Dec 03 - 09, 2007

In 1998/99 Pakistan witnessed a sharp decline in its foreign exchange reserves coupled with a slowdown in economic growth, leading to the danger of an embarrassing default. Keeping in perspective, the highly un-predictable international, regional and domestic business and political environment which saw high oil prices and massive earthquake, Pakistan made a revolutionary turnaround within a short period of seven years.

The momentum of steady economic performance is expected to continue in FY08 indicating that most of the financial indicators set by the government planners were achieved in FY07. Economic growth has accelerated and averaged 7.0% per annum; inflation and fiscal deficit have been contained within reasonable limits.

The SBP report of FY07 revealed that the key indicators of economy were very much in manageable range despite global externalities and geo-political situation. Forex reserves increased to over US$16 bn, whereas foreign investment also witnessed an all time high of US$ 4.1 bn on YTD basis in FY07. Real GDP growth of 7% was achieved in FY07 (FY06: 6.6), while trade and fiscal deficits remained within the reasonable range of 6% and 4.2% respectively.

As the economic turnaround was on its way, major large scale manufacturing industries such as cement and automobile flourished. Even today, Pakistan is going through a construction boom. Thus, growth in these sectors resulted in huge demand and consumption in oil industry. The oil industry has shown similar trend in line with steady GDP growth rate and ever-increasing power demand on account of industrial and construction activities and also due to increased participation of agriculture sector and large scale manufacturing which grew by 5% and 8.8% respectively. Seeing, this demand in oil in present and future, it seems that the state-owned entity Pakistan State Oil would benefit the most due to its large infrastructure and retail network.

Earlier industry analysts predicted that, white oil consumption will remain static at 9.5million metric tons. White Oil constitutes of Motor Gasoline (Mogas), High-Speed Diesel (HSD), Jet Fuel (JP-1) and Kerosene (SKO). This forecast was based on the premise that growth in White Oil would be hampered due to the trickle down effect of international prices on domestic prices causing an ever-increasing dependence on CNG and LPG.

Contrary to above projections, early start of FY08 witnessed a sharp rise in demand of Mogas which resulted mainly due to significant reduction in smuggled Mogas from across the border. This demand has led major OMCs (PSO, Shell and Caltex) to import Mogas as existing refineries were unable to meet the enhanced demand. It is estimated that Mogas consumption in FY08 would be around 1.6 million metric tons compared to 1.1 million metric tons in the previous year.

The oil industry witnessed an explosive growth of around 46% in Fuel Oil consumption owing to increased reliance on thermal power generation. This is due to widening supply-demand gap in power generation, low gas availability to power plants and drop in hydel generation. The industry sources say that estimated demand of HSD in FY08 would touch 8 million metric tons.

The oil experts predict a continued steady growth in black oil consumption; with the maximum benefit of the anticipated profits going to the state-owned oil giant Pakistan State Oil (PSO), being the major stakeholder in this business sector. Industry sources foresee that some six major companies plan to set-up IPPs which will require at least one million metric tons in a year. Analyzing the growth trend in IPP sector it won't be wrong to say that again the major beneficiary can be PSO because of its vast infrastructure and past experience in supplying fuel oil to all major IPPs including WAPDA. Recently, PSO has entered into a fuel supply arrangement with an upcoming 212MW IPP. This is the first fuel supply agreement signed by any IPP of new regime.

Lately, PSO has been laying special emphasis on white oil products that had been a forte of Shell till five years back. During the last five years, PSO's motor gasoline participation increased to 49% from 40% despite industry having been fragmented with eleven players, which used to be enjoyed by only three players till 1997-8. Shell's Mogas share dropped to 28% from 41% while Caltex also reported a decline in its participation from 18% to 14%. PSO successfully maintained its participation in Diesel at 60% level and Shell came down from 30% to 22% and Caltex came down to 8% from 10%.

In the first quarter of FY08, PSO market share was 49.7% in Mogas and 72.1 in diesel. It is expected that the national company would perform in this manner in the coming months.

According to analysts, PSO successfully managed to record sizeable profits in all quarters of the fiscal year 2007 despite wild fluctuations in international prices resulting in significant inventory losses. Contrary to PSOís performance, Shell's earning before tax was only Rs 378 million. Caltex, not being listed on Stock exchanges, doesn't make its data available, however, analysts assumed that Caltex must have had results similar to Shell.

Interestingly, PSO despite being the largest holder of inventory in the country reported after tax earning of Rs 4.7 bn with an EPS of Rs 27.3. Analysts attribute the positive bottom-line of the state company primarily on account of higher fuel oil intakes and ever-increasing market participation in key white oil products through innovative and customer-focused approach.

The first quarter FY 08 results recently announced by PSO showed ever-improving financial fundamentals and unprecedented corporate performance. Overall PSO market share of 71.7 percent during the quarter is the highest-ever for seven years. PSO sales revenue increased to Rs 122 billion versus Rs 101 billion during the same period last year. After tax earnings for the quarter were Rs 2.1 billion versus Rs 567 million in the comparative period. In black oil and white oil, PSO quarterly market share stood at 84.4 and 61.2 percent respectively.

According to the industry experts, PSO has been displaying strong fundamentals in all key financial indicators for the last couple of years. This clearly shows PSO management's outstanding performance as a result of well-perceived and far-reaching strategies, which are contributing a lot in terms of higher volumes and market participation. It is also estimated that PSO would be the major domestic beneficiary of an all time high international prices that would help the company to expand its business in other spheres of economy.