pakistan petroleum industry

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Acknowledgements We would firstly like to thank Allah (SWT) for His guidance and bestowing His utmost blessings in the most difficult of times during this project. Furthermore, we are thankful to Ms Amber Imtiaz for her support and supervision. We would also like to thank; Mr Moghul Anwar, GM Exploration (PPL); Aneel Kumar (PSO), Mohammed Iqbal (PSO), Amir (PSO); Vaqar Ahmed Khan, GM Training (PSO) and Dr Zaidi (PSO). We also appreciate all the students that co operated with us, especially; Shadae Hassan Nilofar Varzgani Alisa Ispahany Yousuf Ali Onaiza Raza Hissan ul Arfeen This has been a one of a kind experience where we feel that we’ve learnt a lot and have enjoyed carrying out this assignment. After reading this report we hope you will feel the same way too. Analysis of Pakistani Industries -Oil and Petroleum Industry-

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API Report Covers all - Exploration, Refinery and OMC sectors

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Page 1: Pakistan Petroleum Industry

Acknowledgements

We would firstly like to thank Allah (SWT) for His guidance and bestowing His utmost blessings in the most difficult of times during this project. Furthermore, we are thankful to Ms Amber Imtiaz for her support and supervision. We would also like to thank; Mr Moghul Anwar, GM Exploration (PPL); Aneel Kumar (PSO), Mohammed Iqbal (PSO), Amir (PSO); Vaqar Ahmed Khan, GM Training (PSO) and Dr Zaidi (PSO).

We also appreciate all the students that co operated with us, especially;Shadae HassanNilofar VarzganiAlisa IspahanyYousuf AliOnaiza RazaHissan ul Arfeen

This has been a one of a kind experience where we feel that we’ve learnt a lot and have enjoyed carrying out this assignment. After reading this report we hope you will feel the same way too.

Introduction

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Historical Background

Petroleum exploration in Pakistan began more than a century ago. The first well was drilled in 1866 at an oil seepage Kundal in the Mianwali District of Punjab Province. This was seven years after the World’s 1st well was drilled in 1859 in Titusville, Pennsylvania by Edwin Drake. Activities continued during the last quarter of the 19th century, a discovery of oil at Khattan in Balochistan was the main success where thirteen shallow wells produced 25,000 barrels of oil between 1885 and 1892. The Government of Indio-Pak controlled the drilling activities during this early phase.

The first commercial success came with the drilling of Khaur-1 by Attock Oil Company in 1915, in the Potwar Basin. After a lull, the exploration activity passed into private hands: during 1912-1947, private oil companies. Including Attock Oil Company, Burmah Oil Company, Indolex Petroleum Company and Whitehall Petroleum Corporation carried out extensive exploration, basing their drilling operations on geological investigations

After independence in 1947, there was a need for an appropriate legislative framework to organize the petroleum sector and in 1949 the Pakistan Petroleum (Production) rules were introduced. These rules contained incentives that triggered a new wave of exploration. After the dissemination of these rulers, Attock Oil and Burmah Oil companies established Pakistan Oil Fields Ltd (POI.) and Pakistan Petroleum Ltd (PPL),.

No new oilfields were discovered except for a very small one at Karsal (1956) in Potwar where production declined very rapidly. The drilling activities by other foreign oil companies were also unsuccessful. The Government of Pakistan decided to enter directly into oil exploration in order to sustain the exploration effort, and with assistance from U.S.S.R. they established the Oil and Gas Development Corporation (OGDC) in the public sector in 1961. The exploration in offshore regions which had started in 1961 remained limited to the drilling of only eleven exploratory wells of which nine were located in the Indus offshore

During the period from 1983 to 1987 a total of 65 exploratory wells were drilled at an average of 13 wells per year with a success ratio of 1: 2.7.

1990-2000 onwards we saw the first effort made by shell to introduce oil marketing in Pakistan. This was soon followed by PSO which carried out aggressive marketing to gain back the lost market share, as well as introducing a large number of value added products to its customers.

Highlights of the Year 2005-2006

Liberalization of oil sectorAnalysis of Pakistani Industries

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The public sector oil and gas entities have been made independent and the Board of Directors of these companies has now been given complete autonomy to operate on commercial lines without interference. As a result, the performance of the companies has improved significantly.

Furthermore the imports of fuel oil and HSD have been deregulated, as well as the prices and allocation of LPG. With these incentives the production of LPG has risen to 1600 tons/ per day.

Consumer prices of Furnace Oil and White Oil products are linked to the international prices are now adjusted on a fortnightly basis; this will ensure more confidence of the international sector.

Finally, incentives have been provided for up-gradation/expansion of existing refineries

Exploration and Production (E&P) Sector ReformOnshore and offshore policies were announced in May, 2001 and an incentive package was given to attract foreign investment in the upstream sector. The seismic surveys in offshore areas indicate tremendous potential of oil and gas. As a result, many multinational companies have shown interest in exploration in these areas. However, after an interview that was conducted at PSO, Mr Ahmed provided said that the results so far have not been very satisfying and the exploration was deemed unsuccessful. However, on the bright side:

i. OGDCL has for the first time in Pakistan’s history made an oil discovery in the NWFP Province.

ii. MOL, a Hungarian Exploration company, has also made a major discovery at Gurgry district Kohat N.W.F.P.

iii. There have been investment commitments of around US $ 1 billion since October 1999.

Privatization of Public Sector Entitiesi. NRL was Privatised on 07-07-2005, taken over by the Attock Groupii. GOP has decided in principle to privatize PSOCL, OGDCL, PPL. Government

has also divested its minority shareholding in seven oil fields.

Environmental Reforms Being a clean fuel, Natural Gas share in the energy mix is being increased to

replace imported fuel which will have a positive effect on the forex of the country. CNG is being encouraged in the transport sector to improve urban ambient air quality and reduce carbon emissions. About 1000 CNG stations are in operation and over 1 Million vehicles have been converted to CNG, making Pakistan third largest CNG consumer in the world after Argentina and Italy.

Lead-free gasoline has been introduced since 2001 to improve the air quality. Attock Refinery has started producing unleaded gasoline since 2002. LPG supply as an alternate fuel is being encouraged to protect the environment and to conserve fuel wood resources.

Upstream SectorDrilling Activities

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In 2005-06 101 wells were planned including 53 as exploratory and 48 as appraisal/development wells. Against the target of one hundred and one, total 64 wells were into drilled, and in the Private Sector there were 34, the total was 98. During the fiscal year 2005-06, there were eight oil and gas discoveries in the country.

Midstream SectorRefining Transfer of regulatory functions to OGRA In pursuance of the reforms policy of the Government to separate policy

functions from regulatory functions, oil regulatory functions have been transferred to OGRA with effect from 1st April, 2006

Establishment Of New Oil Refinery Project Under the deregulation, privatization and liberalization policy of the

Government, private sector investment in the down stream oil sector is being encouraged. The Government has therefore, approved additional incentives for setting up of a new Coastal Oil Refinery at Khalifa Point near Hub, Baluchistan.

Blending Of Ethanol Into Motor GasolinePSO has launched pilot project which began in 16th August, 2006 in Islamabad, with 10% blending of Ethanol into the Motor Gasoline, followed by a similar project in Karachi and Lahore.

PricingThe prices of petroleum products have increased tremendously in the International market during the past two years. The domestic sale prices of petroleum products, being linked with International Market product prices, were required to be increased accordingly. However, the Government decided to protect the consumers from the burden of high International prices and capped the domestic sale prices from time to time since May, 2004 till to date. The consumer has benefited through this capping in particular and Government able to control the inflation in the country. When the international prices went down, the benefit wasn’t passed down to the public.

Downstream sectorMarketing In order to create healthy competition, achieve efficiencies and attract

investment in the downstream oil sector in pursuance of deregulation, two new oil marketing companies were approved in the name of Askar Oil Services Private Limited and Baqri pvt. Ltd. In accordance with the requirements of the Criteria of establishment, these companies will have to make minimum investment of Rs. 500 million in the next three years of their operations.

It was estimated that around 16 million tons of petroleum products will be consumed during the year while actual consumption remained at around 15.9 million tons almost near to the target.

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Structure

The structure of the industry has been divided into three main parts:1. Upstream2. Midstream3. Downstream

Upstream sectorThe upstream sector includes the searching for potential underground or underwater oil, drilling of exploratory wells, and subsequently operating the wells that recover and bring the crude oil and/or raw to the surface.

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Offshore:Offshore literally means in the sea away from the shore; not on the shoreline but out to sea; the exploration activities that undertake in the sea away from shore is termed as offshore activities.

OnshoreThe exploration activities that undertake on the land away from the sea is known as onshore activites Many such discoveries have been made in Punjab are onshore activities.

Past

Pakistan has been considered a petroleum province since long, the first well was discovered in 1866 at Kundal in the upper Indus region. After the independence in 1947 there was a need for the legal framework in the petroleum upstream sector and in 1949 Pakistan. In Potwar where production declined very rapidly. The drilling activities by other foreign oil companies were also unsuccessful.

The private companies made the initial discoveries; in the early 1960s OGDCL was created which developed a successful track record in discovering oil.

Following the oil crises in 1973 number of impressive discoveries were made both by private sector and OGDCL.

In order to remain attractive in highly competitive global exploration market, the Government has been making progressive changes in the investment polices and regulations at regular intervals. With first E&P policy of 1991,Pakistan caught the attention of international petroleum industry and further subsequent improvements through policies of 1993, 1994, and 1997 made Pakistan an attractive location for upstream investment. Pakistan overhauled the policy in 2001 and introduced corresponding regulation in 2001 for onshore areas and in 2003 for offshore areas.

The government was slow in making a policy for this sector because previously government felt that there was less need to priorities this sector given that cheap imported oil was available. However in 1980s due to increased oil prices, government in 1991 gave its priority to this sector by launching first petroleum policy in 1991.

Present

Geographical zoning of the oil fields According to Oil and Gas Journal (OGJ), Pakistan has proven oil reserves of 300 million barrels as of January 2006. The majority of produced oil comes from reserves located in the southern half of the country, where the three

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largest oil-producing fields are located in the Southern Indus Basin. Additional producing fields are present in the Middle and Upper Indus Basins.

Since the late 1980s, Pakistan has not seen many new oil fields coming online. As a result, oil production has remained fairly flat, at around 60,000 barrels per day (bbl/d). During the first eleven months of 2006, Pakistan produced an average of 58,000 bbl/d of crude oil.

Dependence on imported oil is rising Due to Pakistan’s modest oil production, the country is dependent on oil imports to satisfy domestic oil demand. As of November 2006, Pakistan had consumed approximately 350 thousand barrels of oil and various petroleum products, of which, more than 80 percent was imported. The majority of oil imports come from the Middle East, with Saudi Arabia as the lead importer.

Exploration companies-a quick snap shot BP is the largest oil producer in Pakistan, with production averaging approximately 30,000 bbl/d. The oil major operates 43 fields and more than 100 wells throughout the country. OGCDL is Pakistan’s second-largest oil producer, with average production at 25,000 bbl/d.

Exploration policies Pakistan’s exploration polices were revised in 2001 to make the upstream sector more attractive to foreign investors. It was also considered necessary because of increased competition from other countries, a perception of high level of political risk by the petroleum industry because of the import parity price crises in 1997-98, international sanctions on account of the nuclear

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blasts in 1998, and the political changes in 1999 ad the Afghanistan crisis in 2001-02.

Onshore and offshore policies were announced in May 2001 and an incentive package was given to attract foreign investment in the upstream sector. The seismic surveys in offshore areas indicate tremendous potential of oil and gas. As a result, many multi national companies have shown interest in exploration in these areas.

Oil drilling, discoveries and production activities

Pakistan has drilling density of 8 wells per 10,000 sq. km and success rate of

1:3.6. (Figure 2) that compares very favorably with global drilling density, which averages 100 wells per 10,000 sq. km with success rate of 1:10.

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The total proven and recoverable reserves of natural gas and oil are estimated at 43 trillion cubic feet (TCF) and 780 million barrels respectively. Large areas of Pakistan's basins still remain geological frontier and hold promise for the future in view of the multiple habitats for petroleum generation and accumulation. Independent international studies indicate an oil and gas potential that is many times more than these proven reserves.

Pakistan remains an active and prospective exploration country. Significant finds continue to be made in the existing producing areas as well as in less-explored regions. The proven rate of exploration success and a sizeable domestic oil and gas market present promising investment opportunities.

OGDCL has for the first time in Pakistan’s history made an oil discovery in the NWFP Province. MOL, a Hungarian Exploration company, has also made a major discovery at Gurgry district Kohat N.W.F.P.

Due to practical policies of the present government, since issued in October 1999 there have been investment commitments of around US $ 1 billion.

In 2005-06 one hundred and one wells were planned including fifty-three as exploratory and forty-eight as appraisal/development wells. Against the target of one hundred and one, total sixty-four wells were spaded i.e. thirty-three exploratory and thirty-one as appraisal/development wells

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In the Public Sector, OGDCL spuded twenty-three exploratory and seven appraisal/development wells, and in Private Sector thirty-four wells were drilled which included ten exploratory and twenty-four appraisal/ development wells. On an average 220 meters were drilled per day.

