Empirical analysis of investment in Pakistan’s upstream sector

Abstract

The paper examines the oil and gas exploration and production in Pakistan and finds the effectiveness of regulatory regimes in attracting investment. The empirical part involves estimating the error correction model where the upstream sector's oil and gas rigs count is regressed on crude oil price and domestic economic activity using monthly data from January 1995 to February 2023. The study further finds the impact of exogenous variables, including petroleum policy dummies, incidences of terrorism, and LNG import, on the drilling activities in the country. Specifically, we test the data for unit root and check the cointegration before estimating an error correction model to examine the dynamic relationship among total rigs, oil prices, and the Quantum index of manufacturing (QIM), a proxy for monthly economic activity. The results highlight the existence of cointegration, implying a long-run relationship between the variables. The natural gas reserves in Pakistan's upstream sector respond positively to crude oil and domestic wellhead gas prices, with a price elasticity of more than 1 for gas price to reserves addition. The gas rigs model gives more robust results. Moreover, incidences of terrorism, LNG imports and policy dummies are significantly affecting the natural gas rigs.