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Pakistan Energy Conference 2011

Reasonable OMC & Refining Sector

Margins Imperative for Investmentin Energy Sector

Monday April 11th, 2011



Pakistan Oil Market Overview

• Pakistan is an energy deficit country

• Petroleum Product demand in 2009-10 was 20.16 million M. Tons

Pakistan Energy Conference 2011April 11, 2011 | Slide 2

Imported

crude

34%

Importedrefined

product

52%

Local crude

14%

10.4 million M. Tons6.88 million M. Tons

2.88 million M. Tons



Due to progressive policies adopted a decade ago,

the oil sector in Pakistan attained international

quality service standards and is driving the country’s

economy by:

Oil Marketing Sector statement

•

Making oil products available across the country• Ensuring safety in handling dangerous oil products

• Assuring quality and quantity of oil products

• Enhancing the image of the country (quality retail

stations)• Introducing world class standards and

technological innovations




Out look of POL Demand in Pakistan

Demand of POL products in Pakistan is Expected to grow by 3%

per annum (PMG~6%, HSD~2%, FO~4%) Such increase would require additional investment in

infrastructure

A forced reduction in oil consumption due to inadequate

infrastructure will potentially slowdown economic growth We have already experienced growing Gas outages during the

winter months, these are expected to increase in coming years,

thereby impacting industrial output

Shortage of Gas will only be compensated through oil Therefore investment in timely development of the oil sector

infrastructure is extremely important to support GDP growth




Areas that require Major Investments


Refineries

Increasing storage capacities

Increase ship handling capacity at port

Increase in capacity for conversion of Naphtha into

PMG

Pipeline to link Keamari Port with Port Qasim

Refineries upgradation to produce products of Euro II

standard Development of LPG Autogas station



Margin of refineries


• Ex-Refinery price of POL products are determined on the basis

of import parity price (IPPS)• Therefore refinery margin in Pakistan are dependant on

difference of cost and IPP

• Government has given the protection to local refineries in the form of

Deemed duty- But



Frequent changes in refinery price formula


• Removal /Reduction of deemed duty protection

• Hypothetical formula of Ex-refinery Price of PMG (price allowed to ex-

refinery is lower than international market)

• Removal of incidental charges from Import Parity Price (IPP) formula in

Dec 2010

• Ex-refinery price of SKO & LDO as announced by OGRA is even lower

than IPP (Shifting the burden from GoP to Refineries)



Margins of OMCs

OMCs were allowed in 2002 a margin of

3.5% of consumer price

Since 2006, Govt has tweaked OMC margin7 times

Such adhoc changes in margins haveshattered the confidence of existing andfuture investors




Amendment in OMC Margins

Year 2002 - OMC were allowed a margin of 3.5% of consumer price

Year 2006 - the margin was fixed @ 3.5% of price before GST

Year 2006, the margin was fixed @ 3.5% of price before Petroleum levy &Sales Tax

July 2008 -The margin was frozen in Rupee term at the then prevailinglevel

Aug 2008 - The margin was reduced to and capped @ AG lightUS$100/BBL

Feb 2009 - Fixed margin of Rs. 1.35/ltr in HSD and on rest of the product 4%of price excluding GST & PDL (It was fixed for the oil price range of US$45-$80) - Current price is in the range of US$110-US$120/BBL

Dec 2010 - Margin on all products were fixed in rupee terms




Margins* history – Motor gasoline

* Margins plotted as % of retail price


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

19-

Aug-

93

03-

Nov-

93

13-

Feb-

95

15-

Dec-

99

14-

Mar-

01

01-

Jul-02

16-

Mar-

06

25-

Aug-

07

01-

Apr-

08

21-

Jul-08

01-

Aug-

08

01-

Oct-

08

01-

Jan-

09

01-

Jan-

10

01-

Dec-

10

01-

Apr-

11

Shift fromfixed margin

regime to %basis

3.5% marginson end sellingprice till March

15, 2006

GST & PDLexclusion

from margincalculation

Current declinein oil prices

effectingprofitability

% wasincreased from

3.5% to 4%

Margin is fixedin Rs. per liter



Margins* history – Diesel

* Margins plotted as % of retail price


0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

19-

Aug-

93

03-

Nov-

93

13-

Feb-

95

15-

Dec-

99

14-

Mar-01

01-Jul-

02

16-

Mar-06

25-

Aug-

07

01-

Apr-08

21-Jul-

08

01-

Aug-

08

01-

Oct-08

01-

Jan-09

01-

Jan-10

01-

Dec-

10

01-

Apr-11

Shift from

fixed marginregime to %

basis

3.5% marginson selling pricetill March 15,

2006

GSTexclusion

from margincalculation

Decline in oilprices effected

profitability

Margins were

fixed in rupeeper liter



Margins cover OMCs investments and expenses

Capital expenditure on storages, pipelines and retail outlets

Investment in inventory

Rising cost of doing business:

Interest rates, KIBOR: 14%

Rs/US$ parity: Rs 86+

Electricity, gas, fuel

Insurance cost

Traveling

Human Resource

Land leases

Advertisement

Repairs & Maintenance




Consumer Price Index


Source: www.tradingeconomics.com

Li ki f OMC i ith i h b ht i



Linking of OMC margins with price has brought ininvestment in the country

Shift of fixedmargin regime to

% basis – animpetus forgrowth in

investment

0

1

2

3

4

5

1 9 8 5

1 9 8 6

1 9 8 7

1 9 8 8

1 9 8 9

1 9 9 0

1 9 9 1

1 9 9 2

1 9 9 3

1 9 9 4

1 9 9 5 / 6 ( 1 8 m t h )

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

A n n u a l C a p e x R s b i l l i o n

0

5

10

15

20

25

30

35

40

C u m u l a t i v

e C a p e x R s b i l l i o n

Total Capex Cumulative Capex WOPP

Asia

Petroleum

and ZOT

Modernization of Retail

Outlets by Chevron & Shell Introduction of New Vision

Retail Outlets by PSO




This sample calculation is based on the prices effective April 1, 2011

GoP revenues are linked to Oil prices e.g. Custom Duty, PDL, GST and Income tax

A reduction in OMC margins will not have a significant impact on the consumer,

Reduction in margin is also a cause of increasing the tendency of malpractices in

the industry

Capping / Reducing margin did not have any material impact on thecustomer price but will be detrimental to investment

PMG HSD

Cost of product 59.35 73.80

IFEM 5.54 2.30

OMC Margins 1.50 1.35

Dealers Commission 1.87 1.50

Petroleum Levy 3.16 0.44

Sales Tax 12.14 13.50Net Taxes/(Subsidy) 15.30 13.94

Selling Price 83.56 92.89

OMC Margins %age 1.80% 1.45%




Net Margin comparison – different industrial sectors


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Net Margin Gross Margin

Source: Elixir securitiesYear : 2010



Recommendation

Pakistan Energy Conference 2011April 11 2011 | Slide 17

GoP should announce a long term and sustainable

policy on Refinery Price and OMC Margin

Give a legal protection to investors against:

Adhoc changes in Government Policies

Changes in taxation structureUnfair burden on oil sector in the form of Price

Differential Claims and Circular Debt

Providing a level playing field to all players of industry

Fully deregulating the petroleum sector in the longer term

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