DEVELOPING AN INFRASTRUCTURE FOR THE OIL INDUSTRY
Gradual deregulation of the POL business ushers in a new competitive era presenting opportunities as well as challenges for existing players
By SHABBIR H. KAZMI
Feb 12 - 18, 2001
Crude oil based products meet nearly 44 per cent demand of Pakistan's energy requirement and the rest being met by natural gas and electricity. The country is heavily dependent on imported finished products. The petroleum, oil and lubricants (POL) sector has become a centre of attraction as the Government of Pakistan (GoP) aims at achieving self-sufficiency in these products during this decade. While weak demand is hampering near-term growth, deregulation and potential privatization do not allow the investors to ignore the sector.
Until recently, the oil marketing business (except lubricants) was regulated by the GoP, both in terms of product prices and distributor margins. Under the new policy, emphasis on attracting investment into the energy sector, the GoP has initiated the process of deregulation. While furnace oil being the first to be freed, motors gasoline and diesel business are to be liberalized within the next 12 months.
The beginning of process for complete liberalization of POL trade has already attracted new players, i.e. Mobil and BP Lubricants in lubricants business. Attock Refinery and Pak-Arab Refinery are almost ready to enter into oil distribution and retailing business. The existing oil marketing companies, Pakistan State Oil, Shell Pakistan and Caltex Pakistan, are busy in revamping their operations.
With the commencement of operations by Pak Arab Refinery (PARCO), near Multan, the total refining capacity took a quantum leap — from slightly more than 6 million tonnes to about 11 million tonnes per annum. Out of this 6.337 million tonnes pertain to the three refineries (Pakistan Refinery, National Refinery and Attock Refinery) and 4.343 million tonnes being controlled by PARCO. Another small refinery, Bosicar Pakistan with an installed capacity of 25,000 barrels per day, is expected to come on line within this year. While certain locally refined products are already in surplus quantities, after the commencement of operations by PARCO, the country will remain deficient in indigenous production of some key products.
(000 tonnes per annum)
Source: OCAC Report
At present bulk of the imported products are dispatched from Karachi port to upcountry by road — a unsafe and expensive mode of transportation — and by railway wagons. During the year 1999, products weighing 11 million tonnes were transported by road for primary and secondary hauls. An estimated 15,000 tank lorries are involved in the movement of motor gasoline, HSD, Kerosene, Furnace oil, jet fuels and crude oil. At an average one tank lorry, bound for an upcountry destination, leaves Karachi every 30 seconds. This creates not only traffic jams on roads in Karachi and on highways but is also a serious traffic hazard. The involvement of such a large number of tankers has given birth to 'Tanker Mafia' whereby oil marketing companies are at the mercy of transporters. The Tank Mafia is virtually in a position to disrupt transportation/supply as and when they desire. Therefore, there is an urgent need for the second pipeline which should come on line at the earliest.
During the same period 2 million tonnes products were handled by Pakistan Railways. Though, the mode is safer as compared to transportation by road, it could only be used for the movement of products to a limited destinations.
As against this, 9 million tonnes products were transferred by pipelines. Out of which movement of 5 million tonnes was through PARCO pipeline. This pipeline connected Keamari (Karachi) with Sheikhupura, Mehmoodkot and Machike. Together with Chaklalla, these depots were termed core depots as they constituted 70 per cent of total volume. However, after the commencement of operations by PARCO this pipeline has been dedicated for the transfer of crude oil only.
WHITE OIL PIPELINE
The new vista is White oil pipeline project — from Karachi to Mehmoodkot . PARCO, through Pak Arab Pipeline Company (PAPCO) has been entrusted to construct this pipeline on Build, Own, amd Operate (BOO) basis. The project, with an estimated cost of US$ 600 million, is a joint venture between the GoP and the state of Abu Dhabi. Besides, local oil marketing companies also have equity stake in the project. Due to the company's exclusive pipeline transportation experience and existing infrastructure, PARCO is well placed to implement this project. The pipeline is scheduled to be soft commissioned by October 2002 and complete commissioning is expected by December 2002. Once the pipeline commence operation it will reduce the pressure on roads and railways.
OIL MARKETING COMPANIES
At present three oil marketing companies operate in Pakistan. These are Pakistan State Oil Company (PSO), Shell Pakistan and Caltex Pakistan. The first two are listed at local stock exchanges. PSO enjoys nearly 74 per cent share of the total POL market in the country. The other two companies, Shell (21%) and Caltex (5%) control the remaining market. However, with the shift in GoP policies oil marketing companies are trying to reposition themselves. Since PSO has the largest infrastructure, it is expected to maintain its edge for a considerably long time.
There are indications that volumes have been either stagnant or declined across almost the entire spectrum of POL products during last 12 to 18 months. Total demand for POL products in Pakistan is estimated around 17.5 million tonnes. Prior to commencement of operations by PARCO, local refineries were meeting around one-third of this demand and the country was dependent on imports for the remaining two-third.
