How to minimize the import bill?
By AMANULLAH BASHAR
Oct 07 - 13, 2002
Pakistan, which is a consumer of over 400,000 barrels of oil per day, has to endeavour and in fact striving hard to get rid of the huge burden of import bill on the national economy ranging $2.5- $3 billion every year.
The option for the economic manager is to improve the available energy resources within the country or to find oil substitutes that obviously can be natural gas or utilization of plentiful coal reserves so far untapped in Pakistan.
Working on these lines, the government has already indicated to shift power generating sector and other oil consuming industries either on natural gas or on coal.
Out of the total expenses on the import of POL products, only the fuel oil or the furnace oil adds over a billion-dollar to the total oil import bill every year.
Steps however have been initiated to stop import of fuel oil completely within a year or two by switching over the oil consuming industrial units from oil to gas or coal. A major portion of the cement units and power generation has already been shifted to coal-fired and gas fired system respectively.
However, apart from hectic efforts so far made to explore oil within the country, the total production of oil from local resources has not touched even one forth of the total oil requirement. With the new discovery of oil resources in Sindh, Pakistan's indigenous crude production is approximately around 60,000 barrel per day out of which some 5000 barrels are exported. Our total proved reserves are estimated around 275 million barrels. The crude import requirement is currently about 150,000 barrels a day. Although country is rich in natural resources and has the capacity to become self-sufficient in energy, however under the given circumstances it seems hard to predict how long it would take to attain that position when our dependence on imported energy is done away with.
It is unfortunate that the access to the oil potential blocks especially in the province of Balochistan is a major obstacle for the oil exploring companies due to large area in that tribal area is under force majeure and the tribal chiefs are creating obstacles in reaching the available opportunities. There were reports a few months back that some understanding between the government and the tribal chiefs had reached. This understanding followed by some incentives to the provincial government as well for the development in the province. However the agreement has not produced the desired results so far. Recently, it is learnt that the federal government and the provincial government of Balochistan have left aside the issue of evacuating some of the oil and gas fields from the local tribes until the general elections in the country. The exploration activities have been reported stopped by the companies involved due to agitation from the tribal people. There are a number of areas having ample scope for exploration of natural resources especially oil and gas in Balochistan. These areas are identified as Dera Bugti, Jandran area of Kohlu in Mari Tribal Agency and Sarooria in District Khuzdar. Generally, the local population opposes development activity in their areas with the contention that process of development and arrival of outsiders may put the local population in a state of minority. There are also some bad feelings about the activity of foreign companies in that area it is learnt they have expressed their willingness to tolerate the oil exploration activities to be undertaken by Iranian or Chinese companies but not the companies from the West.
The federal government on its part has however taken effective initiatives especially for uplift of the underdeveloped areas in that province. The government has earmarked Rs890 million for initiating development work in Mari, Bugti and Mengal areas and also for raising Special levy force. There is however need to convince to the local people that development of their areas is in the best interest of people of the area as well as of the nation and the generations to come. Permission, being given to the private sector for launching radio broadcasting station can be used effectively to educate the population living in the remote parts of the country about the benefits of the development which is the only source of social and economic prosperity of the people and the area.
Despite the fact that the energy sector is the only vibrant sector where the foreign investment is coming noticeably, yet it does not translate the real potential of the natural resources, the nature has gifted to this country. The present government has accelerated the pace of reforms in the oil sector with the deregulation of this important sector.
Pakistan has an extensive natural gas infrastructure, however, the gas reserves are gradually declining especially in Sui and need augmentation either through new findings or gas supply arrangements from Turkmenistan.
Pakistan's petroleum minister Usman Aminuddin recently visited Kabul to attend the second steering committee meeting on Pakistan-Afghanistan-Turkmenistan gas pipeline. The international donors who were earlier hesitant to provide financing for this cross border pipeline project have now expressed willingness to sponsor this significant project. The Asian Development Bank is also taking keen interest in the project and has assured financing for feasibility report of the project. Once this project comes on the ground, Pakistan is likely to assume a noticeable position on world's natural gas map.
The process of deregulation initiated by the present government has already eliminated the involvement of the government in lubricants, import and pricing of various segments of the oil sector. The intention of the government to deregulate the import of High Speed Diesel (HSD) is yet another major step to bring in the private sector in the business.
Farooq Rehmatullah, Managing Director of Shell Pakistan on the occasion of Annual General Meeting held in Karachi has observed that Oil Sector has great potential to attract foreign investment in Pakistan, however, the lowest rate of margin is proving a major obstacle.
Accompanie by Salimuddin Ahmed, Director External Affairs and Hussain Mucchhala, Director Finance, the Shell Chief said that the margin of oil companies in Pakistan hardly comes to 3.5 per cent which, can be stated as the lowest in the world. As compared to the margin rate in Pakistan, the oil companies operating in other countries like Malaysia, Singapore, Thailand and India was between 15 to 20 per cent.
Reviewing the performance of Shell Pakistan during the financial year ended June 30, 2002 Farooq Rehmatullah who is also the Chairman of the Company said with a sense of achievement that Shell has successfully met the challenges of a volatile economic environment and reduced economic activity. Company's tenacity is reflected in the improvement of gross sales, which increased by 5 per cent from last year to a record Rs78.9 billion, largely owing to higher volumes, and price increases.
Overall profit after tax increased by 1 per cent to Rs1.06 billion. This performance encouraged the company to recommend a final dividend of Rs14 per share which along with the interim dividend of Rs4 per share declared earlier in February last makes for a total distribution of Rs18 per share for the financial year 2002.
The Shell Petroleum Company Ltd (UK) also increased its investment in Shell Pakistan by purchasing an additional 5.744 million shares at a cost of $22.3 million demonstrating Shell's committed confidence in the countr's economic progress and in the buoyancy of the oil and gas sector in Pakistan.
