Growing role of the private sector
By AMANULLAH BASHAR
June 09 - 15, 2003
Undaunted by the economic slowdown internationally, the economy was well poised to gain new heights in Pakistan.
The handsome financial results of the oil companies during the current fiscal year were highly encouraging to attract further investment in the oil sector. The strong economic fundamentals have shown impressive improvement besides effective check on inflationary pressures also helped bring down the rate of inflation to 3.3 percent, reduced fiscal deficit to 4.3 per cent and low interest rates to 3.4 per cent.
All these indicators supported the economy not only to hit the target of 4.3 per cent for GDP growth but even go beyond the targets such as collection of the revenue of Rs460 billion, the exports target of 10.4 billion and top of all the strong reserves position moving to cross the $11 billion mark.
All these positive signs also helped vibrating the oil sector as well reflecting in the handsome performance both by the public as well as the private sector oil companies in Pakistan.
The POL industry has simultaneously shown robust growth reflected in their extra-ordinary profits earned by all major oil marketing companies during the current fiscal 2002-2003.
The experts attributed this outstanding performance of the oil sector to the policies of deregulation, liberalization and gradual privatization of this vibrant sector.
The forthcoming financial year is sure to add much more activity in the POL marketing sector due enhanced role of the private sector with the privatization of Pakistan State Oil (PSO) which the experts say will be the event of the next financial year.
Abdul Sami Khan, President of the Association of Petroleum Dealers, while reviewing the enhanced activity in the oil marketing and distribution sector observed that the main cause behind increased activity was the quantum jump in the dealers margin which rose from 0.5 per cent to 4 per cent, the main attraction for the investors in the petroleum sector. As a result, Sami said that the number of retail outlets has jumped almost double in Karachi alone and more gas stations are likely to come.
Besides the increased margin, the deregulation of the sector also played a vital role in enhancing the market activity in Pakistan. Earlier, for getting permission for a POL outlet or a gas station, one has to run after the ministry of petroleum and a few could succeed in getting the license. Now the situation is almost different, the oil marketing companies are authorized to issue permission for establishment of petrol pump which tremendously encouraged the investment in this sector.
Over the question that whether the speedy shifting of the vehicles from oil to CNG would affect the demand for oil in the transport sector, Sami was of the view that though CNG was in vogue among the transporters, yet the growth rate of the vehicle population in Pakistan is so high that may hardly hide the demand for oil in Pakistan. The demand for new cars is so high that the manufacturing companies of various popular models are finding it hard to meet the demand. One of the most significant instrumental behind rolling of new cars on the roads is the increased activity of the leasing business. Leasing sector has also played important role in re-activating the automobile industry which ultimately brought positive effect on the oil sector.
The smuggling of oil from Iran in the bordering province Balochistan which is being sold at a much cheaper price is however a cause of concern for the POL sector in Pakistan. This menace has now reached up to Lasbella which is in close vicinity of the industrial city of Karachi. It is feared that if an effective check was not put on, this may also smuggled into Karachi. Although the oil marketing companies usually make tall claims about quality of customer services, yet there are growing complaints of adulteration at the retail outlets as well as tampering with the meters. People suffered by this dishonesty feel that this practice cannot be carried out without connivance of the regulating or overseeing authorities, however this is damaging the image of the distributors among the consumers.
Other factors which helped increase economic activity in the sector include the industrial consumption of POL products that rose by 1.7 per cent during July-March 2002-2003 to 12.640 million tons from 12.433 million tons consumed in the same period last fiscal showing increase in economic activity.
Out of six, consumption of four main products that is petrol, kerosene, high speed diesel and light diesel oil, have shown negative trend while consumption of fuel oil and JP-1 depicted an increase of 3.54 per cent and 29.35 per cent respectively during July-March of the current financial year which offset the impact of decline in other products.
Despite a negative trend the overall consumption of POL products by the end of the current year is likely to remain same at 17.9 million tons of last financial years in view of the prevailing conditions and no major change in demand pattern except for some items.
Demand for petrol plunged by a mere 0.54 per cent despite 43 per cent increase in sales of new car during July-March of the current fiscal. Conversion of gas to compressed natural gas can be termed as one of the main reasons of declining petrol consumption as car makers, have rolled out both CNG kits cars and petrol version.
Diesel consumption during the period stood at 5.055 million tons showing a fall of 0.26 per cent, Furnace Oil consumption showed growth of 3.5 per cent to 5.740 million tons from 5.543 million tons.
Increased consumption by the IPPs, which were typically operating at higher load factor during the year and higher inventory levels maintained by the IPPs and WAPDA on account of government's instruction to meet any supply threat during the Iraq war that could be the primary reasons for increasing fuel oil consumption.
There is a general perception that furnace oil demand is likely to experience a negative growth owing to improved gas supplies. However, the gas supply is still insufficient to affect fuel oil consumption noticeably. PSO, which enjoys 75-80 percent market share in furnace oil, was main beneficiary of increasing consumption of fuel oil.
