Energy sector, having enormous potential to bring in
the much sought after investment both from home and external resources,
is gradually assuming a greater role as in the economic development of
Apart from oil and gas exploration segment which
attracted the major part of the total investment came in during the
current financial year, the oil marketing companies did not lag behind
and made significant investment in various dimensions of the oil sector
from construction of oil pipeline project, expansion in oil storage
capacity project and tremendous improvement in customer services through
introduction of most modern outlets in all the major cities of the
Pakistan State Oil (PSO) despite carrying a label of
a public sector entity, and facing tough competitions from multinational
contenders in the market performed superbly in marketing, operational
and investment activities reflected in the financial results achieved by
It was because of the professional management and
consolidation of the resources that despite the revenue drop and a
record provision of Rs2 billion made to taxes, PSO earned an all-time
record profit before tax of Rs5.1 billion for the financial year ended
June 30, 2002.
The gross profit increased by 49 per cent while
profit after tax rose to Rs3.2 billion registers a growth of 42 per cent
over prior year period. In addition the company absorbed the balance
financial impact of Rs408 million on account of Voluntary Separation
Scheme (VSS) offered in April 2001. Without adjustments and inventory
gains/ losses, operating profit of the company grew by an impressive 32
per cent over the prior year. The profit increase is primarily due to
innovative marketing strategies, organizational restructuring, enhanced
product mix, revamping of internal systems with improved productivity
along with the partial impact or enhanced margins during the last
quarter of the financial year 2002.
New Vision Development Program remained the key area
of investment as the company is deriving substantial volume from these
state-of-the-art outlets. During financial year 2002, the company made
an all time record capital expenditure of Rs1430 million, while the
total expenditure during the last six years i.e. from 1996-2002 exceeded
With rigorous follow-up on stuck-up claims of Rs7.5
billion on account of price differential, the government finally decided
to reimburse oil marketing companies by incorporating a nominal cushion
in consumer prices of Mogas, HSD, SKO and LDO up to the final settlement
of entire claim which is expected to be settled by December 2003.
The company also won the ICAP-ICMAP Best Annual
Report Presentation Award for its impressive Annual Report. Shaukat Aziz,
Minister for Finance while giving away the award acknowledged the
remarkable performance of the public Sector Company competing with
multinational firms. PSO also won the Karachi Stock Exchange Top 25
Companies Award for the record 18th consecutive year.
Financial year 2002 experienced global economic
recession triggered by September 11, 2001 incident in the USA followed
by coalition military operation in Afghanistan. Pakistan's proximity to
Afghanistan and a war like situation on its b order with India put the
country's economy under tremendous pressure resulting in lower domestic
During the first half of the year, the international
crude and POL product prices and consumption dropped sharply with
trickle-down effect in domestic consumption and prices. With the upward
movement in international prices and increased demand of POL products
after January 2002, the local demand and prices also recovered and
followed by the same trend however, the consumption grew at a slower
pace. In the second half of the financial year 2002, the overall POL
industry showed a growth of one per cent as compared to negative growth
of 9.1 per cent registered during July-December 2001 period thus
partially off setting the sharp drop on cumulative basis.
In Financial year 2002, the overall POL consumption
in Pakistan was 17.3 million tons, down by 4 per cent over the preceding
year, which had been growing at a compounded annual growth rate of 7 per
cent during the last two decades. The decline in consumption was
primarily due to the reduced consumption of fuel oil, which registered a
negative growth of 6.3 per cent. Consumption of Motor Gasoline, which
has been declining at around 3 per cent during the last five years,
registered a decline of 2 per cent despite the CNG & LPG substitution,
fluctuating prices and inflow of smuggled product from across the
adjacent borders. HSD demand also witnessed a marginal decline of 0.33
per cent while SKO and LDO demand also dropped by 18.5 per cent and 14.2
per cent respectively.
Local refineries produced 9.5 million tons while the
deficit requirement of around 9.3 million tons was imported. In
financial year 2002 furnace oil and HSD represented 87 per cent of total
POL demand were imported to the tune of 4.6 & 4.7 million tons
respectively. POL products like Mogas and Naphtha became surplus since
PARCO came on stream in September 2000. As a result approximately
170,600 million tons of Mogas and 385,000 million tons of Naphtha were
exported during the year ended June 30, 2002.
In order to extend the cross country pipeline
Tarujabba (Peshawar) from Machike, PSO and ARL signed a Memorandum of
Understanding for the construction of 470 km new white oil pipeline,
with ultimate capacity of 2 million tons to an estimated cost of Rs10
billion. Work on $481 million Pak Arab Pipeline Company Project, which
has been delayed owing to the September 11 incident is now progressing
smoothly and is, expected to be completed by December 2003.
