Changing oil marketing dynamics The downstream oil industry is shaping up quite fast. This week, the Pakistan State Oil is expected to formally announce plans to take over at least 12pc additional shares of Pakistan Refinery Limited, one of the country’s oldest refineries. Another medium-sized oil market company, Admore, is struggling to survive amid nasty disputes and court cases among its shareholders, which stem from its hostile takeover by a Lahore-based group enjoying political clout in the current set up. The US-based Chevron, formerly Caltex, has already called it quits and is completing legal formalities for transferring its marketing business to Total-Parco Pakistan. It’s shareholding in Pakistan Refinery — a joint venture of Pakistan State Oil (PSO), Shell and Caltex — is up for grabs by PSO. In fact, the entire oil marketing industry is expanding; having grown from just three to more than 10 small and big oil marketing companies in a matter of a few years. The number of refineries has also increased to five, and all of them have entered into the marketing business. And the biggest of them all, which enjoyed a monopoly-like situation until a decade ago — the state-run PSO — has been loosing ground. Almost every small and big market company has intruded into PSO’s territory. Although it still enjoys the role of a market leader and remains the country’s biggest company by revenue, its market share has dropped from over 75pc a decade ago to a little over 60pc. The fact that the market leader is paying taxes and dividends to the government and earning profits on the back of guaranteed returns should not be a reason for satisfaction. A more serious approach should be to examine its entire business model and market challenges to unleash the true potential of the strategic public asset. The company announced two weeks ago that it earned a record profit of Rs23.7 billion in the first half of the current fiscal year. A closer examination of its books reveals that Rs11 billion of that profit had accrued on account of delayed payment of mark-up from Hubco and Kapco as a result of clearance of circular debt by the government. Another Rs2.3 billion in profit came from its investments in Pakistan Investment Bonds. While it may be considered a prudent business approach from a revenue diversification perspective, a professional management is expected to celebrate its success only if it is gaining market share and drawing maximum earnings from the core business. These few numbers would throw a little light on the direction the downstream market is heading to. PSO lost its overall market share by about 1.8pc in just six months (July-December 2013), from 64.7pc to 62.9pc. In the high speed diesel segment, PSO’s sales dropped by 1.4pc, against the OMC industry’s growth of 7pc. As a result, its market share went down by 4.6pc to 53.8pc at end-December 2013. In the motor gasoline business, the overall industry grew by over 19pc, but PSO posted only a 15pc increase. Petrol consumption during the period was higher because of lower CNG availability. Its market share dropped by 1.7pc to 49.6pc. In white oil, the industry grew by about 10pc, but PSO’s sales improved by only 3.1pc, and it ended up losing its market share from 56.5pc to 53.1pc. In black oil, PSO was able to maintain its market share at around 75pc, mainly because of its long-term furnace oil supply contracts with the power sector, and because the government was able to address the circular debt in the period. It is clear that while smaller companies like Byco, Attock Petroleum, Hascol and Total-Parco are gaining ground, the market leader is loosing its hold to smaller, newborn companies with limited infrastructure. In some cases, the oil giant was seen willingly allowing its infrastructure and supply line to be used by other firms. Until recently, the company was without a chairman of the board of directors for over a year. And it has been without a full-time managing director for over eight months now. It is in this background that PSO needs to take over a majority decision-making position in Pakistan Refinery for reverse integration for guaranteed product supply, given the fact that private refineries tend to reduce their supplies to PSO when its payables go up. And in turn, they sell their products directly to the market to gain more footholds. In fact, the government has now revived PSO’s board of directors, which was barred from working two weeks ago on verbal orders, to take a final decision over taking over PRL’s shares. PRL is a Rs150 billion-entity in which PSO already holds a 37pc stake.
Posted on: Tue, 18 Mar 2014 16:24:53 +0000
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