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.
REFINING CAPACITY
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.
|
LOCAL PRODUCTION
(000 tonnes
per annum) |
|
Products |
PARCO |
Others |
Total |
|
LPG |
154 |
68 |
222 |
|
Motor Gasoline |
533 |
979 |
1,512 |
|
HOBC |
229 |
56 |
285 |
|
Kerosene/JP-1 |
693 |
350 |
1,043 |
|
HSD |
1,357 |
1,357 |
2,714 |
|
Furnace Oil |
1,351 |
2,017 |
3368 |
|
Sulphur |
26 |
- |
26 |
|
Others |
- |
1,510 |
1,510 |
|
Total |
4,343 |
6,337 |
10,680 |
| Source:
OCAC Report |
PRODUCT MOVEMENT
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.
CONCLUSION
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.
TABLE 1
|
Export of Petroleum and Petroleum Products
(US$ million) |
|
Year |
1996 |
1997 |
1998 |
1999 |
2000 |
|
Pet. & Pet. Products |
66 |
82 |
36 |
47 |
82 |
|
Total Exports |
8,707 |
8,321 |
8,627 |
7,779 |
8,569 |
TABLE 2
|
Import of crude and Petroleum products
(US$ million) |
|
Year |
1996 |
1997 |
1998 |
1999 |
2000 |
|
Crude |
509 |
583 |
468 |
429 |
805 |
|
Petroleum Products |
1,479 |
1,672 |
1,104 |
1,035 |
1,999 |
|
Total Imports |
11,805 |
11,895 |
10,118 |
9,432 |
10,184 |
TABLE 3
|
SALES PRICE
(Rs/Ltrs) |
|
Product |
26-01-99 |
10-04-99 |
19-05-99 |
11-12-99 |
20-03-00 |
|
Motor Gasoline |
22.18 |
22.19 |
24.40 |
27.00 |
27.50 |
|
Super |
23.64 |
23.64 |
26.04 |
29.00 |
29.50 |
|
HSD |
9.66 |
9.66 |
10.66 |
11.50 |
12.80 |
|
JP-1 (For PIA) |
4.96 |
5.23 |
6.38 |
9.94 |
11.52 |
|
FO (Rs/Tonne) |
5,500 |
5.500 |
6,070 |
7,285 |
8,800 |
| Source:
Ministry of Petroleum and Natural Resources
Hydrocarbon
Development Institute of Pakistan
|
TABLE 4
|
COMMERCIAL ENERGY
IMPORTS,
PRODUCTION AND CONSUMPTION |
|
Year |
Imports
(000 Tonnes) |
Production
(000 Tonnes) |
Consumption
(000 Tonnes) |
|
1995-96 |
10,135 |
6,343 |
15,601 |
|
1996-97 |
10,398 |
5,930 |
15,606 |
|
1997-98 |
11,064 |
5,858 |
16,524 |
|
1998-99 |
10,926 |
5,925 |
16,648 |
|
1999-00
(July-March) |
8,456 |
4,899 |
12,994 |
Source:
Ministry of Petroleum and Natural Resources
Hydrocarbon Development Institute of Pakistan |
TABLE 5
|
OIL REFINERIES
PRODUCTION |
|
Energy Products |
1993-94 |
1994-95 |
1995-96 |
1996-97 |
1997-98 |
1998-99 |
|
Motor Spirit |
928,320 |
865,326 |
968,814 |
908,517 |
989,489 |
979,160 |
|
Kerosene |
487,774 |
463,281 |
506,748 |
413,057 |
478,265 |
350,214 |
|
HOBC |
70,072 |
57,782 |
62,156 |
67,027 |
65,389 |
55,658 |
|
HSD |
1,442,178 |
1,349,822 |
1,439,802 |
1,321,124 |
1,353,331 |
1,357,156 |
|
LDO |
318,740 |
265,210 |
253,917 |
275,334 |
248,818 |
270,290 |
|
F0 |
1,878,290 |
1,721,868 |
1,916,387 |
1,793,653 |
2,014,083 |
2,017,260 |
|
Aviation Fuels |
567,461 |
526,577 |
585,149 |
594,299 |
583,411 |
750,137 |
|
Naphtha |
108,271 |
147,523 |
104,596 |
80,856 |
70,827 |
77,275 |
|
LPG |
40,326 |
36,844 |
36,130 |
41,437 |
54,579 |
68,048 |
|
Energy products
consumption |
|
Energy Products |
1993-94 |
1994-95 |
1995-96 |
1996-97 |
1997-98 |
1998-99 |
|
Aviation Fuels |
424,457 |
421,883 |
460,930 |
451,088 |
1,219,784 |
640,577 |
|
Motor Spirit * |
1,045,383 |
1,045,527 |
1,155,586 |
1,211,906 |
7,443,118 |
1,189,042 |
|
HOBC |
134,714 |
112,326 |
64,482 |
64,375 |
2,598 |
56,952 |
|
Kerosene |
608,201 |
601,843 |
613,531 |
522,595 |
493,857 |
500,528 |
|
HSD |
5,598,747 |
5,877,103 |
6,347,547 |
5,170,116 |
500,528 |
6,616,774 |
|
LDO |
312,360 |
272,298 |
252,208 |
272,865 |
6,616,774 |
257,712 |
|
Furnace Oil |
5,101,719 |
5,629,187 |
6,706,797 |
6,913,020 |
257,712 |
7,386,166 |
|
Energy products
consumption by province |
|
Province |
1993-94 |
1994-95 |
1995-96 |
1996-97 |
1997-98 |
1998-99 |
|
Punjab |
6 968,189 |
7,444,049 |
8,775,832 |
7,807,684 |
50,842 |
8.833,710 |
|
Sindh |
4,818,148 |
4,862,066 |
4,875,542 |
4,538,859 |
31,219 |
4,580,897 |
|
NWFP |
1,054,089 |
1,110,491 |
1,237,516 |
1,217,381 |
7,798 |
1,347,869 |
|
Balochistan |
491,644 |
559,558 |
617,960 |
1,913,268 |
705 |
1,779,929 |
|
A.J. Kashmir |
162,148 |
247,285 |
350,880 |
369,019 |
1,795 |
356,727 |
| IMPORT
OF PETROLEUM PRODUCTS |
|
Products |
1993-94 |
1994-95 |
1995-96 |
1996-97 |
1997-98 |
1998-99 |
|
100/LL |
2,445 |
2,925 |
2,445 |
2,515 |
2,447 |
1,103 |
|
HOBC |
52,167 |
|
3,937 |
|
|
|
|
Kerosene |
118,767 |
145,389 |
87,855 |
103,039 |
42,858 |
114,416 |
|
HSD |
4,377,068 |
4,485,342 |
5,093,588 |
4,870,118 |
4,924,932 |
5,302,174 |
|
Furnace Oil |
3,243,999 |
3,865,436 |
4,748,892 |
5,117,186 |
5,845,639 |
5,303,305 |
|
Motor Spirit |
56,094 |
156,988 |
106,122 |
209,579 |
148,036 |
99,164 |
|
MTBE |
59,550 |
81,081 |
94,499 |
95,879 |
99,872 |
105,803 |
|