Responding to a relevant question that while the oil companies are getting the lowest margin in this country, why the price of POL products are so high in Pakistan? Rehmatullah while pointing out towards the international oil prices responsible for increase of oil prices in Pakistan also the government levies on the oil products are responsible for making the oil as an expensive commodity in Pakistan.
The government levy on motor gasoline comes to 48 per cent and on HSD it was 26-27 per cent which, has been recently reduced to 23 per cent.
Farooq Rehmatullah answering to another question said that the oil companies operating in Pakistan times and again have invited the government attention towards the issue of higher oil prices due to the levy on oil products and having suggested to bring down the size of levies as well. In Pakistan government levy is a major source of revenue causing increase in oil prices.
Farooq Rehmatullah said that an increase in margin of oil companies would not only improve the status of Petroleum Industry but will also greatly encourage the foreign investment at a massive scale.
However, despite an extremely low margin, Shell has invested $32 million in Pakistan. He said that the Company has also paid $11.3 million out of its share for the White Oil Pipeline project from Karachi to Mahmoodkot. This pipeline project is very vital for the country as it will carry 5 million tons of petroleum hence attributing to reduce the transportation expenses and minimizing the road occupancy by the tankers and also improve the traffic hazards and accidents.
Farooq Rehmatullah expressed his concern that if the US-Iraq conflict flares up, it could further raise the international prices of POL products.
Shell is the leader in petroleum industry. It is committed to work for the betterment of peoples standard in health, education, social welfare and overall economy of the country.
Pakistan State Oil, which is the largest Oil Company in the public sector, announced the highest-ever cash pay out of Rs1.86 billion to sharesholders for the financial year 2002. The company approved a final dividend comprising 80 per cent, cash Rs8/ per share and 20 per cent bonus shares combined with earlier two interim cash dividends of Rs5 per share, the total amounts to Rs13 per share.
The impressive financial achievement of the company ratifies the remarkable results hit by the company. According to a PSO spokesman, despite the revenue drop and a record provision of Rs2 billion made for taxes (an increase of Rs800 million) PSO earned an all time record profit before tax of Rs5.1 billion, up by 49 per cent, while profit after tax rose to Rs3.2 billion registering 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. Even after excluding adjustments and inventory gains/losses, operating profit of the company grew by an impressive 32 per cent over the previous year.
The profit increase is primarily due to innovative marketing strategies, organizational restructuring, and product mix, revamping of internal systems with improved productivity along with the partial impact of enhanced margins during the last quarter, the company feels.
Caltex Oil (Pakistan) Limited, one of the most outstanding oil companies operating in Pakistan carries professional vision to carve an impressive place in the market. Taking advantage of its professional vision, Caltex was the first amongst the oil majors to establish Compressed Natural Gas (CNG) refueling facility at its retail network. Caltex Chief Arshad Nasar says that the company took the lead due to its commitment to the government's policy of promoting CNG as an alternative fuel to the general public.
Caltex has already invested over $1.0 million in setting up 25 refueling facilities at initial stage, with the setting up of additional 25 facilities the number of fueling stations are about to touch the figure of 50 stations. Besides refueling facilities, Caltex has also set up 4 CNG conversion centers in view of the increasing demand for CNG.
Caltex believes that Pakistan has a vibrant economy with a significant size of 140 million populations. Far-sighting future economic growth in Pakistan, Caltex has quite extensive investment plans amounting to Rs4.5 billion since January 2000 in projects related to the development and augmentation of petroleum infrastructure of national importance. Recently, Caltex has purchased 11 per cent equity in the White Oil Pipeline project which, is estimated to cost around $480 million. This is the single largest investment in the petroleum downstream sector after the PARCO refinery project in Pakistan. The pipeline project is to play a significant role in country's overall economy by transporting HSD on the most economical, safe and reliable basis from Port Qasim to Mehmoodkot, Multan.
Oil prices have multiplier effects on general price index besides affecting the competitiveness of locally produced goods in the export market. Prices of POL products are kept low in many countries to check the price inflation.
In Pakistan, petroleum imports represent 41 per cent of the country's primary energy supply, which consumed at least 30 per cent of our total export earnings. In real terms the price we have to pay for import of oil is roughly estimated $3 billion dollars.
The demand for energy consumption so far grew at an average of 4.8 per cent in the last five years. In order to meet the future energy demands we have no option but to find cheaper and indigenous resources to save the candle of the economy currently burning from both ends. Because it is the people who pay the price at the cost of their economic prosperity. The situation demands to deal with all the snags responsible for creating hurdles in the way of economic progress with iron hand.
As a result of disturbed conditions, due to US-Iraq conflict, the sustainable supply at normal price always remains under threat. On one hand sustainable supply of oil remains vulnerable while on the other hand the importing country has to pay more when ever the prices shot up in the world market. This situation becomes more painful for a country like Pakistan, which has enormous energy resources and ample scope for discovering more resources within the country.
The present government has launched a massive poverty alleviation programme with the assistance of international donor agencies in the country. The exorbitant oil and electricity prices may however prove counter productive to the efforts of the government for poverty alleviation in Pakistan. For example the high electricity rates are the real cause of over 40 per cent power theft in Pakistan. The affordable price of natural gas is the best example at least in the domestic consumption where no report of gas theft is reported from any part of the country.
If the present government desires producing positive results out of its plans for the poverty alleviation, people at the helm of affairs should pay a serious thought on the importance of affordable price level of essential items especially the electricity and the POL products to give a breathing space to the people. It is not the plans or strategy but it is the people behind the plans and strategy that matters for making these plans a success.