gas sales and replacing them with a genuine open-access regime for qualified buyers under clear regulatory rules. Gas currently curtailed due to network constraints should be redirected to willing off-takers rather than shut in. Every molecule shut in today risks becoming permanently unrecoverable, particularly in mature reservoirs.
Next, clear the cash flow blockage. Of the roughly Rs3,200 billion in circular debt, around Rs1,500 billion is owed to E&P companies. Convert these receivables into tradable, government-guaranteed bonds with a ten-year maturity. This does not create a new liability. It formalises an existing one. The companies get a tradable, government-backed instrument they can use as collateral to raise financing for new drilling. The additional production that follows generates tax and royalty revenue that services the bonds over time.
Finally, secure and expedite. Extend the CPEC-style dedicated security framework to upstream operations in Balochistan and Khyber Pakhtunkhwa. Establish a single-window regulatory authority to consolidate upstream approvals, with a binding 90-day timeline. No fiscal incentive will compensate for a permitting process that takes years.
None of these reforms works in isolation. Price without market access is meaningless. Market access without liquidity yields no drilling. Liquidity without security will not be deployed. And none of it will move at the required pace if approvals remain trapped in administrative delay. This is a system problem – and it demands a sequenced solution.
These proposals are not novel. They have circulated through boardrooms, ministries and policy forums for years. What is missing is execution. Pakistan does not lack ideas. It lacks implementation discipline. The next time a shipping route narrows, there will be no domestic production to fall back on.
The writer is a lawyer who writes on public policy matters.