With the constant follow-up by Oil Marketing
Companies on enhancement of margins that had been frozen for the past
several years, the government realized the financial distress being
faced by the oil marketing companies, specifically after linking the
domestic price mechanism with international price fluctuations from July
1, 2001 announced phased upward revision in their margins up to 3.5 per
cent effective July 1, 2002, similarly dealers margins were also
enhanced to 4 per cent.
Despite all the adverse factors, PSO sold
approximately 11.5 million tons of POL products. Reduced off-takes by
HUBCO (around 9.9 million tons) primarily resulted in sales volume drop
of 6.3 per cent over prior year. Had the consumption level of HUBCO
remained at the preceding year's level, the company would have not only
achieved almost the similar volume sold in financial year 2001 but would
have also maintained its market participation as fuel oil demand of this
power utility company has been met by PSO being its sole supplier under
long term Fuel Supply Agreement.
With the launch of the new Vision concept, PSO has
not only been able to arrest its chronic decline in market share of
Mogas, which had been declining consistently at a CAGR of 2.5 per cent
per annum during the last several years, but was also able to gain 1 per
cent share during the fiscal year ended June 30, 2001. During financial
year 2002, PSO successfully maintained its market share at 40 per cent
despite the stiff competition from existing players, induction of new
entrants and logistics issues.
PSO managed to contain the decline in market share of
HSD, which had also been registering sharply downturn in market share at
a CAGR of 4.7 per cent till financial year 2000. During financial year
2002, the company registered a market share of over 59 per cent despite
the overall low agricultural demand as well as restricted supplies to
agricultural areas adjacent to Indian border, which have been solely fed
by PSO. In addition, on going New Vision construction activity on a
number of outlet and defence businesses won by competition for financial
year 2002 also led to volume drop.
However, the company regained the defence business
for financial year 2003 for the supply of 34,000 MTs of Mogas and
117,000 MTs of HSD business from Pakistan Railways for the period of
three years ending June 2005. With the acquisition of these businesses,
PSO would not only further improve its sales performance but also
enhance its market share in Mogas & HSD.
After the steady decline in lubricants market share
for the last several years, PSO regained 1 per cent market share from
the competition and thus increased its participation to 39 per cent.
This reversal in trend was achieved owing to the formation of complete
value chain under the new business unit concept implemented by PSO.
Other initiative featuring the extension of product line, technical
seminars and improved customer services also contributed to market share
In order to ensure the availability and quality of
PSO lubricants, the company expanded its lube shop network to 76 while
another 50 are in development stages. The company also introduced ěFree
Lube Deliveryî at nine locations to provide prompt service at customer's
outlets without any extra cost in addition. The company also introduced
dedicated packed lubricant container service to transport product to all
upcountry storage points in attractive colour scheme. The launch of
these services has helped the company introducing flow of spurious and
counterfeit products with complete customer satisfaction through
During financial year 2002, New Vision Network
expanded to 503 retail outlets at an average construction rate of 2.2
days per outlet. The company successfully equipped 600 retail outlets
with Internet facility while C-Store network expanded to 56, and 44 CNG
facilities were operational. Company-Owned and Company-Operated outlets,
being used as the model stations with the highest standards of services,
were expanded to 26 while another 30 sites would be added during
financial year 2003.
The latest launch of "PSO Loyalty Card" has been the
most innovative marketing initiative, which has not only enabled the
customer to earn PSO Loyalty Points redeemable throughout the country,
but has also offered them attractive discounts for purchases at a large
number of merchant outlets.
To enhance its brand equity, a series of successful
sales promotions and corporate campaigns backed by strong media support
have been launched. In its endeavour to work beyond customer's
satisfaction, PSO introduced computerized complaint lodging system with
a toll-free number. The company has the distinction of being the first
oil marketing company to provide toll-free number at the Customer
Services Department to offer free calling facility to its customers
round the clock.
After the construction of the tallest signs ever
built in Pakistan (around 120 feet high), PSO installed the mega
hoarding 115X47 feet at Qurban Service Station, Karachi, which is also
the largest hoarding ever built by any company in the country.
PSO has been successful in acquiring Defence Energy
Support Center contract for the supply of 39,000 MTs of Jet A-1 to
Afghanistan on competitive bidding against international tender through
World Fuel Services, Miami, USA. The company also renewed and regained
jet-A1 business of leading international air carriers like Air France,
Singapore Airlines, Gulf Air, Saudia etc. Construction of Info-plane and
Fuel Farm Facilities at new terminal Complex Lahore is in final stages.
With the commissioning of the new terminal complex, PSO would be meeting
100 per cent fuel requirements of the emerging hub of the region.