During the current financial year industrial growth has remained subdued due to tight monetary and fiscal policies as well as the GoP's drive to document the economy, which caused fear amongst industrialists and there was a negative impact on investment flows. This translated directly into lower volumes for POL products whose sales are closely related with industrial activity. It is estimated that motor gasoline volume declined by 5 per cent and HSD consumption lowered by 2 per cent during the first half of the current fiscal year. The gradual switch over from motor gasoline to diesel, LPG and CNG was also a major factor behind reduction in motor gasoline consumption.
A new threat to furnace oil sales volume is expected to come about due to the GoP's policy of encouraging shift from furnace oil to gas in power sector. The GoP aims at cutting down furnace oil import bill by switching over to natural gas. This threat is mostly to PSO that has 90 per cent market share in furnace oil trade. As WAPDA and KESC accelerate the transition from furnace oil to gas, long-term volume growth for PSO is likely to suffer. Shell and Caltex are more insulated in this respect, from this new development.
When furnace oil was deregulated, there were great expectations that oil marketing companies would enter into a period of strong earnings growth. Unfortunately, the timing of deregulation was such that hopes have been considerably dampened. A nearly 100 per cent rise in international prices of crude oil coupled with economic slowdown led to decline in sales volume. Furnace oil deregulation has clearly been a boon to PSO as it is by far the largest player in this business segment and has astutely managed its purchasing and pricing to obtain benefits of inventory gains and thus exploited margin management opportunities.
On the other hand, Shell Pakistan has emerged a clear winner in most other major product segments primarily due to its outstanding superiority in brand positioning and maintaining better customer service standards. As a result, in last one year, Shell has snatched PSO's market share of various products but mostly in the high margin lubricants business. It is estimated that PSO's share in lubricants has gone down from 45 per cent to around 37 per cent during this period.
As the GoP intents to deregulate motor gasoline and diesel trade, the existing players are forced to redefine their strategic policies both in terms of changing competitive dynamics between themselves as well as with new entrants like BP Lubricants, Mobil and existing players like PARCO and Attock Refinery. This will be good for consumers as well as investors as regulated era gives way to a competitive environment.
OIL IMPORT BILL
Imports totalled US$ 10.3 billion in 1999-2000, representing a US$ 877.7 million increase over the previous increase. The over-riding factor in this increase was international oil prices. The sharp increase in international oil prices doubled Pakistan's oil import bill in 1999-2000. Since Pakistan's oil imports are price inelastic, even with increase of nearly 75 per cent for petroleum products and 89 per cent for crude oil, quantitative imports increased by 11 per cent in the case of petroleum products and fell marginally by 0.5 per cent for crude oil.
During the decade of nineties, on an average, the largest consumer of the petroleum products has been the transport sector and accounted for 47.7 per cent of the total consumption of petroleum products, followed by the power sector (29.8%), industry (13%), household (4.7%) others (2.8%) and agriculture (2%).With total vehicles growing at about 8 per cent per annum, petroleum consumption demand for the transport sector increased at 7 per cent per annum during the period.
The shift in the GoP policy has opened new vistas for developing an infrastructure for oil industry. The gradual deregulation of the POL business coupled with prospects for privatization of PSO ushers in a new competitive era presenting opportunities as well as challenges for existing players. However, one point must be kept in mind that the story does not ends here. In the next phase, efforts have to be made to establish a world class hydrocraker in the country. The time is ripe for the creation of this facility. Establishment of PTA plant by ICI Pakistan, expansion of PSF manufacturing capacity in the country and the host of other industries using petro-chemicals demand immediate take up of the project. Pakistan exports tonnes of naphtha which is the basic raw material for hydrocraker plant. As the crude oil prices are expected to hover within a bandwidth of US$ 23 to 27 per barrel, the country must make the best use of each dollar spent on exploration and development of oil fields and import of crude oil.
THE GOP POLICY INITIATIVES
* Growth initiative in neglected areas such as agriculture, small and medium enterprises, oil and gas sector,
* Programme to curb rising poverty,
* Acceleration and development of oil and gas exploration as well as encouraging foreign investment in this sector,
* Conversion of power plants from furnace oil to gas,
* Development of upstream infrastructure including pipelines for efficient transportation of imports and discovered resources,
* Rationalization of margins of oil marketing companies to enable them to invest in storage and other infrastructure,
* Deregulation of LPG prices and encouraging the use of CNG.
Export of Petroleum and Petroleum Products
Pet. & Pet. Products
Import of crude and Petroleum products
JP-1 (For PIA)
Source: Ministry of Petroleum and Natural Resources Hydrocarbon Development Institute of Pakistan
IMPORTS, PRODUCTION AND CONSUMPTION
Source: Ministry of Petroleum and Natural Resources
Hydrocarbon Development Institute of Pakistan
OIL REFINERIES PRODUCTION
Energy products consumption
Motor Spirit *
Energy products consumption by province
IMPORT OF PETROLEUM PRODUCTS