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An oil marketing company with a difference

Nov 19 - 25, 2001

Tariq Kirmani, Managing Director, Pakistan State Oil Company Limited

A committed and thorough professional carries rich experience spread over three decades to his credit. His wide exposure to the oil industry in the United States, Australia, United Arab Emirates certainly adorned quality of leadership to run the huge organization like PSO with a network spread all over the country.

Having a Masters degree in Business Administration, Kirmani served the oil sector in various management positions especially in Marketing, Operations and Finance. In 1991 he was the first Pakistani to be elected as a Company Director of a multinational oil company. Currently, Kirmani is also serving as director of Pakistan Refinery, Pak Grease, Attock Petroleum Ltd. and recently been appointed as the Chairman of Oil Companies Advisory Committee (OCAC).

The handsome financial results and a number of distinctions achieved by the Pakistan State Oil (PSO) in various segments of its business operations during financial year 2001 categorically deny the general perception usually considered about the performance of the public sector organizations in Pakistan.

The class of performance, the company demonstrated during the year is well reflected in its record sales revenue of Rs170 billion, up by 26 per cent over the previous year. Record profit of Rs6.4 billion, net profit of Rs2.25 billion after tax, 12.4 per cent up over the previous year, and retaining of its 17 year status of the top performing company at Karachi Stock Exchange are the figures in black and white are certainly louder than the words of praise the company really deserves.

Honouring the method of sharing, the PSO management announced a final dividend of 60 per cent (Rs6 per share). Combined with the prior declared interim dividend of Rs4 per share, the total dividend amounts to Rs10 per share making a total pay out of 100 per cent for the financial year 2001. This will result in cash pay out of Rs1.43 billion as dividend to sharesholders.

One naturally becomes inquisitive to know about factors pushing the company for such kind of performance in the face of a harsh competition offered by multinational companies especially in view of the sinking image of the public sector organizations causing losses worth over Rs90 billion a year to the government.

The sense of achievement which, generally gives confidence, was visibly reflected in his simple but firm tone while Tariq Kirmani was talking about PSO.

Knowing the art of making people easy with whom he converse, Tariq Kirmani encouraged me to ask whether he or his company feel any threat from private sector companies especially after deregulation of the oil marketing and imports by the government. Taking the question with a smile on his face Tariq Kirmani came out with a big "No". Instead of feeling any threat we are finding ourselves more comfortable in discharging our duties especially with a sense to serve our own people. Actually it is the private sector which seems to be uncomfortable due to outstanding performance of the PSO in different disciplines of the business. In fact PSO is importing oil at cheaper prices as compared to the private sector. Hence we are in a position to sell even at cheaper rates as compared to the private sector companies. However we all have to work under a given price mechanism. Since the business operations of private companies are naturally profit oriented they might feel threat from PSO because it is in a position to sell at cheaper price.

He said that as a market leader, PSO has adopted a dynamic approach to flourish in an era dictated by intense competition, deregulation and economic challenges. In this regard, integral to our strategy is the "New Vision Program" that symbolizes our new outlook towards the future while the "New spirit" guides us to become even more competitive.

Tariq Kirmani, who is also the Chairman of "Oil Companies Advisory Committee" (OCAC), said that oil marketing companies are operating in Pakistan under a pricing mechanism provided by the government.

Deregulation & price mechanism

The government taken a number of steps for staged deregulation of the oil and gas sector.

Effective 1st July 2001. The import of Gas Oil was deregulated effective 1st January 2001; the LPG prices were deregulated from 1st September 2000.

The oil marketing companies through OCAC from 15th March 2001 implemented self -management of freight pool. Deregulation of prices is likely to erode oil marketing companies' margin.

The components that determine the selling prices include ex-refinery prices excise duty, petroleum development levy, inland freight, dealer margin, distributor margin and sales tax.

Under that mechanism POL pricing being done on approved pricing mechanism which is tied up with the international oil prices. However the government levies which goes to the exchequer are included in the oil prices. The components of selling price include ex-refinery/ import price, excise duty, petroleum levy, inland freight, dealer margin, distributor margin, sales tax and a possible difference due to rupee-dollar parity based on average inter bank rate for every fortnight.

When his attention was invited towards the fact that there was a downward revision in petroleum prices during last two months but it is unfortunate that the benefit has not been passed on to the grass root level or to the common man. While the middleman or the bulk consumers are pocketing the advantage of price reduction. For example the transporters, airlines, railways, power generating companies and the manufacturing sector using fuel oil have not passed on the benefit by reducing fares or electricity charges or industrial products. The reduction in oil prices should be linked with the procedure that makes it possible that the benefit has been passed on to the consumers. There is no point in reduction of oil prices if the common man is not gets the benefit.

Tariq Kirmani agreed in principle that there should be a mechanism to ensure that the benefit is passed on to the end users. He added that the issue was discussed in the cabinet also. However he suggested that provincial governments should take up the issue and see to it that the benefit has been passed on to the end users. It is a good suggestion he said and added that it is workable and it is up to the provincial governments to look into it.

The downward revision of POL prices brought the oil price further down and the consumers are justified in expecting a relief to the end users especially in the transport and utility services.

On Nov.15 the price of HOBC were reduced from Rs34.32 per litre to Rs.33.71, Kerosene from Rs14.94 to Rs14.40, High Speed Diesel from Rs16.59 to Rs15.09, Light Diesel from Rs14.02 to Rs13.40 per litre while JP4 was brought down from Rs14.11 to Rs13.58 per litre. This is for the third time that oil prices have been reduced. It is moral obligation of the provincial governments to ensure that the benefit is passed on to the consumers at the grass root level.

