Pakistan Energy Conference 2011 Reasonable OMC & Refining Sector Margins Imperative for Investment in 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 2.88 million M. Tons 10.4 million M. Tons 6.88 million M. Tons

Oil Marketing Sector statement 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: 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 margin 7 times Such adhoc changes in margins have shattered the confidence of existing and future 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 prevailing level Aug 2008 - The margin was reduced to and capped @ AG light US$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 3.5% margins on end selling price till March 15, 2006 GST & PDL exclusion from margin calculation % was increased from 3.5% to 4% Shift from fixed margin regime to % basis Current decline in oil prices effecting profitability Margin is fixed in Rs. per liter * Margins plotted as % of retail price

Margins* history – Diesel 3.5% margins on selling price till March 15, 2006 GST exclusion from margin calculation Margins were fixed in rupee per liter Shift from fixed margin regime to % basis Decline in oil prices effected profitability * Margins plotted as % of retail price

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

Linking of OMC margins with price has brought in investment in the country Shift of fixed margin regime to % basis – an impetus for growth in investment 1 2 3 4 5 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995/6 (18mth) 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Annual Capex Rs billion 10 15 20 25 30 35 40 Cumulative Capex Rs billion Total Capex Cumulative Capex WOPP Asia Petroleum and ZOT Modernization of Retail Outlets by Chevron & Shell Introduction of New Vision Retail Outlets by PSO

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

Net Margin comparison – different industrial sectors Source: Elixir securities Year : 2010

Recommendation 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 structure Unfair 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