During the fiscal years 2005-06 eight oil and gas discoveries were made according to the ministry of petroleum.

In Sindh Province 65,774.83 Sq. Kms, Punjab 41,480.52 Sq. Kms, Balochistan 61,814.22 Sq. Kms, NWFP 11,395.66 Sq. kms and Indus Offshore 22,348.43 Sq. Kms areas were under exploration.

In 2005-06 oil production in the country remained 65,577 barrels per day

Exploration Company

Production (barrels in million)

1.OGDCL 11.5012.POL 4.7733.British Petroleum 4.6264.PPL 1.3055.BHP 0.6566.OPII 0.5797.Eni Pakistan 0.1168.MOL 0.3059.Petronas 0.03810.OMV 0.035

Source: Energy yearbook 2005-06

Mode of transport of crude oil Road browsers transport most of the domestic crude oil and tank lorries largely owned by private individuals and small firms. The road tanker fleet is used for distribution within cities and also for around the country.

Pakistan Railways (PR) transports mostly fuel oil, and operates 5,400 tank wagons for this purpose. However, its movement capacity is severely hampered by locomotive availability and other rail infrastructure constraints.

The quality of the crude oil produced is Pakistan has high sulphur content. The details about crude oil are covered in detail in the midstream sector.

Exploration Licenses

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One hundred and forty-four applications for grant of Exploration Licenses were processed during 2005-06, which included seventy applications received during the year. Nine bidding rounds were held in which thirty-nine blocks were offered. As a result thirty-three Exploration Licenses covering an area of 66,344.10 sq. kms. Were granted. Hundred Exploration Licenses are active covering an area of 202,813.69

sq. kms on 30-06-2006. Around 11,824.45 sq. kms. area of three Exploration Licenses remained under Force Majeure, while an area of 14,121.42 sq. kms. Of three different operators. Twenty-three E & P companies are operating in upstream Petroleum sector of Pakistan.

Regulations in the Upstream sector

The upstream activities in the oil and gas sector are administered and regulated though the Directorate General of Petroleum Concessions (DGPC) of Policy Wing, Ministry of Petroleum and Natural Resources. Policy Wing has three more directorates namely, Directorate General of Gas (DG Gas), Directorate General of Oil DG Oil) and Directorate General (Special Projects) to provide support to the Government in formulation of policies for midstream and downstream oil and gas midstream and downstream oil and gas sector. With the formation of Oil and Gas Regulatory Authority (OGRA), midstream and down-stream oil and gas sectors are regulated by OGRA.

Major players in upstream sector

OGDCL

OGDC was created in 1961 under an agreement signed by GOP with USSR for financing equipments and services of Soviet experts for exploration of oil and gas in the sector.

During 1970s, Western technology was introduced and it also under took an aggressive program in Exploration sector of Pakistan.

Seventies developments resulted in discovery of number of oil fields and hence OGDCL financial independence.

In 1997 OGDCL was incorporated as public limited un-listed company managed by independent Board of Directors.

The company has 37.4% of the total area granted by government to the petroleum sector. It has 37% of the total oil reserves of the country.

It has 61% of the country’s total oil production.

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PPL

Incorporated on June 5, 1950 as a Public Limited company, PPL inherited all the assets and liabilities of the Burmah Oil Company (Pakistan Concessions) Limited, and started business on 01 July 1952.

In 1997, Brumah sold PPL to GoP.In July 2004 the government sold 15% of these holdings to general public as part of Privatization Programme.

PPL's present exploration portfolio consists of 17 exploration blocks out of which nine (9) areas, including one (1) offshore block, are PPL operated and eight (8) areas including one (1) offshore block are partner operated. As of June 30, 2006, the remaining proven recoverable reserves of PPL consisted of 4.391 Tcf of gas (784 million barrels of oil equivalent) and around 21 million barrels of oil. The Company's current hydrocarbon production in terms of energy is equivalent to around 184,000 barrels of crude oil per day.

The demand for the energy is rising due to economic growth. Therefore to meet the demand PPL has undertaken various discoveries to boost the energy supply.

PPL recently explored the offshore area and conducted exploration near Pasni however, the exploration undertook failed.

Shell

Shell has been active in exploration and production (E&P) activities in Pakistan since 1994 in onshore and offshore areas of Pakistan. Shell's offshore interests are managed and operated by Shell Development & Offshore Pakistan B.V. Kirthar Pakistan B.V manages its onshore interests. Both of these companies are wholly owned subsidiaries of the Royal Dutch/Shell Group.

Pakistan BV (KP BV).  KP BV holds a 28% share in the Bhit gas field development and in the Badhra development, operated by Eni Pakistan Ltd; other partners include OGDCL (20%)and Premier-Kufpec Pakistan BV (12%).

Shell’s Exploration & Production [E&P] activities in Pakistan are carried out by two companies – Shell Development & Offshore Pakistan BV (SDOP BV), and Kirthar Pakistan BV (KP BV), which manage its upstream interests both offshore

and onshore in Pakistan

SDOP BV holds a 47.50% working interest and is the operator of Block 2365-1 Offshore Indus E (Indus E Block), for which it obtained an exploration license in April 1998; 23.75% each is held by Premier Oil Pakistan Offshore BV and KUFPEC Pakistan BV and the remaining 5% by Government Holdings (Pvt) Ltd. 

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Midstream sector

The midstream sector processes or refines the oil in order to make it marketable.

RefineriesA refinery is an industrial plant for purifying a crude substance The refining sector investment in Pakistan has been almost non existent since

the 1960s. In the late 90s, Pakistan’s refining capacity was less than 150k bbl/day. Pakistan

imported over 60% of its total POL product consumption. At present, Pakistan’s refining capacity stands slightly below 300Kbb/day. This

was mainly due to the commencement of PARCO in the late 2000. Almost the refineries work at around 80% capacity except Bosicar, which just

utilized 45% of its capacity. NRL and PPl operate at full capacity, Inspite of the current condition there is a general lack of refineries, where

Pakistan is facing a deficit 100,000 to 150,000 barrels a day in refining fuel oil and diesel.

There are certain standards that are followed internationally known as EURO 2 and EURO 4 that relate to environmental cleanliness. Neither of these are followed in Pakistan.

The major players or the 5 refineries under OCAC (Oil Companies Advisory Committee) are:

1. Pak Arab Refinery Complex2. National Refinery Limited3. Pakistan Refinery Limited4. Attock Refinery Limited5. Bosicar Refinery Limited

2 refineries have been recently introduced and don’t come under OCAC.Enar Petrotech Services Limited

Dhodak Refinery Limited

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Pak Arab Refinery Committee

PARCO was incorporated 1974, PAK AR was a Joint Venture between the countries of Pakistan and Abu Dhabi. The share holding in the Company is in the proportion of Government of Pakistan (60%) and ABU DHABI Petroleum Investment (ADPI)(40%).

PARCO became operational in late 2000, with 95,000 bbl/d of refining capacity and a share of around 33% in the total refining capacity. It is the largest refinery in terms of capacity and is located in Multan. Furthermore it is also one of the largest companies of the Pakistani corporate sector and has an asset base approaching Rs. 100 billion. 

Until recently local refineries were meeting only 33 per cent of the domestic

requirements and the remaining 67 per cent demand was met through import (Gulf Economist 2007). With the commencement of Pak Arab Refinery, having a refining capacity of 4.5 million tonnes per annum, the country has become surplus in certain products.

It is a state-of-the-art refinery and is based on the latest equipment and process technology; it further has a training resource for technologists from the region. The site has accommodation for the PARCOnians. Up to date facilities are present such as Steam, Feed Water and Condensate System, fuel, oil and water gas system required for the efficient production of the highest quality of petroleum products.

PARCO is engaged in its marketing activities through the "PEARL" Brand. They provide a wide range of lubricants to the motorists under PEARL. PARCO has established a petrol pump, which was a result of a joint venture with TOTAL. The first TOTAL-PARCO petrol pump was commissioned in January 2002 near Sargodha and now the number of petrol pumps across the country are over 100.

National Refinery LimitedAnalysis of Pakistani Industries

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National Refinery Limited (NRL) was incorporated as a public limited company at Karachi in 1963. Government of Pakistan took over the management of NRL under the Economic Reforms Order, 1972.

Presently NRL is under the Ministry of Petroleum and Natural Resources. In June 2003 the Government of Pakistan decided to include NRL in its privatization programme, it was acquired by Attock Oil Group in July 2005 who also took management control at the same time.

This is the second largest refinery in terms of capacity (25% share) and it is located at Korangi. It has a refining capacity of 62,050 bbl/d. NRL enjoys a competitive edge as it is the only refinery producing LBO (Lube Base Oil) in Pakistan. Furthermore it is the only refinery that produces Asphalt (Bitumen for roads) and Base Oil (Lubricants), In an interview with Dr Zaidi of PSO, after it was privatized by Attock Company, the organization took advantage of this by only selling the 2 products to their downstream OMC, Attoc Private Limited. As a result it has a monopoly and based on AKD statistics, it is one of the most profitable oil company of the FY 06. Furthermore, due to the restrictions set by the government we can’t import Bitumen leaving the consumer no other choice but to buy the highly priced Asphalt made locally. The Asphalt produced by NRL are also sold to MNCs with in the country.

It has an asset base exceeding Rs.89 billion or just over US$ 1.5 billion in current dollar terms. As a result of the deregulation policy, the gross margins of the company have improved significantly. Furthermore it plans to introduce LBO revamp project to meet the growing demands of LBO, aswell as a self power generation plant and a reverse osmosis plant in order to counteract the shortage of water during the summer months.

NRL is implementing an Enterprise Resource planning (ERP) solution, SAP, to streamline planning and coordination, thereby improving overall efficiency. The Financial, Maintenance, Materials Management and Human Resources modules were implemented in 2004.

Pakistan Refinery Limited (PRL)

PRL is one of the oldest refineries of Pakistan after Attock Refinery, it was introduced in November 14, 1959 where the opening of the Refinery was

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performed by Field Marshal Mohammad Ayub Khan, President of Pakistan. It became operational in 1962.

It is the third largest refinery in terms of capacity with a refining capacity of 47,110 bbl/d (16% share). It is located in Korangi, Karachi where it also has a tank farm in Kemari.

Products derived from refining of crude oil at this refinery meet an overwhelming part of the world energy needs. PRL, since inception has been the principle manufacturer and supplier of petroleum products to the domestic markets, Pakistan Defense Force and Railways.

PRL takes pride in the competitive edge it enjoys of respect of efficiency, lower operating cost, high quality human resource, reliability and introduction to newer generation technologies. They also promote the production of cleaner fuels in order to become more environmentally friendly.

Attock Refinery Limited

Attock Refinery Limited (ARL) became a Public Limited Company in June, 1979 and is listed on the three Stock Exchanges of the country. This is the fourth largest refinery in terms of capacity and it is located in Rawalpinidi with a capacity of 40,000 bbl/d (14% share).

ARL is the pioneer of crude oil refining in the country with its operations dating back to 1922. Backed by a rich experience of more than 80 years of successful operations, (ARO) has been a first in many aspects, being the first refinery in the region, as well being the pioneer of certain products in the area as well.

ARL is a member of Attock Group of Companies, a fully integrated group covering all segments of oil and gas industry from exploration, production and refining to marketing of a wide range of petroleum products besides also engaged in manufacturing and trading of cement, information technology, etc. The Attock Group contains the following companies related to the oil and petroleum sector.

POL (Pakistan Oil limited) which is an exploration company National refinery limited (NFL) Attock Petroleum Limited (APL) where the main objective of APL was to

establish a Group Company in downstream petroleum sector for marketing of petroleum products in Pakistan,

In a case study carried out by LUMS, due to Attock Company’s poor appraisal and management practices within the refinery, the management has suffered and consequently the company’s performance. However steps are being taken to improve the company’s performance.

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Bosicar Refinery Limited

The Company was incorporated as a public Company on 9th January 1995 . The Mouza Kund Plant (MKP1) is located at District Lasbella, in the province of Balouchistan,

This is the fifth largest refinery in terms of capacity in Pakistan with producing 47,110. bbl/day. Bosicor Pakistan Limited (BPL) began commercial operations at its Mouza Kund plant, near Karachi in 2004 where it is processing imported crude oil & producing Petroleum Products. Bosicar, refinery has which just utilized 45% of its capacity.

The 30,000-bbl/d refinery is supplied with shipments of crude oil from Qatar. The plant allowed Pakistan to become a supplier of naphtha, which constitutes 20 percent of the output. Naptha is among one of the major exports of petroleum products and thus helps in gaining Forex. It is responsible for the processing of imported crude oil & producing Petroleum Products. Out of the 5 major refineries, Bosicor is the only one that is originally a private company.