Consumption of JP-1 rose by 29.35 per cent to 545,875 tons from 422,017 tons owing to sales of 329,896 tons to the transport sector, 8969 tons to the aviation sector and export of 120,447 tons to Afghanistan for coalition forces.
Kerosene consumption also declined by 12.31 per cent to 249,542 tons from 284,562 tons. Consumption of light diesel oil declined to 164,278 tons from 181,994 tons.
According to informed sources, the Privatization Commission has already completed the spade work and the change of hands from public to private sector is likely to take place in near future. There are three major companies are in the run, two from the Middle East while one from Pakistan for buying the PSO which enjoys the largest market share in the company. Although, all the three contenders are strong enough to reach the winning post, yet the government policy to attract foreign investment indicates that probabilities for qualifying the bids are in favor of the foreign buyers. It is because of the deregulation policy of the government that the oil and gas sector attracted over $40 million investment in the private sector for oil and gas exploration during past six months.
The profits of the listed POL companies increased ten times during the third quarter of the financial year. According to an estimate, the income of oil and gas exploration, marketing and distribution companies rose to Rs7.5 billion in the three months ended March 31, 2003 that is up from 732 million rupees during the corresponding period last year.
According to analysts from IP Securities, the Oil Marketing Companies (OMCs) posted an aggregate income of Rs4.7 billion compared to Rs2.1 billion during the same period last year.
The July-December 2002--first half of the current fiscal year-witnessed relatively better global political stability compared to the same period last year, which had witnessed the horrendous September 11 incident followed by a devastating war in Afghanistan.
Despite the tense political climate in Middle East and strike on Iraq by the US and its allies, the general economic conditions in Pakistan during this period were depicted sound and encouraging trend indicated by reduced inflation (3.6 percent), improved GDP, low interest rates etc. The consumption in petroleum, oil and lubricant industry registered growth during this period over prior year which recorded an all time sharpest decline of over 9 per cent.
Earlier, the first quarter of the current financial year had witnessed the POL industry further consolidating its financial position. The government's timely decision to revise the margins in stages helped the financial recovery process of the oil marketing companies.
Pakistan's oil imports also rose 23 percent in the first 10 months of the current fiscal year while exports also rose by 21 per cent. Crude oil in New York climbed to a 12 year high of $39.99 in February this year in anticipation of disruption in oil supplies due to fear of war in Iraq. Pakistan State Oil's profits almost doubled in the nine months ended March 31 after oil prices rose. On April 25, profit was boosted by an average 10 per cent increase in prices of oil in the past nine months. Profit rose to Rs3.3 billion from Rs1.7 billion in the year-ago period. Sales grew 23 per cent to Rs113 billion.
Similarly, Shell Pakistan performed well and it's after tax profits on March 31, 2003, were estimated at Rs552 million and Rs1, 401 million for the nine months from July 2002. For the same period last year the after tax profits stood at Rs262 million and Rs447 million respectively
According to Shell Pakistan, the robust growth in profit has been achieved through a high margin product mix and innovative service propositions extended to the customers, however international price movements also had a positive contribution to the profit, said F. Rahmatullah, Chairman, Shell Pakistan.
Shell Pakistan takes pride in its continued policy of investment in upgrading and improving infrastructure to maintain what the company says its leadership in bringing international standards through the supply chain to the forecourt. This leadership, the Shell Pakistan observes has forced competitors to emulate company's offerings which in turn have benefited the customers in the form of improved facilities and standards.
During the last three decades, the oil marketing companies mainly benefited from inventory gains as prices moved only upward at least twice a year. Pakistan State Oil was the major beneficiary owing to its large storage facility and inventory holdings.
Since July 1, 2001, things have changed dramatically. Now because of price fluctuations every fortnight, the inventory gains for oil marketing companies have vanished. The profits are now primarily dependent on cost-effective imports/supplies, efficient operations, innovative and aggressive marketing and pro-active marketing.
As a result of attractive financial results achieved by the oil companies, the banking sector which always looks for potential customers has also extended its financial support to the oil marketing companies.
During the third quarter of the current financial year, the sales revenue of PSO increased to Rs55.09 billion, up by 30 per cent over prior year which is an all time record since the inception of the company.
On year-to-year date basis, the sales revenue stood at Rs156.39 billion registering an increase of 21.6 per cent.
For the period January-March 2003, the company earned profit before tax of Rs1.78 billion which has remained consistent over corresponding period last year, while it posted the profit after tax worth Rs1.195 billion. The company posted unprecedented profit before taxed of Rs4.68 billion registering an impressive growth of 82 percent in the same period last year. The profit after tax also rose to Rs3.26 billion up by 90.5 per cent.
