1. Pakistan Energy Conference 2011
Reasonable OMC & Refining Sector Margins Imperative for Investment in Energy Sector
Monday April 11th, 2011

2. Pakistan Oil Market Overview
Pakistan is an energy deficit country
Petroleum Product demand in was million M. Tons
2.88 million M. Tons
10.4 million M. Tons
6.88 million M. Tons

3. 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

4. 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

5. 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

6. 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

7. 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)

8. 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

9. Amendment in OMC Margins
Year OMC were allowed a margin of 3.5% of consumer price
Year the margin was 3.5% of price before GST
Year 2006, the margin was 3.5% of price before Petroleum levy & Sales Tax
July The margin was frozen in Rupee term at the then prevailing level
Aug The margin was reduced to and AG light US$100/BBL
Feb 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 Margin on all products were fixed in rupee terms

10. 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

11. 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

12. 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

13. Consumer Price Index
Source:

14. 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

15. 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

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

17. 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