Proposed refinery

Currently, Pakistan’s upcoming investment activities in the sector seem optimistic with 2 mega investment projects in sight. Kuwait and Saudi based firms have expressed interest to set up a large refinery in district Hub, Balauchistan. The envisioned to have a refining capacity of 300k bbl/day which is equivalent to the current Pakistan’s current refining capacity.Bosicor refinery, has also expressed interest in setting up a new refinery with a capacity of 120k bbl/day of crude oil. The company has the completion target for the above mentioned project by December 2008.

Refining Capacity

Pakistan Oil Report 05-06

PARCO has the highest refining capacity followed by NRL, ARL, Bosicor, finally Dhodak and Enar have an equal percentage.

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Petroleum ProductsThe refineries perform the function of distillation which is a process by which components in a chemical mixture are separated according to their different boiling points.There are more than 30 refined products extracted from crude oil. During the current fiscal year furnace oil, was the major product extracted by volume. Other major products were High Speed Diesel (HSD) and Motor Spirit.

POL (Petroleum, Oil & Lubricants) are broadly divided into two broad categories; White Oil and Black Oil. The white oil product category consists of all POL products with the exception of Furnace Oil (FO) and Light Diesel Oil (LDO).White Oil sales have contributes to more than half of total POL product sales volume. Within the white oil product category, High Speed Diesel (HSD) accounted for 72% of total white oil sales volume followed by Motor Gasoline (MOGAS) 12% and Jet fuel with 12% contributions.

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1. Motor Gasoline (MOGAS)Motor gasoline (Mogas) contributes 7% of total POL product sales volume. Principle usage of Mogas remains with the road transport where the sales of this product are highly volatile. The primary reason behind volatile volumes and failure to follow robust automobile sales is the advent of CNG. The high price of motor gasoline has resulted in consumers switching to alternate fuel sources, particularly converting engines to run on CNG, which is sold approximately with a 40%-50% price differential. This has resulted in Mogas sales volume dropping by 11% in FY 06. Of all the vehicles that can be converted to CNG, 45% have already been converted. The GoP is expected to reduce the price differential between Mogas and CNG leading to demand growth more in line with long term trends. There is a further need to reduce the consumption of CNG, as Dr Zaidi of PSO said that by 2010 there will be Gas depletion, where there is a possibility that we may have gas shutdowns.

2. Liquefied Petroleum Gas (LPG)Liquefied petroleum

gas, this is extracted from crude oil and used as

an alternative automotive fuel. Its use is illegal in the country, however many rickshaws, black cabs, and buses have exhausts that use them. The cylinders are dangerous and increase the chances of explosion due to its chemical nature. They are used widely because of it being cheaper than other sources of fuel

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3. High Speed Diesel (HSD)High Speed Diesel, this is one of the most demanded products in Pakistan. This is the main earnings driver among POL products, generating 46% of overall sales volume. HSD volumes are reflected in the transport sector which is expected to take a quantum leap over the next 5 years. The transport sector accounts for approximately 78 % of total HSD sales followed by Agriculture which is around 16% of total HSD volumes. The HSD volumes have declined according to the AKD securities report. The demand of this always exceeds the indigenous supply and is thus imported. It contributes highly towards the import of petroleum, it is primarily used in the transport sector, for both commercial and private consumption – the market has grown by about 6.5 percent a year over the past 3 decades. The pricing structure for the HSD has been partially deregulated implying that at the primary stage OMCs have the liberty to import HSD and fix the price of the product. The distribution margin on HSD is capped at 3.5%, resulting in all OMC’s quoting a similar price in order to retain market share.

Pakistan Oil Report 05-06

HSD Consumption Seasonal TrendsHSD volumes follow a seasonal trend in line with agricultural activity in the country. HSD consumption primarily takes place for tractor and heavy machinery usage during sowing and harvesting seasons. The OCAC forecasts agriculture

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accounts for approximately 16% of total HSD sales volume. The trend for HSD consumption is such that during the sowing season for wheat and harvesting for rice, cotton, and sugarcane the demand is higher as well as during the festive season is also a particular cause for a rise in HSD consumption.

4. KEROSENEIt is used to make jet fuel. Kerosene can be further divided into, JP-1, JP-4, JP-8. The production for JP-1 has almost finished. JP-4 is used for Domestic purposed and JP-8 is for the Firefighter planes; for the army. After the recent war in Iraq and Afghanistan, the demand for JP-8 has risen. The reason for this is, American planes use JP-4 and as a result of which all the planes in Pakistan converted to it as well. PSO supplies the fuel to American as well as the Pakistan army and is exported to Afghanistan. By adding additional materials to it, we can prevent it from anti-icing.

Jet fuelIt has become a key product generating 8% of total POL sales volume. Jet fuel has shown an increase in volume that can be attributed in part to the increase in aviation activity due to improving economic conditions in the country. The primary driver for the growth in Jet Fuel volumes is exports. In FY 06, exports surged by almost 50% where the export concentration lies primarily in Afghanistan towards civilian as well as military consumption. We expect Jet Fuel volumes to continue growing as activity in the export activity in the segment continues to increase.

5. NAPHTHAThis is another product of the distillation process which doesn’t have much use unless it is converted to HSD. Pakistan doesn’t have the “hydrocracker” which has the ability to convert Naphtha into HSD. As a result, excess NAPTHA is exported abroad. If we were able to form HSD from it, we would save thousands of dollars and reduce the import bill. The largest product of crude oil after refining is NAPHTHA.

6. FURNACE OILAnalysis of Pakistani Industries

-Oil and Petroleum Industry-

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There are 2 types, HSFO (High sulfur furnace oil) and LSFO (Low sulfur furnace oil). Furnace oil is required by most industries in the form of fuel. It is largely consumed by the power generating plants such KESC and HUBCO. It is further required in boilers such in the sugar industry (when the byproducts are unable to meet the required demand) as well as the cement industry. The demand for furnace oil has shown decline, this is due to discoveries of alternate cheaper resources such as coal, hydro, gas and ethanol. The fluctuation in oil prices has a detrimental affect on the economy considering that oil and petroleum contribute the highest to the import bill. Residual fuel oil is known as furnace oil (FO)

Residual Furnace OilRFO is primarily used in thermal power generation where its volume has gradually declined (between FY01-FY05) due to higher RFO prices leading consumers to switch towards alternative thermal generation methods particularly gas based generation. Due to the ability of power producers to use multiple fuel sources to generate power, they have switched to cheaper alternatives particularly gas and in some cases coal. As a result of this the RFO has shown a decrease in demand. However due to the rising power demand, lack of water availability and gas supply constraints have shown slight signs of an increase in the volume of RFO.

7. BASE OILUsed in the formation of lubricating oil. The oil is made of different viscosities and is used in car engines.LubricantsIn volume terms lubricants contribute approximately 1% towards POL product volume. However, the importance of lubricants stems from the fact that it is the only completely deregulated white oil segment. Over the past five years the sales volume of lubricants have grown at a rate of 5%.. We expect the lube based

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category to increase as more number of vehicles hit the roads. The lube product category is largely influenced by brand name recognition, where internationally renowned brands of PSO (Castrol) and Shell (Helix) dominate the market.

8. CNGThe advent of Compressed Natural Gas has made considerable inroads as substitute for motor gasoline consumption. Pakistan, at present, is the largest Asian consumer and the third largest consumer of CNG behind Argentina and Brazil globally. In FY 05, the CNG market accounted for 2% of the total natural gas market. The GoP has promoted the use of natural gas as an alternative to liquid fuels considering the burden on the import bill of crude oil as well as the environmental benefits as compared to the high emission fuel oils.

CNG has increased by 45 % in the past 5 years, and the figure is expected to increase by 57% in the year 2010 as the government plans to install CNG in the buses which will significantly contribute to the rise. At present there are 930 CNG stations across the country which is 5 times the amount it was 5 years ago. The concentration of CNG stations is primarily Punjab with 58% concentration followed by Sindh and NWFP with 19% each.

Downstream SectorThis involves the distribution and retail of oil and petroleum related products. Organizations that carry this out are called OMCs.

Company Owned OMCsAnalysis of Pakistani Industries

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These are controlled by the OMC itself, for instance PSO having its own retail outlet.

Oil Marketing Companies (OMCs)

At present there are three major oil marketing companies that operate in Pakistan. These are Pakistan State Oil Company (PSO), Shell Pakistan and Caltex Pakistan.

The first two are listed at local stock exchanges. PSO enjoys nearly 74 per cent share of the total

POL market in the country. The other two companies, Shell (21%) and Caltex (5%) control the remaining market.

Apart from these, 3 OMCs have emerged due to there being low barriers to entry in the OMC sector. This has been done in an attempt to increase penetration levels by increasing the number of pumps.

Pakistan State Oil (PSO) PSO was formed in 1976 through a merger of Pakistan National Oil, Premier Oil

Company Ltd and State Oil Company Ltd. The GoP at present controls 54% stake of PSO including direct and indirect ownership, out of which 51% is up for privatization.

PSO sells the full range of products that include Mogas, HSD, Fuel Oil, Jet Fuel, Kerosene, LPG, CNG and petro-chemicals. PSO was losing ground in key market segments, Mogas and HSD, as Shell Pakistan was giving a run for its money. With a revamp of its corporate image enabled PSO to put a stop to its declining market share as the initiatives they undertook began to gain popularity, PSO’s

Analysis of Pakistani Industries-Oil and Petroleum Industry-

COMPANIES OPERATING IN OIL & GAS (DOWNSTREAM)

1 Pakistan State Oil Company Limited

2 Shell Pakistan Limited

3 Caltex Oil (Pakistan) Limited

4 Total PARCO Limited

5 Attock Petroleum Limited

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market share started to rise. PSO regained its market leader status from Shell Pakistan in FY 03.

PSO is the largest oil marketing company and the only national one in Pakistan with a 61% market share in overall sales volume. When the overall sales volume had been declining in the past few years, the company decided to actively pursue retail markets with new, renovated pumps. The company has also introduced a variety of products that will help them in maintaining their market share which include corporate credit cards, fleet cards and prepaid cards. They have built New Vision outlets to provide better quality service to its customers.

At present PSO has more than 3700 outlets located throughout the country. Out of these, 150 outlets have been revamped so far and another 40 will be fully functional by the year end. At the same time the number of company owned and operated outlets has been increasing.

PSO can establish additional value added services in conjunction with other consumer corporate. PSO has been aggressively on the marketing side especially with the advent of loyalty cards, enabling it to maintain market share in the retail level products particularly, the Mogas and HSD category.

Furthermore it has a strong brand franchise in rural areas with the highest

maker penetration, and the company boasts the largest storage capacity (81% of total national storage). PSO has the largest infrastructure, it is expected to maintain its edge for a considerably long time and it has; since the past 5 years it has been the market leader.

The GoP has aimed at cutting down furnace oil import bill by switching over to natural gas. This threat was mostly to PSO that has 90 per cent market share in furnace oil trade however they were swift in their response as they now have the largest market share in CNG. Presently PSO is the market leader in the following POL categories (M.S %).

1. CNG2. Jet Fuel (45%)3. Furnace Oil (79%)4. HSD volumes (59%)

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PSO has the highest penetration in both Provinces.

Shell Pakistan In 1928, the Royal Dutch Shell plc and the Burmah Oil Company Limited in India

were merged and Burmah Shell Oil Storage and Distribution Company of India was formed. After the independence of Pakistan in 1947, the name was changed to the Burmah Shell Oil Distribution Company of Pakistan. After the transfer of 51% stake to Pakistani investors in 1970, the name was again changed to Pakistan Burmah Shell (PBS) Limited. In 1993, as economic liberalization began to take place, Burmah divested from PBS and Shell Petroleum stepped into raise its stake to 51% and has gradually increased it to 76% present.

Shell Pakistan is divided into six functional areas i.e. Retail, Commercial, Aviation, Operations, Finance and Human Resources.Shell Pakistan is the second largest oil marketing company in Pakistan enjoying a 17% overall market share. Despite the gradual decline in sales volume the company has managed to achieve a 24% growth over the 5 year period.

The company was the first to initiate the retail revamping by the introduction of Shell’s Retail Visual Identity (RVI). The company has continuously focused on a high margin product mix. Even with declining volumes as witnessed in key POL products the focus on high margin and low volume products enables the company to maintain a competitive edge. Numerous Customer Value Propositions are delivered at the retail outlets that include the first ever drive-through ATM, first ever pharmacy, and they now even provide the customers with the convenience of paying household bills at several pump sites in the major cities of the country.

Shell Pakistan was also the first to introduce Shell’s Retail Visual Identity (RVI). Market leadership in the Lubricant product category (41 % M.S)

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With competition gradually rising Shell has aggressively pursued other avenues such as CNG to generate higher margins. Shell Pakistan has undertaken full investment in the CNG infrastructure that has enabled the company to benefit from higher margins on gross sales revenue from CNG, even more than PSO.

One key aspect that distinguished Shell Pakistan from the rest of the oil marketing companies is the brand value that the Shell name carries. However, with the rise in competition and improving product quality from its competitors, Shells name is finding it hard to retain market share and is facing a declining trend.