Based on the phenomenal financial performance, PSO announced a cash dividend of Rs3 per share to its shareholders, Rs1 or 10 per cent more than that declared for the corresponding period last year. Combined with the earlier declared interim half-yearly dividend of 60 per cent Rs6 per share, the total payout comes to 90 per cent for the first nine months of the financial year 2003. This will result in a cash payout of Rs1.54 billion as dividend. The January-March 2003 period witnessed continued global upheavals owing to the change geo-political scenario specifically in the Middle East resulting in consumption drop.
In the backdrop of the Middle East crisis, PSO had to maintain high inventory level due to regional political environment which also resulted in higher financial charges. Despite all these adverse factors and the overall industry decline of 7.2 percent coupled with tough competition from the existing as well as new entrants, PSO however succeeded in consolidation of its position especially in white oil products and increased its market share. PSO occupies 42 per cent of the market share in Mogas, 60 per cent Diesel, 69 per cent of Jet A-1 and 72 per cent of Kerosene on year to year basis.
PSO takes pride in its efforts to have an edge over its competitors. In Fuel Oil, despite fierce competition owing to free market conditions with the induction of new players as well as traders and importers, PSO showed increase in its participation stood at 77.6 per cent.
PSO's Board of Management observes that not only remarkable increase in profits but also the consolidation process of the company in terms of market shares were primarily due to well comprehended initiatives.
Earlier, the National Bank of Pakistan (NBP) has rolled over a $100 million letter of credit-cum loan facility of PSO. The rollover has been made on fresh terms and conditions that make this facility a fresher look. In this connection the NBP and PSO signed an agreement for the said facility early this year. This credit-line had supported PSO in imports of oil which has an estimated turnover worth $600-$800 million a year. PSO's total imports including diesel comes around $ one billion per annum.
The LC-cum loan facility was arranged by the NBP Bahrain for two years on a rollover basis. It may be recalled that PSO had first secured this facility back in June 2001 which expired October last year. PSO has also entered into a country-wide, state-of-the-art management services' arrangement with the United Bank. An agreement in this respect between the two organizations was signed last year in November. This arrangement offers a service with a view to reduce the transaction time from an average three working days currently to a merely one day, because of strong branch network of the UBL all over the country.
The cross border pipeline from Central Asia is featuring significantly in the overall energy projections of the country. Pre-qualification of the companies interested to invest in the pipeline project have already been accomplished while the ground work could start in early next year.
The pipeline will carry up to 30 billion cubic meters of natural gas per year from Turkmenistan's Daulatabad gas fields which are said to be world's fourth largest gas reserves. Originally, the focus of this international project was to supply natural gas to Afghanistan, Pakistan and India besides Pakistan's sea ports for shipment to other regional markets.
By virtue of growing economic stability which reflects in the confidence of the economic managers of the country. They are determined to go ahead with the $2.25 billion dollar gas pipeline project from Central Asia to Pakistan even if India, the potential buyer of the gas declines to participate in this project.
Nauraiz Shakoor, Minister for Petroleum and Natural Resources while expressing the strong will of the government to go ahead with the project even if India does not participate in this gas pipeline project, the construction of the 1600 km pipeline from gas-rich Turkmenistan to Pakistan passing through Afghanistan could start as early as next year.
It may be mentioned that India was invited by the three sponsors of this project to join in, however, India had expressed its concern over security of the project due to disturbed political conditions in Afghanistan. However, possibilities of Indian participation in this multi-national project can be ruled out especially following the improvement in relations between Pakistan and India.
Currently, the natural gas helps the country to meet 37 percent energy demands of the country. In order to cut the burden of $3 billion expenditures on oil imports, government was taking active measures to promote use of natural gas and locally produced coal in all oil consuming sections of the economy. In this respect, Chinese company was actively engaged in developing Pakistan's huge coal reserves in Thar. Other expert companies in coalfields from Germany and Australia are also negotiating terms to carry out work on the development of Thar coal fields carrying over 175 billion tons of unexplored coal reserves in Pakistan. Currently, Pakistan produces some 4 million tons of coal per annum which is mostly consumed by the brick kilns and cement industry. However, plans are in the hand to expand the use of coal in power generation also.
Thar conceives the largest coal reserves located 380km of Karachi shore.
Currently, the expenditure on oil imports is a severe burden on the national economy. The oil imports during the current financial year have added at least $one billion to the total bill of $3 billion. The economy like Pakistan obviously cannot afford to such a level of cost on import of a single commodity. In order to get rid of this unbearable burden, the present government is determined to find a replacement primarily from locally produced national gas and secondly by importing natural gas from Central Asia. The exorbitant price of electricity is the most annoying factor behind disrupting the growth of social and economic life in Pakistan. Import of 30 billion cubic meter of natural gas from Turkmenistan would not only be sufficient to shift the entire oil consuming sector on gas but also enable Pakistan to re-export the same to the energy starved countries. Availability of natural gas in such a huge quantity would be cost effective for the industrial sector to face the challenges of globalization under WTO regime in 2005.