PSO has been maintaining strong focus on quality
assurance as indicated by the expansion of Mobile Quality Testing Unit
Network from 12 to 16. These testing units are being operated on
dual-shift basis in major cities of the country to ensure companies
During Financial Year 2002, PSO signed long-term Sale
and Purchase agreements with National Refinery and Bosicor Refinery in
addition to the existing agreement with PRL and PARCO. With the
execution of these agreements, the company has made an access to assured
and cost-effective supplies. The company has successfully negotiated
with Kuwait Petroleum Company for the supply of 0.5 per cent Sulphur Gas
Oil for the period 2003-05 on attractive rates. During July-December
2002, PSO would import 1.6 milion tons of low Sulphur Gas Oil from KPG.
In Fuel Oil, the company signed the term contract
with 3 international suppliers for 2.4 million tons of High Sulphur Fuel
Oil and 0.4 million tons of Low Sulphur Fuel Oil during the period
During the year ended June 30, 2002, PSO imported gas
oil and fuel oil to the tune of 3.3 and 4.2 million tons respectively.
Consequent upon WAPDA's decision to import a portion
of its annual fuel oil requirement, PSO and WAPDA entered into
hospitality agreement that would facilitate the power utility to store
its imported product at Zulfiqarabad Oil Terminal for onward shipment to
power generation units. With the new hospitality arrangement with WAPDA
previously done with Shell, PSO would generate certain assured and
guaranteed ancillary profits. Parallel to this, PSO became the first Oil
Company in Pakistan to win the first ever-international tender floated
by WAPDA against international competitions for the supply of 110,000
MTs of fuel oil during September.
The company has been importing around 0.6 million
tons of LSFO for KAPCO at a premium higher than HSFO resulting in an
extra expenditure of $12 million a year. In order to save precious
foreign exchange, PSO has now started supplying 20,000 MTs a month or
240,000 MTs a year LSFO from Attock Refinery to KAPCO which would bring
substantial savings to national exchequer. Gradually the quantity will
be increased to 400,000 MTs a year. Besides saving foreign exchange,
local LSFO will also narrow down the current price differential between
HSFO & LSFO while the outstanding amount on account of HSFO/ LSFO price
differential claims against WAPDA would not grow at historically higher
PSO also helped save $40 million foreign exchange
reserves by utilizing two grants for the procurement of fuel oil
provided by the Japanese Government with the prescribed time frame. PSO
not only utilized the entire grant but also remitted to the government
the entire amount equivalent to the local currency. As the payment terms
of this grant were very attractive for suppliers, the cost of import was
lower than normal and PSO, being a customer friendly company passed on
the benefit to this lower cost savings to the consumers.
The company also provided storage and handling
facility to Attock Refinery for the export of surplus Naphtha being
produced by them. A similar facility was also extended to PARCO for its
surplus Mogas of 300,000 MTs.
In order to enhance its storage capacity at Zulfiqar
Oil Terminal, the company has started constructing 2 additional storage
tanks each 30,000 tons capacity for handling and storing crude oil on
behalf of Bosicor Refinery. The company is to enhance storage and
handling capacity at depots and installation and to bring them at par
with HSE standards undertook various other projects.
PSO being fully committed to implement total quality
management approach has achieved ISO 9000 certification for its six
terminals while the balance storage would be made ISO compliant in the
next couple of years.
The company has strengthened its internal controls
specifically in supply chain area by implementing computerized load
acknowledgement system, which is aimed at preventing misappropriation of
products in transit and ensures prompt delivery of products to customers
and depots. To ensure proper supplies to local retail outlets, fleet
management plan has been implemented at Karachi, Lahore and Islamabad,
which would be extended gradually to other major cities of the country.
While PSO has emerged as a true model company for
contemporary businesses the continuously changing business scenarios
nevertheless, call for constant realignment and improvement specifically
under complete deregulation regime. Induction of new players, cutthroat
competition and menace of smuggled and spurious products as well as
threat of product substitution are a few major challenges for the oil
marketing industry in Pakistan.
Deregulation of HSD has indicated the new paradigm.
Expected further deregulation of the petroleum sector would lead to
price war among the existing as well as new players resulting in margin
In an increasing competitive and deregulated
environment with free market conditions, an optimum balance between
earnings and market share will be the top priority of the management.
Higher operating efficiencies with continuous
innovation and improvement in business processes are the perquisites for
future expansion and growth in shareholders' value.
The challenges of the coming year would demand an
even greater dexterity and ability to respond to rapidly changing
external environment. With the various new initiatives already
undertaken in the recent years PSO is confident of continuing its
positive performance both in terms of sales volume and profitability.
Display of highly impressive performance during
financial year 2002 has however endorsed that the strategic initiatives
undertaken by the management are taking PSO to the path of glory and
stability — A role model set for other companies in the public sector.