Caltex In Pakistan

Chevron Pakistan Limited (formerly known as Caltex Oil Pakistan Limited) is a part of Chevron Corporation which is a leader in the global integrated energy business. Chevron is the fifth-largest integrated energy company in the world. The headquarters are in San Ramon, California, and conducts business in approximately 180 countries, and is engaged in every aspect of the oil and natural gas industry, including exploration and production; refining, marketing and transportation; chemicals manufacturing and sales; and power generation.

Chevron Pakistan Limited has operated in the sub-continent since 1938 and apart from the main oil storage facility at Karachi, has 10 Depots throughout the country, which includes three inland terminals in Rawalpindi, Machike and Shikarpur.

The company’s Retail network consists of 598 outlets located throughout the country as well as a wide spread distribution network catering to the demands of the Industrial, as well as the Agricultural sectors. Chevron installed its first CNG facility at its Company managed retail outlet at Islamabad. Subsequently, more CNG facilities have been added to the network in Karachi and Lahore increasing the number of CNG refueling facilities to 66 nationwide. In addition, Chevron has also established three CNG conversion kit centers

Chevron Pakistan was the first oil marketing company to introduce many modern concepts in the industry in Pakistan.

1. Its technical advantage in the industry is its state-of-the art computerized lubricating oil blending plant.

2. Chevron was the first in modernizing its retail outlets, installing electronic dispensers and implementing Customer Service Systems.

3. It was the first oil marketing company to launch a CNG station in Islamabad in 1998.

4. Chevron is the pioneer in establishing Convenience Stores and introducing co-branded Cards in the market.

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Attock Limited Company

The OMC sector was historically restricted to three major players in this field. APL has been able to effectively penetrate the market in a short period of time by competing with well-established OMCs. Over the last five years, APL has expanded its retail outlet network at a very fast pace.

APL belongs to the Attock Group which is the only vertical oil and gas entity in Pakistan. According to AKD securities, APL has gone on to become the third largest OMC in Pakistan with a market share of 8% in FY06 versus 2.9% in the same period last year according to AKD securities. Aggressive marketing efforts and relentless retail network expansion has enabled the company to become the best performing oil company in FY06. APL is the only OMC in Pakistan belonging to a Group involved in Oil Exploration, Production and Refining thus ideally suited to proficiently fulfilling its customers’ needs.

TOTAL-PARCO Pakistan Ltd

This is a Joint Venture Company that has been formed to market 25% of MCR production, through retail outlets, which are currently in the development stage. The first TOTAL-PARCO petrol pump was commissioned in January 2002 near Sargodha.

The number of petrol pumps across the country are over 100. Other sites are currently being commissioned with an aim of establishing a country wide network.

Pakistan Oil Report 05-06

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Based on this graph, PSO has the highest share of POL products followed by Shell, Clatex and APL.

Major Players

Ministry of Petroleum, and Natural Resources

Ministry of Petroleum and Natural Resources was created in April 1977. Prior to that, the subjects of Petroleum and Natural Resources were part of the Ministry of Fuel, Power and Natural Resources.1. The Ministry is responsible for dealing with all matters relating to petroleum, gas and mineral such as the policy, imports, exports, pricing, and matters relating to international aspects .2. Geological Surveys.3. Administration of Regulation of Mines and oil fields and Mineral Development (Federal control) Act, 1948, and rules made there under, in so far as the same relate to exploration and production of petroleum, transmission, distribution of natural gas and liquefied petroleum gas, refining and marketing of oil;4. Administration of Marketing of Petroleum Products (Federal Control) Act 1974 and the rules made there-under;5. The Ministry has one attached department i.e. Geological Survey of Pakistan (GSP) and the following are the oil related organizations / companies under its administrative control:

i. Hydrocarbon Development Institute of Pakistan (HDIP)ii. Oil and Gas Development Company Limited (OGDCL)iii. Pakistan State Oil Company Limited (PSOCL)iv. Pakistan Petroleum Limited (PPL)v. Pak Arab Refinery Company Limited (PARCO)

HDIP (Hydrocarbon Development Institute of Pakistan)

Hydrocarbon Development Institute of Pakistan (HDIP) is an autonomous body under the Ministry of Petroleum & Natural Resources. It carries out applied research and renders advice to the Government on scientific and technical matters in the oil, gas and energy sector including energy-environment, energy-planning and energy-policy issues. The HDIP also provides consultancy and laboratory services for the oil and gas industry in Pakistan in diverse fields of its expertise. A research Project of HDIP on using compressed natural gas (CNG) to replace liquid petroleum has grown into a country-wide industry. Furthermore it also facilitates private sector investment in the sector by providing professional guidance and advice.

OGDC (Oil and Gas Development Company)

OGDC in as exploration company and was created in September 196, in pursuance of an Agreement signed by GOP with USSR for financing equipments, and services

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of Soviet experts for exploration of oil and gas in Pakistan. During Seventies, the Corporation introduced Western technology for updating its equipment base, and undertook an aggressive work program in Exploration sector in Pakistan. It was incorporated as a public limited un-listed company managed by an independent Board of Directors. The company has involved itself in a number of explorations of oil and gas projects. It is currently listed on all 3 stock exchanges with the highest market capitalization and is trying to position itself in the London Stock Exchange Market.

PPL (Pakistan Petroleum Limited)

Incorporated on June 5, 1950 as a Public Limited company, PPL inherited all the assets and liabilities of the Burmah Oil Company (Pakistan Concessions) Limited, and started business on 01 July 1952.In 1997, Brumah sold PPL to GoP. In July 2004 the government sold 15% of these holdings to general public as part of Privatization Programme.

PL's present exploration portfolio consists of 17 exploration blocks out of which nine (9) areas, including one (1) offshore block, are PPL operated and eight (8) areas including one (1) offshore block are partner operated. The demand for the energy is rising due to economic growth. Therefore to meet the demand PPL has undertaken various discoveries to boost the energy supply. PPL recently explored the offshore area and conducted exploration near Pasni however, the exploration undertook failed.

The above 2 exploration companies come under Ministry of Petroleum and Natural Resources, the remaining exploration companies are:

COMPANIES OPERATING IN OIL (UPSTREAM)1 BHP Petroleum (Asia/Pacific) Inc.2 Lasmo Oil Company Ltd.3 Hycarbex Inc.4 Orient Petroleum Inc.,5 OMV Pakistan Inc.6 Petronas Carigali (Pakistan) Ltd7 Pakistan Oilfields Ltd.8 Premier Exploration Pakistan Limited9 Tullow Pakistan (Developments) Ltd.10 Ocean Pakistan Corporation11 TotalFinaElf Exploration & Production12 PAIGE Limited (PAIGE).13 NATIVUS Resources Limited18 Occidental Petroleum (Pakistan) Inc.19 Petroleum Exploration (Pvt) Ltd.20 Polish Oil and Gas Company (POGC).21 Pakistan Petroleum Ltd.22 Shell Exploration Offshore23 MOL Oil & Gas Company B.V.

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24 BP Pakistan Exploration & Product

PARCO(Pakistan Arab Refinery Company Limited)PARCO was incorporated in1974, it was a Joint Venture between the countries of Pakistan and Abu Dhabi. The share holding in the Company is in the proportion of Government of Pakistan (60%) and ABU DHABI Petroleum Investment (ADPI).(40%). PARCO became operational in late 2000, with 95,000 bbl/d of refining capacity. It is the largest refinery in terms of capacity and is located in Multan. Furthermore it is also one of the largest companies of the Pakistani corporate sector and has an asset base approaching Rs. 100 billion. It is a state-of-the-art refinery and is based on the latest equipment and process technology; it further has a training resource for technologists from the region. PARCO is engaged in its marketing activities through the "PEARL" Brand. They provide a wide range of lubricants to the motorists under PEARL. PARCO has established a petrol pump, which was a result of a joint venture with TOTAL. The first TOTAL-PARCO petrol pump was commissioned in January 2002 near Sargodha and now the number of petrol pumps across the country are over 100.

This is the only one under the Ministry of Petroleum and Natural Resources, the remaining refineries present in the midstream are:

COMPANIES OPERATING IN OIL (MIDSTREAM)1. Pak Arab Refinery Complex2. National Refinery Limited3. Pakistan Refinery Limited4. Attock Refinery Limited5. Bosicar Refinery Limited6. Enar Petrotech Services Limited7. Dhodak Refinery Limited

PSO (Pakistan State Oil)

Pakistan State Oil (PSO) is the oil market leader in Pakistan having around 78% share of Black Oil market and around 57%* share of White Oil market. It is engaged in import, storage, distribution and marketing of various petroleum products, including Mogas, HSD, Fuel Oil, Jet Fuel, LDO, SKO, petro-chemicals, LPG and CNG. This company, the winner of “Karachi Stock Exchange Top Companies Award” for a number of years and a member of World Economic Forum, has been a popular topic of case studies by Business schools in Pakistan and abroad based on its radical corporate transformation over the last few years. It provides excellence in customer service, total quality control, health, safety and environment. PSO has ended FY06 as a market leader in all the major products. In the presence of stiff competitive market situation, PSO again emerged as leader with 65 percent share on an overall basis. PSO is the only major OMC in the public sector, the remaining OMCs are:

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COMPANIES OPERATING IN OIL DOWNSTREAM1. Shell Pakistan Limited2. Caltex Oil (Pakistan) Limited3. Pakistan State Oil Company Limited4. Total PARCO Limited5. M/s Bosicar Pakistan Limited6. Attock Petroleum Limited7. Askar Oil Services Limited8. Overseas Oil trading Comopany

Strategic Players

OCAC (Oil Companies Advisory Committee)

The Oil Companies Advisory Committee (OCAC) was formed in the mid sixties with the objective of having a forum of the oil companies that could interact with each other and the Government in matters relating to the management of the oil business within the country. The members of OCAC currently comprise of the five refineries and eight oil marketing companies. New entrants both in the refining and marketing sector are also coming in the country and the number of member companies is likely to increase.

OGRA

OGRA has been set up on 28th March 2002 to foster competition, increase private investment and ownership in midstream and downstream petroleum industry. OGRA has the authority to decide the prices of oil on fortnightly bases after linking them to international oil prices. Consumer prices of gas are reviewed bi-annually on the basis of cost of supply to improve the confidence of foreign oil and gad producers of the country.OGRA has exclusive power to grant, amend or revoke licenses for regulated activities and enforce compliance of license conditions to promote efficiency, cost effectiveness, best practices, and high safety and service standards etc. The regulated activities are:Natural Gas

1. Construction or operation of pipelines or storage facilities or other installations2. Transmission3. Distribution4. Sale

OIL Construction or operation of refinery, pipelines, storage facilities, blending

facilities and installation. Marketing and storage of refined oil productsLiquefied Petroleum Gas (LPG) Construction or operation of pipelines, production or processing facilities,

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Storage facilities and installations. Transporting, filling, marketing and distribution

Compressed Natural Gas (CNG) Construction or operation of installations including testing or storage

facilities. Transporting, filling, marketing and distribution

International Player

OPEC

The Organization of the Petroleum Exporting Countries (OPEC) is an international organization made up of Iran, Iraq, Kuwait, Nigeria, Angola, Qatar, Saudi Arabia, United Arab Emirates and Venezuela.

The organization’s aim is to stabilize prices in the international oil market with a view to prevent unnecessary harmful fluctuations, giving regard to the interests of the producing nations.

OPEC’s influence however, has not been a stabilizing one. In 1973 crisis developing and developed world faced inflation. Pakistan had an inflation rate of 30% during that period.

OPEC nations account for two-third of the world oil reserves and controls 40% of the production, which gives them strong bargaining power as suppliers.

Analysis of the Industry

Source ministry of Petroleum and natural resources www.mnpr.com

FACTORS AFFECTING THE DEMAND CONDITIONS

Analysis of Pakistani Industries-Oil and Petroleum Industry-

( in million tones )2003-2004

2004-052010-11

2017-18

Demand of Petroleum Products

14.3 15.0 17.0 19.0

Production from Local Refineries

10.3 12.0 11.3 11.8

Surplus Naphtha / Motor gasoline available for exports

1.3 1.3 0.8 0.8

Deficit of HSD and FO 5.0 5.0 6.5 8.2

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Increasing population Pakistan’s oil and gas needs are growing very rapidly. It ranks 6th in the world’s

most populous countries with population growth of about 2% per annum.

Increased economic activity and growth The economic growth in the country of over 6% in recent years has pushed the

annual demand for oil by over one percent.

Sectoral oil consumption during the year 2004-05 was: Power (23.5%), transport (61.5%), agriculture (1.0%), industry (10.5%), domestic (1.3%) and government (2.2%).

Reliance of Households on free traditional biomass and wood Biomass is the energy source of poor in Pakistan. Around 40% of all households

rely on free traditional biomass-wood and dung-as their primary cooking and heating fuels.

Income Effect Income influences fuel choice with the exception of wood, kerosene and dung in

rural areas. High-income households choose hydrocarbons, natural gas where it available and otherwise. Wood, kerosene and dung use declines with increasing income in urban areas on the other hand, primary household fuel among household irrespective of income.