Although the government has granted marketing licenses to a large number of oil marketing companies including some refineries, however three active oil companies in Pakistan capture the market. These companies include Pakistan State Oil, Shell and Caltex.

PSO is the largest among the three, meeting some 70 per cent demand of petroleum products in the country. However the worldwide economic recession in general and highly disturbed conditions in this region have their own effect on Pakistan's economy. The industry consumption of POL products has been essentially stagnant, depicting a negative growth of 0.5 per cent primarily due to economic recession. During the 1st quarter of the fiscal year, the industry's demand declined by 15 per cent over the last year.

There was a decline in demand of some major products like Motor Gasoline (MOGAS), Light Diesel Oil (LDO) and Superior Kerosene Oil (SKO) whereas fuel Oil (Furnace Oil) and High Speed Diesel (HSD or Gas Oil) showed a nominal growth.

Key products like jet petroleum (JP-1), MOGAS, SKO and LDO declined by 8.2 per cent, 5.7 per cent, 6.2 per cent, 10.8 per cent while HSD and Fuel Oil showed marginal growth of 0.6 per cent.

PSO was established in 1976 through the merger of ESSO, Premier Oil Company and Pakistan National Oil. The company is the largest oil marketing company in the country with around 70 per cent share of the oil market and, as such, forms the backbone of the country's fuel and energy needs.

The company is engaged in the storage, distribution and marketing of petroleum products, petrochemicals and CNG. It has more than 3,800 retail outlets, 28 storage depots and nine installations all across the country.

It is the lowest cost supplier with assured access to long term supplies. During the year 2000-01, the company sold 12.7 million tons with revenues of Rs135 billion.

Tariq Kirmani attributed the outstanding performance of PSO to the committed squad of the managers moving ahead with a team spirit guided towards the goal with clarity of vision and sincerity of the purpose. Citing the example of dedicated efforts on the part of PSO workforce, he said that despite the industry registering a decline and adverse factors, PSO sold 12.6 million tons of petroleum products in the July 2000-June 2001 period, which was essentially the same volume achieved in the preceding year. The continuing decline in PSO's market share of key products has been arrested. During the review period, the company increased its market share of motor gasoline to 40 per cent from 39 per cent while the decline rate in HSD was reduced.

The company has initiated a series of measures to strengthen the brand image and arrest the chronic decline in the market share of key products. During the Financial year 2001, the company maintained its strong focus on New Vision retail Development program, commissioning record 185 outlets bringing the total to 295. The company has been laying special emphasis on quality and quantity of products. In this regard, 7 more mobile Quality Testing Units have been added in major cities bringing the total to 12. PSO also plans to provide Internet at 500 retail outlets, especially in inaccessible areas. The facility is already provided at 150 outlets. The company has installed " Price Display unit" at its monoliths and pylon signs to inform customers about the retail prices and introduced new products like Castrol GTX-XL and various other grades of industrial lubricants.

After successfully handling fuel oil deregulation and imports, PSO has become the first Oil Company to import approximately 33,000m tons HSD at Zulfiqarabad Oil Terminal. PSO undertook various projects to enhance storage and handling capacities at depots and installations and to bring them at par with international Health, Safety & Environment standards.

The new arrangement for HSD handling has not only relieved Karachi from noise and environmental pollution but also reduced the traffic congestion of POL tankers at Keamari. In the past few years, Mogas is being rapidly replaced by the Compressed Natural Gas (CNG) as fuel for a variety of vehicles. To cater to the demands of this growing segment, 30 PSO stations are now providing this facility while 40 more CNG stations are in various stages of completion. A new lubricant specifically developed for CNG engines are also being introduced. With the availability of greater quantities of liquefied Petroleum Gas 9LPG) from PARCO and other refineries, PSO is attaching an even greater emphasis on providing this customer friendly fuel to areas where natural gas is not available. For staged deregulation of the oil and gas sector, PSO is all out to consolidate its strength to stay ahead of the competition, as PSO's motto is to pass on the benefits of deregulation to the valued customers.

Innovative steps

PSO has taken a number of steps to improve its corporate image and increase its market share over the last several years. An aggressive plan has been launched to build New Vision outlets to provide better quality service to customers. Some 295 New Vision retail outlets all over the country have been established in a short period of two years.

The number of company-owned and company-operated (CoCo) sites has increased to 20 to set high standards of customer service.

The company has also embarked on an ambitious program to promote the Internet, specifically in accessible areas all over Pakistan. A total of 500 retail outlets are to be provided with Internet facility, which is now available at 150 outlets.

The company has introduced quick oil lube vans with an aim of providing customers oil change facility at their doorstep. Some 12 mobile Quality Testing Units have also been provided to ensure proper quality of products at retail outlets. These units are operational in Peshawar, Karachi, Multan, Lahore, Islamabad and Faisalabad.

The company has also set up Easy Payment Centers, in collaboration with Citibank, at selective retail outlets for payment of utility bills. The centers have been initially set up in Karachi.

PSO has adopted a customer-focused approach and is catering to all the segments of the market. In this regard, PSO has recently extended its product line of lubricants, introducing products for the segments that were previously untapped.

The company has restructured its existing system to provide a more speedy and efficient system for handling and resolving complaints. Under this initiative, a computerized "complaint Logging System" for efficient data entry has replaced the existing manual system.

Mega projects

A new White Oil Pipeline (WOPP), with ultimate capacity of 12 million barrels is being laid from Karachi to Mehmudkot, and is expected to commence by December 2002. PSO has acquired 12 per cent equity in the WOPP project, incorporated as PAPCO, with a total project cost of $480 million. PSO will be able to capture 100 per cent business of Lahore Airport since the company is building the Lahore terminal Complex, which is likely to be completed by November 2001.