Increased use of Cars After government reduced the tariff on the import of used car, the demand in cars

has increased of these cars are 1300cc and above and run on high speed diesel. Since the demand of the petrol and diesel is a derived demand, this has led to increase in the demand of diesel and other petroleum products.

Also, use of cars giving far more mileage per gallon of oil and Flexi fuel cars has also increased.

Conversion of Public transport to CNG Government has encouraged use of environment friendly CNG in public transports

such as buses and rickshaws to reduce the use of oil.

Lumpiness of LPG purchases LPG has to be stored under pressure in metal cylinders. The initial deposit fee is

around Rs 1500-2000, then the consumers have to pay an extra cost of around Rs 400 the customer may have pay extra deliver fee as well. The total cost can not be broken into installments and serve as barrier to take LPG.

Improved Marketing by OMCs After deregulation of the petroleum sectors forced monopoly like PSO to indulge in

excessive marketing. Previously, government’s quota system allocated imported oil to different companies for distribution under this PSO used to get around 70% to 80% of the total.

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When the system was de-regularized, the companies could import as much oil as they want this forced companies like PSO to improve their marketing, which led to improved service and retail outlets, meeting quality standards and stimulating demand for petroleum products and services.

Rise in general cost of doing business Increase in oil prices increases the overall price of doing business. Increased prices

directly to increase in freight charges, increased in utility charges especially for business that use oil for heating boilers etc.

Businessmen look for other low cost energy options such as coal and CNG that lead helps in decreasing the cost of production and operations.

Increased use of Substitutes The consumption of petrol has declined by 10% in the last fiscal year due to

cheaper availability of CNG and LPG. This is due to government’s effort to promote CNG as an alternative energy substitutes to reduce oil import bill.

Government encouraging use of other substitutes Oil imports form a major portion of our import bill therefore government is

encouraging used of substitutes such as CNG, Coal, ethanol, nuclear, solar and wind energy. People have shown strong affinity towards these substitutes to their cost efficiency.

Rising prices of petrol Oil has been a subject of historical price rises in the international market that

ultimately increases the price of petroleum products available in Pakistan. Due to increasing prices of petrol people were quick in shifting to substitutes such as CNG.

High Sales Tax The government charges a sales tax of 15% on sale of petroleum products. OMCs

transfer the entire tax burden to consumers making the fuel very expensive for the consumers and reducing its demand.

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FACTORS AFFECTING THE SUPPLY CONDITIONS

Demand exceeds supply Pakistan's energy demand far exceeds its indigenous supplies. Indigenous

production of crude oil during the year 2004-05 was 66,079 barrels per day which is insufficient to meet the 15 million ton demand of the petroleum products.

The crude oil import for the year 2004-05 was about 8.3 million tons

Unrest and wars in Major suppliers of Oil The recent terrorist activities in Saudi Arabia which contributes 18% to the world

supplies and has the largest oil reserves War in Iraq, which has the second largest reserves. Nuclear ambitions of Iran, which has the world’s third largest reserves. Its recent

capturing of British sailors pushed the price up to $65/barrel.

Tussle Between Iran and US The nuclear ambitions of Iran have enraged US and other powers. The tussle

between the two countries poses a threat of war and creates a lot of uncertainty in oil market which leads to fluctuations in price of oil in the oil market as Iran is the second largest supplier of oil.

Depletion of indigenous sources So far about 844 million barrels crude oil reserves have been discovered of which

535 million barrels have already been produced Up till now over 620 exploratory wells have been drilled by various National and

international exploration and production companies, resulting in over 177 oil and gas discoveries.

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Few players in the market The petroleum industry is highly capital intensive and requires the lot of expertise

in exploration, refining and marketing the product. This restricts the exploration and other oil industry activities to government owned refineries and Multi-national Corporation. This restricts local private investors to enter the market.

High Risk and Low Success ratio For every 4 well dug there is a chances of only 1 being successful, this

keep a lot of investment and capital tied in exploration and increases the lead time of the supply. Nearly 18% to the world high cost

Uncertainty in the Oil Market The continuing war on terrorism, especially in the supplier countries leads to lot of

speculation and thus price hikes.

Phenomenal growth in China and India China and India are the emerging and fastest growing economies of the world and

occupying major portion of the world population. There increasing need for energy demand both for local and industrial purpose have prompted both countries to invest heavily in foreign markets and secure the resources of these markets for their own use. Pakistan is way behind in these measures if this continues prospects of gaining secure and stable sources of future supply may become our greatest concerns.

Control of Prices by OPEC through Supply restrictions Opec the international alliance of oil producing and exporting countries aims to

maintain a certain level of price to protect the producer countries. It decreases the supply of oil to restrict the price from going to a particular level.

Political Turmoil in Baluchistan Government and other foreign investors have made multi billion investments in

Gwadar port in province of Baluchistan. The political turmoil in province especially after the killing of Nawab Akbar Bugti escalated the tension and makes it more difficult to attract foreign investment in oil and gas sector in the province, thus making the prospects of future supplies uncertain.

EU and US cartel EU and US. are working towards developing a cartel as they have a largey amount

of oil reserves that have not been exploited yet. The other reason is that they want to reduce the monopoly and bargaining power

of OPEC. Also they fear that OPEC will favour Iran if a war between Iran and US erupts which will effect their oil dependent economies.

FACTOR CONDITIONS

RELATED FACTORS

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1. MATERIAL RESOURCES

The indigenous oil is low in sulfur content that makes it better in quality as compared to India.

The local production of oil is insufficient to meet overall demand so 74% (2004-05) of our oil is imported.

The supplier of material to OMC’s are same for all the country therefore the quality of raw material that goes to different OMC’s in the country is almost the same for all.

Our refineries produce 11miilion tons of oil in which 26% local crude oil and 46% imported crude oil.

We import our crude oil mainly from Saudi Arabia, Iran and Abu Dhabi. The oil resources and their extraction are concentrated in Potwar region in the

North and Lower Indus basin near Karachi in the South. There are two products HSD and furnace oil that cannot be refined in larger

quantities at local refineries due to maximum capacity utilization; therefore, these products have to be imported.

OMCs add different chemicals in their products to develop differentiation in their products. These chemical can not be produced in the country due to lack of technology.

These chemicals are imported from China and Singapore which perform the outsourced duty of a USA company.

2. HUMAN RESOURCES

Since the petroleum industry is capital intensive the number of labor required is relatively less than the other industries.

The From the labor force, non skilled graduates are inducted in the industry as

apprentices and the trained to acquire the technical skill, this process usually takes minimum of 6 months the training time increases with increasing complexity of the task.

The quality of our labor force is they have a very quick observation and therefore learn quickly.

In the petroleum sector there is trend towards specialization. Unfortunately, we lack training in technical skills.

The current labor force employed in the petroleum sector is sufficient to meet the basic technical requirements of the industry. However they lack special skills that can give competitive advantage to our country.

The existing engineering universities do not have interaction with the industry, therefore the graduated coming out of these universities have good theoretical knowledge but no awareness about the industry and its workings.

There is no government policy that supports the development of technical institutions in the country. Therefore development of special skills can not take place and for this reason we also lack R&D.

3. CAPITAL RESOURCESAnalysis of Pakistani Industries

-Oil and Petroleum Industry-

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We don’t produce any of the machinery locally, 70% of the machinery especially the one used in refineries is imported from Japan, the rest such as pump dispensers is imported from other countries like Germany, Brazil, Turkey etc.

In the petroleum sector the machines are upgraded every 3 years, it is not feasible and possible to install new machinery by completely scrapping out the old one.

The capital cost of investing in machinery is as high as 3 billion dollars. Private sector of such a small economy like Pakistan cannot invest such a huge amount; therefore, the machinery is outdated as compared to other countries like India and china.

High-speed diesel (HSD) is one of the major imports of Pakistan and adds a lot to our import, the source of producing HSD in refinery is Naphtha, since we do not have Naphtha cracking system, which converts it into HSD; most of the valuable Naphtha is exported.

The existing machinery meets the basic requirements of oil production of the country. However these machineries do not meet the international standard of EURO 2 and EURO4, which require the machineries to be environment friendly.

INFRASTRUCTURE

Source: PSO headoffice, karachi

1.Port facilites Crude oil, white oil products and low sulfur fuel oil (LSFO) are received at the

Karachi port, while LPG and high sulfur fuel (HSFO) are at the Fauji Oil terminal at Port Qasim. The port facilities are connected to the tankage/storage facilities of the refineries and oil marketing companies (OMC’s) through pipelines.

There is a need of an additional pipeline to connect the two ports. It will provide greater security and reliability of industry operations through smooth supply of oil.

2.Installations Refineries and the OMCs have key installations and terminals to receive and store

crude and petroleum products in Karachi, Mehmood kot and Moragh. These key

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installations are the primary supply points for the transportation of petroleum products to different depots throughout the country.

The storage tanks are of different sizes and mainly of two types Vertical tanks and Horizontal tanks

The Storage tanks are mainly horizontal tanks in Pakistan as they are easy to maintain. However, these tanks are old and do not fulfill the international requirement and government standards of a safe distance of 100ft between the tanks and 50ft from the boundary wall.

Total storage capacity of installations and depots amount to only 21days of consumption equivalent which will be insufficient during a supply crisis.

In vertical tanks according to the international standards a Vapor Recovery system is placed. With this system the evaporating vapors liquefy and go back to the storage. However there is no such system in Pakistan, which results in loss of fuel through vaporization and also harmful emissions to the environment.

People working at the refineries and installations are provided with (PPEs) goggles, masks, safety shoes, gloves and helmets etc to prevent them from exposure to harmful emissions. However most workers are reluctant to use it because it makes movement and working difficult.

TRANSPORTATION

1. Shipping Vessels The National Tanker company subsidiary of Pakistan National shipping Company

(PNSC) was established in 1981, and it is jointly owned by PNSC and PERAC (State petroleum Refining and Petrochemical Corporation). NTC owns one tanker “M.T Johar”, with carrying capacity of 80,000 tons which is principally used for transportation of crude oil from the Arabian Gulf to Karachi. The country’s remaining transport needs of imported crude oil are met through chartered tankers as required

2.. Tank Lorries Road bowzers or tank Lorries move most of the domestic crude oil and petroleum

products. The road tanker fleet is used both for short-haul secondary distribution within cities, and medium to long haul shipments around the country.

Due to pipeline limitations, and severe rail infrastructure constraints most transportation is done by road.

Companies like PSO use modern systems such as Radar Gauging System to maintain quality, temperature and level of product (to ensure there are no leakages) in the lorries. This helped in overcoming problem of adulteration and

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leakages to a great extent. However, all the Lorries in Pakistan do not have this system and they are not willing to do it due to the cost attached in replacing these lorries.

There is no Bottom loading system in the Lorries that prevent people from inhaling the fumes and keeps the right quantity of fuel maintained.

3. Pipeline The installations and refineries can receive the supply from both pipelines and tank

Lorries; however, depots are supplied only through tank Lorries. White oil pipeline was establishes in 2004 that transports oil from the south of the country to the north. It has reduced costs as the transportation cost has lowered; lorries and rail require fuel to work, which is not needed by pipelines.

4. Railway tanks Pakistan Railways also provide transportation mostly for fuel oil. However, its

movement capacity is severely hampered by locomotive availability and other rail infrastructure constraints.

5. Retail Outlets Most petroleum products are marketed ex-depot but gasoline. Diesel and kerosene

are sold through retail outlets. In recent years many outlets have been extensively renovated and upgraded, especially after deregulation of the sector by the government, which increased the competition in the downstream sector. They also have to sell compressed natural gas CNG, which has become a serious competitor to gasoline. Increasing attention is also being paid to safety standards and the quality and quantity of products offered to consumers.

6. Freight pool system BackgroundPakistan 60% of the consumption is in the mid Punjab region where as Karachi in the south receives 60-67% of oil, which includes the major portion of imported oil received through the port. Logically the oil transported from here to North freight charges add to costs and must increase the price, therefore the price in North should be higher than the prices in South.

The government of Pakistan demands OMCs to observe uniform prices across the country previously government used to pay back the freight charges incurred by OMCs to supply the oil to North. However they realized this is not practical method as it increases the chance of overstating the cost. Government therefore asked the OMCs to build a freight pool system in which it invested some money and also asked the firms to pool their resources in it. This way a better check and balance could be kept at freight costs and also it saved under utilization of transport vehicles which come back empty after they have delivered a product in the far flung area in the North.

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ADVANCED FACTORS

Quality of Research and development Unfortunately like other industries there is non-existent R&D in the petroleum

industry as well. The government has not even planned to take an initiate to develop research and

development centers to locally produce our own machinery. OMCs on their own are conducting R&D to develop differentiated products. Since last 2 years the concept of brands has come into the industry. OMCs now

use different chemicals to improve the quality of their products and differentiate it with respect to competitors.

Deregulation Under the deregulation process of crude oil import, quota on import of HSD and

furnace oil was abolished. Under this policy national and multi national could import as much HSD as they

want. Previously, government used to allocate the quota for OMCs which gave PSO a portion of 75%, making it a monopoly in the market. After deregulation competition increased in the market and PSO was forced to invest in Marketing and improving the standard of its retail outlets, if it were to survive in the market. This move brought about a turn around impact on the policies of PSO and other major refineries such as Shell and Caltex , who differentiated their product in terms of services provided.

SWOT ANALYSIS

STRENGTHS The success discovery ratio is 1:3.5 in Pakistan as compared to world 1:10 OGDCL has for the first time in Pakistan’s history made an oil discovery in the

NWFP Province. MOL, a Hungarian Exploration company, has also made a major discovery at Gurgry district Kohat N.W.F.P.

The industry had extensive and well established network of distribution The increase in competition between OMCs has led to more of value added

products, which has increased both the quality of both the product and service. Our oil has low sulfur content than that of India, which indicates that the quality of

our raw material is better. In 2005-06 one hundred and wells were planned including fifty-three as

exploratory and forty-eight as appraisal development wells. We have cheap labor available as compared to the develop countries which can be

which has good observation skill that make them learn technical tasks easily. Our market consumption can be increased because the population is growing at a

rate of 2% per year. The industry relatively organized then other industries like sugar industry does not

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After deregulation the increase efforts of OMCs to survive in the competitive market has result in value added products and better quality service to customers.

Due to the existence of multi national in the industry new technology has been brought into the country and they have set international standards of operation which serve as a bench mark for national companies.

WEAKNESSES We have a faulty price mechanism because the government is charging ocean

losses and handling charges from the consumer. We have supply stock of 21 to 28 days compared to 90 days minimum in European

countries this stock extremely insufficient in case of a war or other calamity. The government charges a high sales tax of 15% on the sales of oil and petroleum

products. OMC pass the entire tax burden to consumers making the fuel very expensive.

We have a very long value chain. The final price has a commission of dealers, OMC’s government sales tax, government Levies and ex-refinery price.

Our refineries structure is designed to be compatible with Arabian oil that restricts the import of oil from different regions and will be a cause of great problem if cheaper suppliers of oil are available.

Government has invested a millions in Gwadar and the development project concerning oil exploration, refinery and pipelines from various regions. Unrest in Baluchistan can hamper these developments and major investment projects.

A nearly 100 per cent rise in international prices of crude oil coupled with economic slowdown led to decline in sales volume.

Our crude oil spare refining capacity is diminishing rapidly and production flexibility even faster.

The import of Oil, which meets 66% of our local demand, places a heavy import bill on government.

We have surplus of naphtha, which is imported by the government how ever this naphtha is source of generating high speed diesel but due to absence of naphtha cracker technology this important raw material can not be utilized and we are forced to import high speed diesel.

OPPORTUNITIES Gwadar enhances the strategic value of the region it would be center for oil

and gas investments of oil and gas pipelines. If the government is able to attract the foreign investors in oil and gas

exploration the way it has planned, the province of Baluchistan can serve as terminus for major oil and gas pipelines and lead to exploration of oil wells that so far have been untapped.

The growing awareness about the conservation of energy has reduced the worldwide oil demand, if the trend continues this may lead to decrease in the price of oil in future and may reduce the supply demand gap.

South Asia infrastructure fund There is a proposal to convert obsolete and uneconomic refineries into full-fledged

storages. Another proposal from state run Pakistan Mineral Development Corporations (PMDC) to utilize excavated khewra salt mines new Attock for storage

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of oil, all scientific reports confirm that such an underground capacity could be used for oil storage minor investments. If these projects are implemented the deficiency in storage capacity can be overcome and make the country less vulnerable to supply shortages especially during wars.

China wants to build a refinery and petrochemical complex with later expanding it 21 million tons. For every one million barrels daily outlet capacity at Gwadar Pakistan can possibly net over a third billion dollars a year in revenues beside indirect economic benefit costs.

Unusually warm winters are weakening demand for heating oil.

THREATS Increased use of substitutes such as CNG, LPG and coal etc Government has started a pilot project for mixing use ethanol with petrol. Since it

reduces the fuel cost to very low levels there is a great chance of consumers shifting to this cheap substitute.

Government has initiated a project for shifting the public transport such as buses and rickshaws to CNG for increasing cost efficiency and improving the environment.

The privatization process, which leads to more market efficiency, has been under political pressures.

The oil and gas pipeline project has been continuously delayed; china is eagerly looking for sources to secure its energy supplies. It is also working with Russian a well as Kazakhstan, which is central Asia’s largest oil producer. If the implementation lap of the oil pipeline gas continues we might loose the opportunity to other potential competitors.

The government is pursuing a tighter monetary policy; high interest rates in the market can make the local investors in the oil and petroleum sector risk-averse.

America’s virtual control over Afghanistan, the emerging role of Shanghai cooperation Organization (SCO) -this big powers quest for energy is brewing up oil politics in the region. This tug of war poses a threat to Pakistan’s own stake in the energy sector and may open the country to more political turmoil.

Recent terror activities in Saudi Arabia, which is Pakistan’s major oil supplier, can create uncertainty in the Pakistani oil market regarding the future supply of oil.

The continuing tensions between Iran and America and war in Iraq, where major oil installations are target of retaliators only leads to price hikes but creates uncertainty in the supply market and more motivation to finding alternative resources.

Major oil reserves are to said to become harder to find and more expensive to exploit. Many of the oil fields outside Opec have dwindled to very low levels needing costly technology to develop.

Emergence of US and EU cartel in near future can create a strong competitor in the supply market against Opec but since we are in contract with the Opec members such as Saudi Arabia etc we might not be able to avail that opportunity.

Flexi fuel cars and cars that give far more mileage per gallon of oil then before has increased.

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PRIVATIZATION

During recent years government has taken a move towards privatization of government owned company under this policy privatization of OGDCL and PSO was planned.

OGDCL In April/May 1999, Privatization Board of Pakistan approved privatization of

OGDCL and appointment of a Financial Advisor. Expressions of Interest (EOI) for Financial Advisory Services for OGDCL were invited by the Privatization Commission in June 1999. In November 2003, the GOP divested 5% of its shares in the company. Being listed on the Stock Exchange, OGDCL looks forward to a new corporate culture that will demand an increased degree of transparency, accountability and responsibility under the code of Corporate Governance.

PSO Currently the GoP is in the advance stages of divesting 51% stake and

management control pf Pakistan’s largest oil marketing company PSO to a strategic investor. The bidding will take place on May 19, 2007 as informed by the PSO’s GM Human resource Manager, Mr. Vaqar Ahmed

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Imports and Exports

Pakistan’s economy is highly dependent on imports of crude oil. Imported crude oil accounted for 74% of the total crude oil processed by national refineries.

An analysis shows that the demand of crude oil has increased from industrial and transport sector which made the country to import oil to meet energy’s demand.

In terms of import value, petroleum products have shown an increase of 53.44%.the import value rose because of the increase in oil prices.

In terms of quantity the crude oil increased by 4.03% and high sulphur furnace oil imports increased by 21.39%.HSD imports showed a decline of 4.34% signaling improved performance of national refinery sector during the outgoing fiscal year.

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The exports of our country are not significant however from 2000-2 to 2005-06 exports of our country increased. The increase in exports is sue our 100% increase in exports of Naphtha .Pakistan also started exporting Motor Spirit from 2000-01,JP-1 from 2001-02,Kerosene from 2002-03 HSD from 2002-03 ,furnace oil from 2004-06 and Asphalt from 2003-06 and crude oil was exported for a limited time period from 2001 to 2005.

The exports of HSD were minimal because it was exported to Afghanistan since they did not had adequate transport facilities and also war in Afghanistan lead to increase in demand of HSD to be used in tanks ,helicopters etc .

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The export of crude for a limited period was possible because of an oil field at Badin which high quality crude oil that was exported to earn foreign exchange.

Porter’s Competitive Forces

THREAT OF SUBSTITUTES

Ethanol The government has started a pilot project on the directive of Prime Minister to mix 10% of ethanol with the gasoline. The blending of ethanol is on testing stage in Karachi, Lahore and Islamabad. Ethanol a by-predict of molasses obtained through distillation is a comparatively cheaper fuel that would also enhance the performance of the engine. OCAC has some worries over the issue because successful results of the project would mean 10% shifts in energy demand towards ethanol.

Coal Most of the cement manufacturers converted their cement plants from furnace oil to coal firing system during 2003 –04 .due to this conversion the demand for furnace oil in the cement industry has been reduced.

Nuclear energy Pakistan is emphasizing on building alternative energy sources due increasing price of oil internationally. A Chashma Nuclear power plant has already been set up to meet our energy need. Since our demand for energy is greater than supply therefore recently government is setting up another nuclear power plant.

Water

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Water is another alternative to produce electricity. Due to expensive electricity generation through oil, Pakistan’s government has planed to build Bhasha dam, Mangla dam and Kalabagh dam so that our rising energy demand is met cheaply. This would influence our petroleum industry because power is the second largest consumer of petroleum products. It accounts for 35% of total consumption. If this were gradually reduced due to dams; our petroleum sector would be adversely affected. Hydropower electricity generation accounts for 40%.

CNG The demand for CNG as alternative fuel used in vehicle is rising sharply. An average consumer who cannot afford high priced gasoline is shifting his demand to CNG.Also government is planning to bring CNG buses, wagons and mini buses in public transport.

Wood Wood is used, as an alternative energy fuel in rural households because they cannot afford expensive fuels to meet their energy needs. Instead of using electricity made from oil they resort to wood combustion to meet their lightning needs.

Biomass The greatest attraction of biomass is that it often does not require cash expenditure. Traditional stoves for biomass are also cheap. Where biomass is plentiful, where there is enough labor for biomass collection or where household incomes are variable and uncertain, biomass becomes the fuel of choice. Under these circumstances it is difficult for hydrocarbon fuels to replace biomass unless household income rises substantially. In addition there are cultural and other reasons for using biomass: food cooked on wood is claimed to taste better, wood cooking stoves provide space heating because of large heat loss and smoke from wood combustion is said to act as an insect repellent.

Solar and wind Energy:

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Alternative Energy Development Board (AEDB) was established to initiate a dynamic programmed to promote, implement and execute alternative renewable energy technologies. The government recommendation includes development of wind and solar energy to ensure that at least 5 percent of total power generation capacity is met through these resources by 2030 i.e. (9700 MW). Alternative Energy Development Board to ensure the installation of 100MW wind power by June2006 at Keti Bandar and Gharo Sindh and 700 MW by 2010. Development of solar products like solar fans, solar cookers, solar geysers, etc. must be developed through private sector on top priority. Laws and taxes designed to encourage self-energy generation by domestic sector like use of solar heating, solar geysers, etc. and spraying valuable natural for industrial growth.

BARGAINING POWER OF BUYERS

International consumers The bargaining power of international consumers is limited since prices are set by OPEC.And also petrol has inelastic demand therefore, consumers have to buy it because their vehicles, industries and in short economies are dependent on it.

Internationally, major oil importers such as USA and EU had been trying to contain demand for imported crude through a policy of conservation coupled with increased use of alternative energy resources. In the USA, automobile companies are now producing cars that can give more mileage per gallon of oil than before.

Industrial consumers Locally the industrial consumers do not have much say since the prices are set by OGRA fortnightly and are usually based on international oil prices. However industrial consumers do have impact because they are shifting to cheaper energy resources for example in 2003 –04-cement industry shifted to coal from furnace oil.

Household consumers Household consumers consume electricity made from oil. Since electricity has inelastic demand and consumers have little choices as far as electricity providers are concerned, therefore, they do not enjoy a bargaining power as buyer. Their bargaining is very low. However, the government has initiated a project to generate electricity from solar energy reducing dependence on oil for electricity generation. Thus bargaining power of consumers in future may rise.

Government as buyer of imported oil and oil from upstream sector In Pakistan most of the crude oil is bought from Saudi Arabia under government-to-government contract. The terms of the contract are not disclosed but the refineries pay full international price, and any benefit and discount accrues to the government. The remaining crude oil requirement is fulfilled from Abu Dhabi, Iran and Oman. The government buys oil from oil exploration sector and has a high bargaining power. previously for each oil discovery government used to have stake of 50% ,however now it has reduced to 12.5% .even though the bargaining power

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has reduced over the years the government still enjoys a strong position as buyer since the sector had been in government control for long and major companies like PPL and OGDCL have been here since 1960s.

Transport consumers The bargaining power of transport consumers is rising and may continue to rise

in future because of increased use of alternative fuels such as CNG, blended ethanol which may be introduced in future. Also flexi fuel cars using ethanol as fuel would have strong impact on the bargaining power of transport consumers in near future.

BARGAINING POWER OF SUPPLIERS

International suppliers Internationally the price of crude oil rose sharply but is now decreasing shifting the bargaining power towards consumers because of use of alternative fuels efficiently.

OPEC said that the declining trend in oil prices could be due to weak demand of oil because efficient use for oil.

However, OPEC suppliers still enjoy a strong bargaining power because all the oil producing and exporting countries have joined hands to charge same price from their consumers. If OPEC at some times observe that its prices are declining it can instantly cut supplies to maintain the prices they want jointly.

OGRA ‘s regulatory role The oil industry has undergone considerable change in the last quarter century. From an era of nationalization and Government control that evolved in the country since the ‘70’s to a stage where the industry is now being gradually deregulated. One of the significant steps towards deregulation that the present Government has undertaken is the fortnightly consumer price revision mechanism, which has been handed over to OGRA. This has accordingly brought the OGRA into media focus and attention.

Pakistan is deficit in crude oil, diesel and fuel oil. Recently the Government has given permission to bulk consumers and traders to import fuel oil while bulk consumers have also been given permission to import diesel. In order to coordinate all activities, OGRA plays a pivotal role in rationalizing these imports in such a manner that supply/demand balanced.Source:OGRA website

Impact of substitutes Due to rising demand of substitutes and trend towards using alternative energy fuels is increasing therefore the bargaining power of suppliers has reduced to a certain extent. The government has recently announced to introduce CNG in public

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transport, which has raised worries in the minds of OMC’s regarding their bargaining power as suppliers.

Local suppliers The bargaining power of local suppliers especially of OMCs remains weak due to semi –the Government of Pakistan governs regulated environment where the entire operations flow stream. However as deregulations proceeds in the future, bargaining power of suppliers will become important over the next 3-5 years.

THREAT OF NEW ENTRANTS

Highly capital intensiveThe petroleum industry is highly capital intensive. They require millions of Rupees to dig wells in an oil field because the machinery they use during the drilling process is expensive. Also during refining stage technologically advanced machinery is employed which is quite expensive thus due to all these reasons new entrants require huge capital investment and thus high capital intensity serve as barrier to entry.

Risky investment The investment is risky because the success-to failure ratio of digging a well is 1:3.5 therefore due to high risk many new companies resist to enter.

Deregulation has opened doors for FDI The government has deregulated this sector and has introduced policies that can bring more foreign invesment.when we asked the GM Exploration of PPL about this issue he said that previously the government had used to have 50% stake in oil, which has reduced now the government has also given 1-5 years tax window and has allowed duty free imports of machinery to facilitate the upstream sector. All these incentives have brought FDI in the upstream sector.

Easy entry laws has allowed more OMC’s to operate The government has also revised his entry laws in past decade regarding entry of OMC’s. The restriction on the minimum capital required to invest in OMC’s has also reduced. Two new oil-marketing companies were approved in the name of Askers Oil Services Private Ltd and Baqri Pvt Ltd.these companies will have to make an investment of Rs.500 million in next three years.

Facilitating 2001 petroleum policy

Major Incentives

Foreign Equity

100 %

Investment No Minimum Limit

Gains Repatriation

Capital, profit and dividends are allowed

Custom Duty 0% During exploration phase3% Annual deferred basis after

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discovery.

Income Tax

40% Onshore:  Royalty treated as expense. 40% Offshore:  Royalty treated as advance tax.

Royalty

12.5% Onshore.12.5% Offshore: (with holiday for four years and reduced rate for next two years)

Emergence of smaller OMC’s The downstream (OMC) market is saturated with low barriers to entry, the OMC sector is witnessing increased competition as smaller OMCs are attempting to increase penetration levels by increasing the number of pumps so that they would be accessible to large number of consumers in both urban and rural areas.

Refineries establishing OMCs Recently Attock Oil refinery established an OMC with the name of Attock Petroleum Ltd. Refineries are entering and trying to establish their retail outlets due to low barrier to entry and deregulations in the sector, this would move is a huge threat for existing OMCs who might have to give up their market share to a certain extent.

Pakistan has more oil resources as compare to the world…attracted foreign investorsPakistan’s drilling intensity is 8 well per 10 000 sq.km and the success rate is 1:3.5 which compares favorably with the global drilling density of 100 wells per 10 000 sq km with success rate of 1:10.due to exhaustion of oil resources in the world and favorable circumstances in Pakistan foreign investment has increased in past few years and would continue to increase in future inshaAllah.

High interest rate hinders investment High interest rates in the country are due to the tight monetary policy undertaken by State Bank of Pakistan in order to control money supply and hence inflation. High interest rates for the industry means high cost of borrowing and as cost of borrowing would rise the firms would take less loans and hence their investment would also decrease.

COMPETITION

Upstream sector The competition in the upstream sector has emerged because of the increase in

the number of exploration companies in the country.

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British Petroleum, OGDCL and PPL are termed as leaders in the exploration .it is difficult for the new companies to compete with them because of the strong infrastructure if these companies.

Midstream sector The midstream has five refineries and has oligopolistic competition. They produce homogenous products and sell them on predefined prices

negotiated earlier. PARCO refinery is a competition for other refineries because its products are of

slightly better quality and it uses state of the art machinery which gives it a competitive edge.

Downstream sector The OMC sector is gearing up for increased competition as existing refineries

and the evolution of the vertical entities have found it viable to establish retail distribution networks.

PSO is the largest oil marketing company in Pakistan with a 61% share in overall sales volume.however, the over all sales volume has been declining in the last few years which has prompted the company to actively pursue its retail market with new, renovated pumps following Shell Retail Visual Identity strategy. The company has also introduced corporate credit cards, fleet cards and prepaid cards enabling the company to maintain a chunk of its market share. The focus on marketing is significant among OMCs after the deregulation. After deregulation since PSO monopoly dissolved, other OMCs took step to grab the market share.

GOVERNMENT ROLE

Liberalization of this sector: The public sector entities have been made independent. The Board of Directors of the companies has been given autonomy to operate freely with any kind of interference. Due to liberalization the performance of the companies has improved and there has been a remarkable decrease in red tape sum.

Import of fuel oil and HSD have been deregulated: Previously whenever fuel oil and HSD were imported, it was mandatory that 76% was given to PSO 23% to Shell and the remaining 1% to Caltex. Due to these limitations PSO enjoyed a monopoly while shell and Caltex were unable to compete in the market and hence they had less retail outlets resulting in low sales volume. However, after deregulation of the import of fuel oil and HSD the OMC’s can import as much fuel oil and HSD as possible depending upon their requirement. This has increased competition in the downstream sector.

Accelerating pace of privatization The government is taking steps to privatize its major units so that more FDI would come into these sectors. National refinery limited has been privatized on

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7-7-2005. Government has also decided to privatize PSO .PPL; OGDCL.Government has also divested its minority shareholding in seven oil fields.

Governments policy have opened the oil marketing sector The government’s policies have encouraged many OMC’s to enter into the market. The companies include ADMORE GAS (PVT.) LTD., ASKAR OIL SERVICES (PVT.) LTD., ATTOCK PETROLEUM LTD HASCOMBE STORAGE (PVT.) LTD. OVERSEAS OIL TRADING CO. (PVT) LTD. TOTAL-PARCO PAKISTAN LTD.

Separate ministry of petroleum The government has formulated a separate ministry for this sector, which is Ministry of Petroleum and Natural Resources. It is directly under the Prime Minister of Pakistan. The ministry is responsible for making policies for the upstream, midstream and down stream sector. The policies have been successful in the past.

Facilitating 2001 petroleum policy

Petroleum Policy 2001

Major Incentives

Foreign Equity 100 %

Investment No Minimum Limit

Gains Repatriation

Capital, profit and dividends are allowed

Custom Duty0% During exploration phase3% Annual deferred basis after discovery.

Income Tax

40% Onshore:  Royalty treated as expense. 40% Offshore:  Royalty treated as advance tax.

Royalty

12.5% Onshore.12.5% Offshore: (with holiday for four years and reduced rate for next two years)

Transfer of regulatory function to OGRA OGRA has been set to foster competition; increase investment and ownership in the midstream and downstream petroleum industry protect the public interest while respecting individual rights and providing effective and efficient regulations. It will regulate the entire sector except for the award of petroleum concessions.

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Government is negotiating with China to set up oil refinery at GwadarThe Chinese government is negotiating with the government about the construction of oil refinery at Gwadar port. Pakistan is considering providing incentives from free land for refinery construction to allowing unlimited duty-free import of crude for processing, sales tax exemption for refined products exports and infrastructure.

Government is planning to build oil cross-national oil pipeline The government is planning to build cross-national oil pipeline from Gwadar port, which would enhance Pakistan’s strategic importance in the region. China has shown interest in trans-Himalayan pipeline to carry the Middle Eastern crude to western China. It would benefit China in reducing its cost of carrying unsafe oil shipped from Malacca. The Gwadar port would be linked to east and coastal areas of China where energy demand is concentrated.

Government maintains uniformity of oil prices throughout the countryThe prices of petroleum products have increased tremendously in the International market during the past two years. The domestic sale prices of petroleum products being linked with international market products of petroleum were required to be increased accordingly. The government decided to protect the consumers from the high oil prices. The government absorbed the loss of around Rs.74.5 billion by June 2006. Internationally the prices increase from 81% to 120%, but the domestic prices rose from 47% to 59% during may 2004 to June 2006.

Blending of ethanol with gasoline on directives of Prime minister The government has launched a trial E10 gasoline pilot project in the form of petrol blended with 10% of ethanol. The blended petrol tested in Karachi and Islamabad has lowered petrol prices by Rs.1.50 per litre.the step has been taken to find alternative energy resources and to limit the rising import bill which has caused balance of payment deficit for the country recently.

The ministry is directly under Prime Minister. …Better accountability The Ministry of Petroleum is directly under the Prime Minister control. Therefore; PM is responsible for taking any immediate actions or decision concerning the ministry. Also since the entire ministry is under PM control it would lead to better accountability.

Pricing formula

COMPONENTS IN CALCULATING THE SELLING PRICE OF PETROLEUM PRODUCTS

Consumer prices in Pakistan are made up of the following elements:

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Ex-refinery price based on concept of “Import Parity” Government levies (excise duty and Petroleum Development Levy)

Inland freight

Distributor and dealer margins

Sales tax

The Ministry of Petroleum has approved the pricing mechanism. Each of the above elements have been explained below

EX-REFINERY PRICE:The ex-refinery price of a product, which is paid to local refineries, equates to the landed cost of the product. In other words it relates to the import parity price of the product if the same were to be imported. The base price relates to the relevant product’s FOB price averaged for the fortnight as quoted in the Arab Gulf region to which are added other elements like freight, duties, L/c and bank charges, custom duty, wharfage etc to arrive at the refinery price.

GOVERNMENT LEVIES:Government levies are the prerogative of the Government and are fixed in accordance with the needs of the Government. Petroleum products are an important source of any Government’s revenue and Pakistan is no exception.

INLAND FREIGHT:Inland freight is used to equate the prices of the products all across Pakistan. In order to do this:

29 core depot locations have been identified and prices are kept constant over these locations.

The product wise cost of product transportation from refineries or imports to these 29 locations is allocated to the respective product and is called primary transport cost.

Primary cost represents actual cost and does not include any profit element for the marketing companies.

The cost of transporting product from these aforementioned core 29 depot locations to the respective retail outlet is called secondary transport cost and varies in accordance with the distance of the retail outlet from the nearest depot. This cost is over and above the maximum ex-depot sale price determined by OCAC for the 29 core depot locations.

DISTRIBUTOR AND DEALER MARGINS:The Government fixes the distributor and dealer margins, which represent the profit element for the oil marketing company and their dealers. These margins are

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represented as a percentage of the Maximum Ex-Depot Sale Price. From July 2002, these have been fixed at:

3.5% for Oil Marketing Companies and 4% for dealers.

SALESTAX: Sales tax is the last element in the consumer pricing and is calculated at 15% of the price before sales tax.

Source: OCAC website

Critical Success Factors

Deregulation of petroleum sector The deregulation of the petroleum sector has allowed the companies to make independent decision. Previously whenever fuel oil and HSD were imported, it was mandatory that 76% was given to PSO 23% to Shell and the remaining 1% to Caltex.Due to these limitations PSO enjoyed a monopoly while shell and Caltex were unable to compete in the market and hence they had less retail outlets resulting in low sales volume. However, after deregulation of the import of fuel oil and HSD the OMC’s can import as much fuel oil and HSD as possible depending upon their requirement. This has increased competition in the downstream sector.

Privatization of major units bringing FDI into the country The government is taking initiative to privatize major units such as PSO, PPL

and OGDCL so that privatized companies would bring in new technology and more investment opportunites.currently the exploration sector is highly capital-intensive need huge amount to drill oil fields. After privatization the cost of risky investment will be passed on.

47 out of 64 present target have been achieved During the year 2005-06 47 out of 64 present targets have been achieved

successfully. The goals and rolling plans set by the petroleum energy sector have been achieved.

Feasibility studies conducted by upstream sector to find more oil fields The government has also provided incentives to conduct feasibility onshore studies to find more oil fields.

More exploration licenses are given The government has processed one hundred and forty Exploration License

during 2005-06 according to the energy yearbook. Thirty-three Exploration Licenses covering an area of 66, 344, 10 km was granted. This would improve our exploration pace and may find more oil fields.

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More discoveries by upstream sector During the fiscal year 2005-06 there were eight oil discoveries. OGDCL had the

highest production. More discoveries by the upstream sector would our country less dependent on high priced imported oil and benefiting Petroleum industry and consumers.

More oil marketing companies are entering…beneficial for consumers Due to deregulation more oil marketing companies are entering into the market even though the price has not been influenced however the services provided have reached international standards. There has been increase in competition between the OMC’s. To meet the competition they have improved the lay out of their retail outlet, trying to build brand loyalty with their customers. They regularly launch various schemes to suit different consumer’s needs. For example PSO introduced fleet cards for its business customers.

Government protected consumers from high international oil prices The prices of petroleum products have increased tremendously in the International market during the past two years. The domestic sale prices of petroleum products being linked with international market products of petroleum were required to be increased accordingly. The government decided to protect the consumers from the high oil prices. The government absorbed the loss of around Rs.74.5 billion by June 2006. Internationally the prices increase from 81% to 120%, but the domestic prices rose from 47% to 59% during may 2004 to June 2006

Rise in international co-operation to improve local exploration PPL, PSO and OGDCL are given various tax and royalty payment incentives. They operate under joint ventures and partnerships with various international oil companies to improve their exploration expertise.

Duty free imports of machinery

The government has allowed duty free import of machinery for the upstream sector. This has significantly reduced their cost of exploration and also enabled them to buy technologically advanced machinery that will aid them in efficient drilling process.

Transfer of regulatory function to OGRA OGRA has been set to foster competition; increase investment and ownership in the midstream and downstream petroleum industry protect the public interest while respecting individual rights and providing effective and efficient regulations. It will regulate the entire sector except for the award of petroleum concessions.

Blending of ethanol into motor gasoline

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The government has launched a trial E10 gasoline pilot project in the form of petrol blended with 10% of ethanol. The blended petrol tested in Karachi and Islamabad has lowered petrol prices by Rs.1.50 per litre.the step has been taken to find alternative energy resources and to limit the rising import bill which has caused balance of payment deficit for the country recently.

Establishment of new oil refinery projects Under the deregulation, privatization and liberalization policy of the government private sector investment has been encouraged. The government has approved additional incentives to set up Coastal Oil Refinery at Khalifa Point near Hub, Baluchistan. Also at Gawadar port oil refineries financed by China are going to be established soon.

Issues and problems

Gwadar and oil politics The Gwadar port and cross-national pipeline would enhance Pakistan’s strategic importance. China needs Gwadar port facilities for future oil and gas imports. Its also wants a trans-Himalayan pipeline to carry the Middle Eastern crude to western china. China wants to build a refinery in Gwadar and would like to shift the oil thousands of kilometers further east to coastal areas where most of the demand is concentrated. This has caused discomfort for USA since its presence in the region would be affected.

Privatization of the companies delayed: Disinvestments of number of companies including PPL has been delayed by the

government as ruling party legislators pointed out that the step could cost them votes in election. Delay of PSO privatization is causing discomfort for investors interested in PSO.

Increase consumption but flat production The consumption of the country is rising due to rise in the level of economic activity taking place. However, most of the oil resources are near depletion that has reduced local supply of oil. Recently offshore explorations by PPL have failed, which has further aggravated the situation.

Demand of substitutes is slowly rising The demand of substitutes is slowly rising and consumers are shifting to substitutes such as CNG for vehicles; coal for energy generation in cement industry; more emphasis on flexi fuel cars; mixing of 10% ethanol in gasoline.

Naphtha cracking plants are not here: Pakistan does not have naphtha-cracking plants and all the naphtha produced is exported to other countries. Naphtha is an important product of crude oil but we lose all of it because of absence of cracking plant. The reason why it is not in Pakistan is because the cost of setting up of plant is very high and politicians in

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the short run find it more profitable to export the naphtha instead of building a costly cracking plant.

No quality control check on oil quality by government: The government does not check the quality of oil being explored, refined and marketed to consumers. However, PSO has its well-equipped Central Lab from where the quality of the oil received through refineries and imports is regularly checked.

High risk rate: The risk rate associated with the industry upstream sector is high. The success to failure ratio is 1:3.5, which is very high and hence hinders investors to invest in such a risky sector.

Import price parity: Import price parity is calculated as caps to reflect as closely as possible the true cost of imports. They are based on 15 day average Arab-gulf free on board plus cartage, freight and number of incidentals.

Lack of refining capacity: Pakistan currently has only 5 refineries, which have limited capacity. They are not able to fulfill the local demand of oil.therefore; in case of shortages Pakistan’s OMC’s import refined oil which is expensive.

Lack of research and development We do not have any research and development institute working for this sector. The drilling technique that we use is inefficient and obsolete. Also the equipment used in process is of low quality.

Import high priced crude oil from Gulf We import high priced crude oil from gulf region because of our strong ties with Arab counties. In the case of PARCO refinery, the investment by Abu Dhabi is tied to processing at least 40% Abu Dhabi crude oil. All the refineries are designed to run Arabian light crude oil .it has low sulphur content and none are suitable for processing to lubricants at National Refinery.

Poor infrastructure The infrastructure of our country is poor. The poor railway and road network increases the transport costs. The routes are also not feasible and it is difficult to transport oil through Lorries on rugged roads. Also we have lack of pipeline capacity that is 20 years old. Due to lack of pipeline the country’s diesel handling capacity has reduced.

High price paid by consumers The consumer final price consists of ex-refinery price, government Levis, inland freight charges, and distributor and dealer margin of which 3.5% for oil marketing companies and 4% of dealers, and 15% sales tax. All these costs

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increase the final price paid by consumers. Even if the price of oil decreases in the oil market the low price benefit is not passed on to the consumers but absorbed within the chain. This has significantly increased inflation in our country since oil is the basic commodity for industrial and household consumers.

Heavy reliance on imported oil According to the 2006 figures oil production is 59.4 thousand barrel per day and oil consumption is 360 thousand barrels per day, the gap is met by the oil imports. We rely as much as 67% on imported oil for our consumption .The increased reliance has made us heavily dependent on the rapidly changing international oil market.

Environmental concerns

In Pakistan there is a widespread consumption of low quality fuel combined with dramatic increase in the number of vehicles on the road has significantly contributed towards air pollution problems. The lead and carbon emission are the air pollutants in urban areas, also lack of energy efficiency standards has contributed to Pakistan high carbon dioxide intensity leading to severe skin, throat and lung diseases.

Inventory Gains With international prices falling around 20% from their peak historic levels, there are apprehensions that days of large inventory gains are gone for OMCs and the profitability that were seen over the last few years may not be repeated going forward,

De bottlenecking This is mainly occurring in the transport sector, where transportation of oil from the north to the south results in added costs. Initiatives such as the white oil pipeline can help in reducing costs and ensuring that such matters don’t get out of hand.

Comparison with India and China

Figure 23: Comparative Data – China, India, Pakistan  China India PakistanGNP 8.5 percent 6.5 5.2 percent

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percentReserves $450 billion $110

billion$12.56 billion

Population 1.34 billion 1.05 billion

162 million

Per Capita Income $1,300 $600 $500Skilled Labor 200 million 400

million50 million

Cost per Labor $1.2 $0.90 $1.17Poverty Level 57 percent 40 percent 38 percentForeign Investment $3.00 billion $1.64

billion$850 million

Economic Level Fast Fast MediumCountry Rating A+ B+ B-Political Level Stable Stable MixedCountry Risk Low Low MediumCountry’s Perception

Moderate/Open Open Moderate

Sources:    (i) World Bank, (ii) Asian Development Bank-Country Report, (iii) IMF-Annual Report, (iv) State Bank of Pakistan, (v) IBA-Karachi Library, (vi) Fortune Magazine, (vii) Brooking Institute, (viii) Economic Intelligence Unit.

Comparison of social standing with India and China

The above table is an indication of the fact that China is in a much better situation than both Pakistan and India. It has a population and covered area much larger than both the countries. Therefore the level of energy consumption would also much higher as well as the opportunities for the oil sector. Pakistan isn’t at par with India either; based on this table, the high Political level and country risk, these factors contribute immensely to the level of FDI of the country, which is essential in developing the oil sector in less developed countries.

Comparison with China The size of China's population - 1.3 billion people where it has an increasing

demand for energy with significant GDP growth whereas the population in Pakistan is 1.64 million, where the masses live in rural areas where there is a lack of oil availability and affordability for consumer use.

The Chinese economy is much more integrated with the world economy through international trade and investment, which helps to explain its stronger rate of GDP growth during most of the past 3 decades

China has now become the second largest consumer of oil. Its real gross domestic product is growing at 8 to 10 percent a year, and its need for energy is projected to increase by about 150 percent by 2020. It is a key player in world energy markets, accounting for more than 10% of the world's total energy demand.

It is advanced in terms of economic, social and business aspects and has a better social standing than Pakistan. It is therefore able to invite foreign investors who

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are able to provide exploration expertise. Furthermore China has a more widespread and superior infrastructure than Pakistan.

Social indicators reflect generally improving living conditions for the average Chinese.

China has now moved from bicycles to cars that has accelerated its oil consumption; by 2010, China is expected to have 90 times the number of cars it had in 1990, and it will probably have more cars than America by 2030. This statistic indicates the rise in the oil consumption as well as its trickle down effects in other industries.

Imports of crude oil and refinery products are growing fast.  By 2030, net oil imports are expected to reach more than 8% of world oil demand. These trends will make China a strategic buyer. 

Chinese intervention in an Indian-Pakistan war, has meant that it willingly helps Pakistan in times of crisis. It has extended its collaboration by setting up a refinery in Pakistan.

A memorandum of understanding has been signed between China and India (2005) that states: "cooperation in upstream exploration and production, refining and marketing of petroleum products and petrochemicals, oil and gas pipelines, research and development, and promotion of environmentally friendly fuels” The joint collaboration can be a possible threat for Pakistan’s economy.

China and India are also running pilot projects in selected areas where they have increased the ethanol-oil mix to 10%. In Pakistan, such a move is likely to be opposed by the OCAC as it would hurt their interests, however the initiative has been taken in which only selected outlets across the country have this facility.

Comparison with India India is the seventh largest consumer of primary energy in the world.  India has skilled labors, millions of English speakers and has gained an

international reputation as a leader in high technology, software and knowledge work. Whereas Pakistan is behind in all of these aspects.

India will become an increasingly important player on world energy markets, due to the rapid expansion of the population as the strong economic growth increase energy demand.  Primary Energy supply will rise by an average of 3.1% per year between 2000 and 2030

According to a Wood Mackenzie Report, India’s remaining oil reserves are an estimated 4.67 billion barrels. With production at 693 thousands barrels per day these are expected to last 18.5 years. There are also several untapped resources of Pakistan which remain to be exploited and utilized,\.

As of July 2005, there were a total of 18 refineries in India with an aggregate installed capacity of 127 million metric tonnes per annum. The number of refineries in Pakistan as of 2006 is 7 with an aggregate capacity of 13 million tonnes per annum.

India was a net importer of petroleum products. However, since 2001-02, India has become a net exporter of petroleum products. The exports of petroleum products have risen by more than 90 percent in 2004-05, over the previous year where High-speed diesel (39.4 percent) contributes the most.

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In contrast Pakistan, has been a net importer of oil, which contributes significantly in its totals import bill. HSD (high speed diesel) has always been in short supply, and as a result we have to import it in order to meet demand as we don’t have the adequate resource for producing it from Naptha by using the hydrocracking plant.

The last few years India has converted itself into a nation producing surplus oil and petroleum, due to the additional refining capacities created in this sector. In the domestic market, supply of petroleum products will be more than their demand in the coming years and hence refineries should resort to export markets. Pakistan does export certain petroleum products, such as NAPTHA, but it needs to expand in order to export products.

India is in the process of securing overseas energy resources in order to meet its accelerating energy demands. Pakistan is still in the phase of discovering it own resources, let alone overseas.

The enormous size of Indian oil and gas companies is an indication that considerable sums are being spent in R&D. Such expenses have also paid dividends in the past. Research has provided the industry with tools to discover and produce oil and gas efficiently. Pakistan lacks in this arena, and has to spend more resources on R&D in order to become globally competitive.

The prospects for export of petroleum products to India’s neighbors such as Pakistan, China are very bright. Pakistan mainly imports petroleum products from Saudi Arabia, Kuwait and UAE. Diesel from India would definitely be cheaper as compared to the other countries due to its close proximity. Some of the Indian refining companies have begun finalizing both sea and land transport routes for export of diesel to Pakistan

.

World Bank report 2002

Based on this table we can deduce that Pakistan is highly dependant on RFO as compared to other countries such as India and China. Residual furnace oil is the

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primary source of fuel in most industries and is also one of the largest imports of petroleum products. Whereas India and China are becoming more reliant on other sources of fuel, a trend which Pakistan is beginning to follow, in order to reduce the high import bill of the country.

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